加载中...
共找到 25,322 条相关资讯
Operator: Good afternoon, ladies and gentlemen, and welcome to Metro Inc. 2026 First Quarter Results Conference Call. [Operator Instructions] Also note that this call is being recorded on January 27, 2026. I would now like to turn the conference over to Sharon Kadoche, Director, Investor Relations and Corporate Finance. Please go ahead. Sharon Kadoche: Good afternoon, everyone, and thank you for joining us today. Our comments will focus on the financial results of our first quarter, which ended on December 20. With me today is Mr. Eric La Fleche, President and CEO; Nicolas Amyot, Executive VP and CFO; Marc Giroux, Chief Operating Officer; and Jean-Michel Coutu, President of the Pharmacy division. During the call, we will present our first quarter results and comment on the highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward-looking information. In general, any statements which does not constitute a historical fact may be deemed a forward-looking statement. Words or expressions such as expect, intend, are confident that, will and other similar words or expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, our annual budget and our 2026 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown as well as uncertainties that could cause the outcome to differ materially. Risk factors that could cause actual results or events to differ materially from our expectations as expressed in or implied by our forward-looking statements are described under the Risk Management section in our 2025 annual report. We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements, except as required by applicable law. I will now turn the call over to Nicolas. Nicolas Amyot: All right. Thank you, Sharon, and good afternoon, everyone. First, I will start by mentioning that we are pleased to report that the challenges related to the temporary shutdown of our frozen food distribution center in Toronto are now behind us as operations have fully resumed. Our contingency plan was effective in securing supply across our Ontario food store network. The direct costs associated with our freezer issue and our related contingency plan amounted in the quarter to $21.6 million pretax or $15.9 million post tax and our results are adjusted for these costs only. Turning to our Q1 results. Total sales reached $5.3 billion, an increase of 3.3% versus the first quarter last year. Sales were negatively impacted by the transfer of one significant pre-Christmas shopping day to the second quarter this year as well as by the temporary shutdown of our frozen food distribution center, as I've just mentioned. Food same-store sales grew by 1.6% in the quarter, and they were up 1.9% when adjusting for the Christmas shift. On the pharmacy side, same-store sales grew by 3.9%, supported by a 5.1% growth in prescription sales and a 1.3% growth in front store sales. Similar to food, when adjusting for the Christmas shift, front store sales were up 1.7%. Our gross margin reached $1.04 billion or 19.7% of sales in the quarter, the same percentage as Q1 last year. Turning to operating expenses. They were $557.6 million in the quarter, up 5.5% year-over-year. As a percentage of sales, operating expenses were 10.5% versus 10.3% in the first quarter last year as they were unfavorably impacted by $20.8 million of direct costs related to the temporary shutdown of our freezer. Excluding these costs, operating expenses grew by 1.6% year-over-year and represented 10.2% of sales. Note that we also had $0.8 million of direct cost impact related to our freezer issue and our losses on asset disposal. EBITDA for the quarter amounted to $482.6 million. That's up 0.2% year-over-year and stands at 9.1% of sales. Adjusting for the $21.6 million direct freezer costs, adjusted EBITDA stood at $504.2 million, up 4.7% year-over-year, reaching 9.5% of sales, an increase of 13 basis points over Q1 2025. Total depreciation and amortization expense for the quarter was $143.6 million, up $10 million. The increase in depreciation and amortization expense is mainly due to the increase in our retail investments including the opening of new stores from last year, right-of-use assets as well as the commissioning of investments in our supply chain, including some automation technology in the pharmacy division. Net financial costs for the first quarter were $37.3 million compared to $30.7 million last year. The bulk of the increase results from the recording in Q1 2025 of interest receivable of $4.2 million regarding the resolution of an income tax position related to prior years as well as higher interest on net debt. Our effective tax rate of 25% is higher than the effective tax rate of 18.2% in the first quarter last year. Largely driven by the resolution of the just mentioned income tax position related to prior years of $20.6 million in Q1 2025 as well as by the Terrebonne DC tax holiday which amounted to $4.9 million this quarter versus $6.1 million in the same quarter last year. Adjusted net earnings were $248.7 million, compared to $245.4 million last year, an increase of 1.3%, while adjusted fully diluted net earnings per share amounted to $1.16 versus $1.10 last year. up 5.5% year-over-year. Our capital expenditures in Q1 totaled $61.9 million versus $89.3 million last year. Looking forward, we expect CapEx in F '26 to reach approximately $550 million as we continue to invest in our retail network. On the food retail side, in Q1 '26, we opened three stores and carried out major expansion and renovation projects at three other stores for a net increase of 88,600 square feet or 0.4% of our food retail network square footage. Under our normal issuer bid program as of January 16, we have repurchased 1 million shares for a total consideration of $98.7 million representing an average share price of $98.72. The Board of Directors declared yesterday a quarterly dividend of $0.475 a share or $1.63 per share on an annual basis, and that's an increase of 10.1% versus last year. This is the 32nd consecutive year of dividend growth for Metro, and it represents a payout of about 32% of last year's adjusted net earnings, in line with our dividend policy. On this, I will now turn it over to Eric for more color on our results. Thank you. Eric La Flèche: Thank you, Nicolas, and good afternoon, everyone. We recorded strong sales and delivered adjusted earnings per share growth in a challenging environment marked by the temporary closure of our freezer in Toronto and persistent food inflation. As Nicolas mentioned, operations at our frozen DC in Toronto have now fully resumed. I'm pleased with the way our teams came together to ensure a steady supply to our food stores for over 3 months. Turning to the quarter. We grew sales by 3.3%, adjusted EBITDA by 4.7% and adjusted earnings per share by 5.5%. As Nicolas said, food same-store sales were up 1.6%, and 1.9% when adjusted for the Christmas shift. We inevitably lost some sales and margins on the items we were not able to supply as part of the contingency plan, and we estimate that impact to be about 30 basis points on same-store sales for the quarter for which no adjustment was made. Discount continues to drive same-store sales faster than Metro with the gap between them remaining consistent with the prior quarter. Total food sales growth of 3.1% reflects the strong performance of our new food stores and conversions. Our internal food basket inflation was below the reported food CPI of 4.1%. Recall that the food CPI measure is somewhat inflated due to the GST holiday last year. We continue to see inflationary pressures on certain commodity prices, namely in the meat category and grocery. Our teams continue to work tirelessly at pushing back on those price increases, requests and offering the best value possible to our customers. During the quarter, transaction count was slightly down but offset by an increase in the average basket. Promotional penetration remains at elevated levels and private label sales continue to outperform national brands. The competitive environment remains intense, but rational, and we are pleased with our new discount store openings and our growing market share in a very competitive market. Online sales grew by 25.8% in the quarter. Growth is being driven by third-party marketplaces, the ramp-up of click-and-collect services as well as the launch of delivery in our discount banners. Turning to pharmacy. The business sustained its momentum with another quarter of strong Rx sales growth and positive front-end performance. Prescription sales were up 5.1%, driven by continued organic growth, specialty medications, GLP-1s and clinical services. Commercial sales grew by 1.3% and were driven by HABA and seasonal, partly offset by a softer performance in OTC. Although the cough and cold season picked up towards the end of the quarter, this acceleration was not sufficient to offset the slow start. Similar to food, adjusted for the negative impact of the Christmas shift front and same-store sales were up 1.7%. We are on track with our plan to accelerate the development of our growing discount banners as we successfully opened three new discount stores in Q1. We continue to see more opportunities. And as mentioned in our previous call, our 2026 capital plan calls for a dozen discount stores, including some conversions as well as several major renovations in fiscal 2026. To conclude, our teams remain committed to providing the best value possible to our customers and we're confident that our diversified business model, sustained investments in our retail network and strong execution will continue to deliver long-term growth for our shareholders. Thank you, and we'll be happy to take your questions. Operator: [Operator Instructions] And your first question, Mark Carden at UBS. Unknown Analyst: This is Matthew [ Rothway ] on for Mark Carden. So I was hoping to dive into what you're seeing from the consumer a little bit more -- are you noticing any change in shopping behavior, any trade down? Do you think food inflation is beginning to have much of an impact there? Eric La Flèche: No noticeable change in consumer behavior. As outlined on previous calls, discount is growing faster than conventional. So we're seeing more traffic there. People are buying more on promotion, private label sales are outpacing national brands. So yes, there's no noticeable change in customer behavior. Inflation -- reported inflation has risen a bit in the quarter. We're not seeing that elevated inflation in our stores. But for sure, inflation pressures put pressures on customers, and it's a concern. So that's why we're focused on value in all of our banners and working really hard to deliver value to our customers every day. Unknown Analyst: Great. And just a quick follow-up. Anything to call out on comp cadence within the quarter, how did that trend? Eric La Flèche: We don't -- no comment on other than what we reported for the company on the food and pharma side, cadence pretty consistent. That's all I'd say. Operator: Next question is from Irene Nattel of RBC. Irene Nattel: Just sticking with the topic of inflation, obviously, getting a lot of airtime in the media. Can you talk about what you're seeing in terms of supplier requests magnitude, frequency and the types of conversations that you're having because like ultimately, they're the what's asking, right? Eric La Flèche: That's right. That's where the inflation is coming from. We see it on the fresh side of the store week in, week out, there's commodity price pressures. Beef, poultry, pork, all those categories are trending up. And in the case of beef, it's been for an extended period of time. So very, very challenging for us to procure meat at reasonable costs so that we can promote and that we can price -- not competitively, but that we can price at prices that consumers are looking for. A big challenge on the procurement side there. But working hard and looking for alternative sources in other countries like Mexico, Australia, whatever, so that we can access some lower prices. But it's for sure challenging. On the grocery side, the number of requests is consistent with prior years. We're in a normal range. But the quantum of the ask, we're seeing a little more than we saw in past years. So we're pushing back as much as we can. We're negotiating as much as we can. Some of it is justified by aluminum prices, commodity prices, chocolate, coffee, name it, there are inflationary pressures that some of our suppliers are facing and trying to push or transfer to us. We negotiate as best we can and there's going to be inflation going forward. So working hard to control it as much as we can. Irene Nattel: That's really helpful. And maybe it might be a little bit early to ask this question because I think a lot of the pricing comes in next week. But in this environment where consumers there's so much value-seeking behavior, when you do pass or when pricing is increased, what are you seeing in terms of consumer response? Eric La Flèche: Well, the prices, as you say, some of those price increases will start to take effect next week. So we'll see. But as merchandisers, we're trying to minimize the impact on our customers. So where we increase price. We do it surgically, and we try to incorporate it into our merchandising strategies, but there are going to be some price increases as there are -- as there have been in previous years. It's is the reality we're facing. What the consumer reaction will be, we'll have to see over the coming weeks. We will be price competitive and we will compete as best as we can. Operator: Next question is from Chris Li at Desjardins. Christopher Li: I was wondering if I can start off with on the gross margin side. Can you please talk to us a little bit about the positive and negative factors that impacted the gross margin during the quarter? Eric La Flèche: Well, gross margins vary from quarter-to-quarter as we say, the competitive marketplace, the promotional weight the cost increases we're getting from our suppliers, all of that impact on the gross margin. So for sure, price -- cost pressures or drag on gross margin for sure. We're trying to be the most efficient that we can in our promotions so that we draw customers into our stores and not kill the bottom line, as they say. For sure, the warehouse investments that we've made over the past years are a plus on the gross margin, they're reducing hours, which reduces the lower the price of the cost of goods sold. So those efficiencies help. And net-net, we came up flat on gross margin rate this quarter. The freezer situation in Toronto did not help, of course, we're not getting efficiencies from that. We're getting the contrary. That was a drag for sure on our gross margin this quarter. So going forward, that's all behind us, and we're looking forward to getting back on track on gross margin. Christopher Li: Okay. That's helpful. And maybe if I can just double click on that. So in terms of going forward, now that you are fully behind all these free of disruption, do you expect margin to increase for the rest of the year. I know it's still a very dynamic environment, as you pointed out, but just generally, is it fair to assume margin should increase the rest of the year? Eric La Flèche: No, you can't make that call. We don't give guidance. We don't -- we won't give you a number ahead of time. We will -- like I said, we're competing in a competitive market. It's our job to have effective merchandising to deliver a gross margin that's acceptable for our returns and our bottom line. So that's what we do every day. I think we have an experienced team, and we're confident in our ability to deliver a decent gross margins. But I'm not going to give you color on up or down. Christopher Li: Okay. That's fair. And then my other question just on same-store sales. Thanks for quantifying the impact in Q1 from the previous disruption. Are you seeing more impact? Or do you expect more impact in Q2? Or is that fully now? Eric La Flèche: Like I said, we are back to normal. So there is no lost sales anymore. The contingency plan was good. It was effective. We supplied our stores "appropriately" but there were some missing items. If you look at the bakery department, some frozen categories in meat or grocery was not the complete assortment so that we lost sales and we lost margin on those frozen categories, which going forward is behind us. So we're looking forward to more normal sales and margins on those frozen products out of Toronto. Operator: Next question will be from Michael Van Aelst, TD Cowen. Michael Van Aelst: Just on the refrigeration issue. Can you explain how it was resolved? Did you fix it? Did you change suppliers and change the equipment? Why was there a charge? Eric La Flèche: Very big mechanical issue in the refrigeration system, basically, two heat exchangers in place, on defaulted and contaminated the other which was never supposed to happen in the first place, but it did. All this to say that the faulty heat exchanger has been replaced by another one using a different technology. So we have two, we have the old one and we have the new one using two different technologies. So that's our -- going forward, that's how we're operating. I don't know what else I can tell, Mike. Michael Van Aelst: Well, the other equipment that's on the older technology, is that the risk at that one falls as well? Or is it just a fault in the equipment rather than [indiscernible]. Eric La Flèche: Well, the exact root cause of the failure of the first one, still remains to be determined. There's a lot of expertise in forensic stuff going on. Net-net, the one that's left is never malfunctioned. It's still functioning really well, and it's backed up by another one that is using a different technology. So we think the risk has been managed well, and we're confident that we're not going to suffer any problem going forward. Michael Van Aelst: And then you had a decent increase in your depreciation this quarter, and you talked about -- one of the things you talked about was pharmacy automation starting to be commissioned. So should we start expecting -- to expect to start seeing some margin improvement on that side of the business coming from this automation in the coming quarters? Nicolas Amyot: So this is Nicolas. Mike, I'll take the question. So that investment was commissioned last year. Obviously, when we make investments in equipment, we ensure that we're going to get or plan for the return on investment. So I would say, yes, over time, we should see some margin improvement in the warehouse distribution for the pharmacy business. I'm not going to quantify that today. We're still at the beginning of the investment, if you will. But yes, obviously, we expect productivity improvements and return on investment. Eric La Flèche: So the return on investment method that we've communicated before, double-digit cash on cash after tax is still on. We're going to get -- we're very confident we're going to get those returns from those supply chain investments at the pharmacy warehouse in Varennes. But like Nicolas said, these are long-term investments, and it will ramp up gradually over time. . Operator: Next question will be from Mark Petrie at CIBC. Mark Petrie: I just had a couple of follow-ups actually. On the topic of gross margin and the impact from the disruptions at the frozen DC. Is there any way to sort of just help shape that? I know I don't think you've quantified it specifically, but like above or below sort of, I don't know, 5, 10 basis points? Eric La Flèche: We -- I gave you some color on the lost same-store sales impact of 30 bps. You can put some dollars on that. What we -- I think the key message here is that we suffered in this quarter because of this freezer on a year-over-year basis. A few million dollars of lost margin for sure on that freezer. We lost the day of Christmas sales that shifted to Q2. So if you compare to Q1 last year, there's some sales and margin loss to last year, too. We have some asset disposals that are on our financial statements that is a reversal versus last year. So you put all that together, there's about $0.03 a share of negative impact that are putting a damper on our results this quarter, but we're confident going forward. Mark Petrie: Yes. Understood. Okay. And I guess, just you called out the sort of challenging operating environment. And I know you specifically referenced the DC disruption and food inflation. But just to be clear, any shifts related to sort of promo intensity or the pressure from industry square footage growth that has sort of compounded those challenges relative to, I guess, either last quarter or last year? Eric La Flèche: So the DC we just talked about versus last year and that's behind us. Food inflation or "rising food inflation" puts pressure on consumers, puts pressure on consumers looking for value, and that puts pressure on promotions. So it's just a more challenge that we have to face. We've been facing. We're in this environment where cost of living is hard. Price of food is key on people's mind. People are making choices, making some trade downs, they're changing stores, they're buying on promotions. So all that has been happening, continues to happen and we adapt. That's why we're opening discount stores, and that's why I think our merchandising teams and all of our banners are offering good value. You have no choice. If you don't offer value, you don't attract customers. So that's what we do. The promotional intensity, I think, is pretty consistent. It's intense, but it's rational. The fact is there are more stores opening. We're opening some stores. Some of our competitors opening stores. So that's the added square footage puts more pressure in the sense of more competition out there with the same promotional intensity. So these are challenges that we face, that we are, I think, experienced at and in a good position to face. I think like I said, in our diversified business model, we're well balanced between food and pharmacy and within food I think we're well balanced between discount, conventional and specialty. And I think going forward, with all the investments we've made in our supply chain over the past few years, our consistent investments in our retail networks we're, I think, well positioned to continue to grow. Mark Petrie: Yes. Excellent. Eric. And maybe just another quick one, if I could, probably for Nicolas. Excluding the DC costs, cost control was pretty strong. Anything to call out there? And what sort of dynamics should we be thinking about for the balance of '26? Nicolas Amyot: Yes. As you point out, good cost control. I think 1.6% increase is perhaps on the low end of what we could expect in the future. So I think what you can expect is perhaps a notch more than that, but continued good cost control and yes, focus on execution and delivering the margin above these costs. Operator: Next question will be from Vishal Shreedhar at National Bank. Vishal Shreedhar: Eric, you've been asked this question many times, but I just want to get your view more formally reflecting on the past. We're in a period of higher inflation, accelerating square footage growth and consumer stress. And you're saying the consumer backdrop is stable, and we appreciate that you see that. But as you look forward and these pressures continue to accrue, do you feel like the grocery environment is normal and accommodative? Or do you think that some of the worries that some investors are articulating are merited. Eric La Flèche: Well, you can always worry the situation you described is factual. I think the industry square footage number Yes, it has accelerated, but that's after several years of low industry and low company, in our case, industry, we've added square footage, but one or below percent whereas population growth has grown, as you know, quite a bit more than that over the past 5 years. So there's a bit of catching up on the square footage factor. And the square footage we're adding is on the discount side, for the most part, a big portion of it in Ontario, where we have lower penetration, lower share and where we see more opportunity for us. So I think that's -- I don't think it should be cause for concern as much as seen as an opportunity for Metro and for our shareholders. So I see that as a positive. Inflation and consumer pressures are a fact. And we're dealing with this have been for a while, like I said, so it's up to us to deliver that value. I think we have good programs in all of our banners, good pricing, good promo, a good loyalty program, effective merchandising that can deliver value to customers. We know it's hard on customers. Cost of living is -- it's tough out there, no question about that. But I think we are offering a good value at the end of the day. Vishal Shreedhar: Okay. And with respect to your new stores, can you comment on if they're hitting plan? Eric La Flèche: Maybe I'll let Marc Giroux give you some color on the new stores. Marc Giroux: So yes, we are satisfied with the -- with our store opening. They're not all equal, but overall, we're very satisfied with their performance in their respective market. As Eric mentioned, we have a plan for a dozen more in 2026. So that will continue to contribute to the total sales. Eric La Flèche: Yes. So we're hitting our sales forecast in general -- more than in general. The large majority of the store openings, like I said, we're very happy with. We're exceeding expectations in most of them, meet expectations elsewhere and confident that the stores are going to be good contributors short term. Vishal Shreedhar: Okay. Wonderful. And maybe I just want to get your thoughts on the pharmacy side. And with respect to the generics that are coming on the GLP-1s, do we have any Pro Doc plans? And when should we expect the Pro Doc generic equivalent to come out. Eric La Flèche: Let me pass it to Jean-Michel. Jean-Michel Coutu: Yes. Thank you for that question. So obviously, there's a lot in the news right now about the genericization of Ozempic. It's -- right now, we know there's been some delays. There's been some noncompliance notices. So we know it's being pushed forward a little bit. We're expecting something earlier in 2026. Now we -- there's a lot of discussions around GLP-1s. We see it a lot as a category of one right now. Everyone talks about Ozempic, but it's a very dynamic category. There's some new innovations coming out around [ Zepklom ], then we saw some news in early in December about the oral GLP-1s. So the way we see it is we think it will increase demand. But at the same time, it's going to -- the margin is also going to be protected by the fact that there are new therapies coming out. So other categories can continue to grow. And on the product front, obviously, we're always looking to increase the portfolio of Pro Doc, but that's not something that we could disclose right now. We need to see how the market shapes up. See how Novo Nordisk also reacts to the genericization of Ozempic in Canada to see if there is space for additional generic companies that product could then market in Quebec where we're prevalent. So I hope that answers the question, but it's -- as a category, it's growing and there's a lot of new innovation coming in. So you have to take that into account when you look at Ozempic. Operator: [Operator Instructions] Next, we will hear from John Zamparo at Scotiabank. John Zamparo: I wanted to revisit the topic on competition levels. and a question I think is for you, Eric. Against whatever base time line you choose, do you consider the market to be more competitive pretty equally across your network? Or is the comment about a very competitive market more specific to certain regions or certain pockets where you are seeing greater store growth from the industry? Eric La Flèche: Well, in our plan for this year, there's more impact from competition in the Quebec market versus Ontario, but there's impact over there from new competition, be it our own cannibalization or competitor square footage. So but there's a little more in Quebec that's happened over the last year and continues to happen this year. That cycles throughout this year. So yes, that's a wave that's going to pass, but there's still -- there's a competitive impact a little more in Quebec this year. John Zamparo: Okay. And then one perhaps for Nicolas. In the past, you've contemplated at times about looking at slightly higher leverage to facilitate more buybacks. And I wonder where Metro currently stands on that subject. Nicolas Amyot: I would say that we're still contemplating the same. We still have a view that we could progressively increase the leverage over time and then use part of that to buy back shares. So I think we're at the same position, and we would do that very gradually and prudently over time. Operator: Next question from Michael Van Aelst at TD Cowen. Michael Van Aelst: So just a follow-up. So overall, the sales are pretty good, particularly when you adjust for the temporary items and the timing. And at the AGM, it sounded like you're going to increase your focus on cost controls this year. Do you think this combination can allow you to get back into your growth algorithm despite the slower start to the year? Eric La Flèche: We remain committed to our financial framework objectives, which, as you know, are mid- to long-term averages. We're working really hard to make those numbers every quarter, every year. Yes, the number for Q1 is slightly below on EPS growth than that framework, but we will do everything we can to meet our objectives. So no change to our objective but we're not going to give you guidance for next week or next month or next quarter. Operator: At this time, we have no questions registered. Please proceed. Sharon Kadoche: Thank you all for your interest in METRO, and please mark your calendars for our second quarter results on April 22. Thank you. Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.
Operator: Good morning, and welcome to the Fourth Quarter Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. [Operator Instructions] During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the company's 2024 annual report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q. These reports are available on the company's website at www.graco.com, and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Chris Knutson, Vice President, Controller and Chief Accounting Officer. Christopher Knutson: Good morning, everyone, and thank you for joining our call. I am here today with Mark Sheahan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for more commentary. Yesterday, Graco reported fourth quarter sales of $593 million, an increase of 8% from the same quarter last year. Acquisitions contributed 4%, currency translation 2% and organic sales another 2% to growth in the quarter. Reported net earnings increased 22% to $133 million or $0.79 per diluted share. Excluding the impact of excess tax benefits from stock option exercises, a nonrecurring tax benefit and the prior year business reorganization charges, adjusted non-GAAP net earnings were $0.77 per diluted share, an increase of 10%. The gross margin rate increased 80 basis points compared to the same quarter last year. The effects of our targeted interim pricing actions more than offset higher product costs resulting from lower factory volumes unfavorable effects of lower margin rates from acquired operations and incremental tariffs. Tariffs affected product costs by $4 million in the quarter, resulting in a 70 basis point decline in the gross margin rate. For the full year, tariffs of $14 million had an unfavorable impact of 60 basis points on the gross margin rate. Operating expenses decreased $1 million or 1% in the quarter. The decline was driven primarily by business reorganization costs of $7 million and litigation costs of $9 million from the prior year that did not recur. Offsetting these costs were incremental expenses of acquired operations of $7 million and higher incentive-based costs. Contractor segment operating margin rate for the quarter was 24% and was consistent for the same period last year, excluding business reorganization charges and litigation spending. Expansion markets segment operating margin was 28% compared to 20% for the same quarter last year. Expansion markets had upfront electric motor license fee revenue of $5 million in the quarter and $7 million for the full year. These upfront license fees increased the operating margin rate for the quarter by 9 percentage points and 3 percentage points for the full year. Total company adjusted operating earnings increased $21 million or 15% during the quarter. Adjusted operating earnings as a percentage of sales was 27% for the quarter compared to 25% for the same period last year. The full year adjusted effective tax rate was 20.5%, which is consistent with our expected full year and prior year tax rate on an as-adjusted basis. Cash provided by operations totaled $684 million for the year, an increase of $62 million or 10%. Excluding acquisitions, inventory was $336 million, down $46 million for the full year and down $140 million from its peak of $476 million at the end of 2022. Inventory is currently at its lowest level since June 2021. Cash provided by operations as a percentage of adjusted net earnings was 153% for the quarter and 137% for the year-to-date. Significant year-to-date uses of cash include share repurchases of 5.1 million shares, totaling $423 million, dividends of $183 million, acquisitions of $135 million and capital expenditures of $46 million. These cash uses were offset by share issuances of $37 million. A few comments as we move forward to 2026. Based on current exchange rates, assuming similar volumes, mix of products and mix of business by currency, as in 2025, movement in foreign currencies would have a 1% favorable impact on net sales and net earnings for the full year 2026. The effective tax rate is expected to be 20% to 21%, excluding any impact from excess tax benefits related to stock option exercises and other onetime items. Projected unallocated corporate expenses and capital expenditures are projected to be $40 million to $43 million and $90 million to $100 million, excluding approximately $50 million up for facility expansion projects for the full year, respectively. Finally, 2027 will be a 53-week year with an extra week occurring in the fourth quarter. I will now turn the call over to Mark for further segment and regional commentary. Mark Sheahan: Thank you, Chris. Good morning, everyone. I'm pleased to report record sales in both the fourth quarter and for the full year. Sales were up 8% in the fourth quarter with acquisitions contributing 4% of the growth. Organic sales at constant currency were up 2% from growth in both the Industrial and Contractor segments. Despite continued sluggish conditions in core construction markets, improved performance in the home center channel, and double-digit growth in the COROB business allowed contractors to achieve organic growth in every region this quarter. Our Industrial business had 11% growth in the quarter with strong organic performance in both the Americas and EMEA due to broad-based market improvement and the timing of completion and acceptance of systems-based projects. For the year, acquisitions contributed $113 million of revenue or 5% growth. We have successfully integrated COROB, while also completing the acquisitions of Radia and color service. Together, these businesses are expected to generate nearly $190 million in full year revenue. They have extended our market reach, provided new product lines and innovation and expanded our manufacturing footprint. Our acquisition pipeline is strong, and we are committed to generating 1/3 of our long-term revenue growth through executing smart and disciplined strategic acquisitions. In 2025, operating cash flow of $684 million was up 10% from 2024 and was 137% of our adjusted net earnings for the year. This impressive cash flow has allowed us to invest $135 million in acquisitions, deploying nearly $50 million in capital expenditures, and returned over $600 million to shareholders in dividends and share repurchases. We finished the year in a net cash position of $600 million. In summary, our balance sheet is strong, providing us with the flexibility to achieve our long-term objectives. Turning to segment performance. Contractor segment sales increased 8% in the fourth quarter with acquisitions contributing 5%, currency translation 2% and organic sales another 1% of the growth. The biggest driver of the organic growth was COROB, which grew 25% in the quarter. Sales volume improved with this being COROB's largest fourth quarter in the past 3 years. The COROB acquisition has performed as expected, and the Radia acquisition brings added capabilities to this attractive and growing space. The home center channel had growth in the quarter. However, foot traffic in the channel is still light. The pro paint channel grew sequentially despite slower sales compared to last year. The overall market for contractor equipment is flat with affordability concerns keeping activity subdued. Despite flat conditions, we've been investing in new products, which along with our pricing actions and the acquisitions previously mentioned are having a positive impact on our outlook this year. Turning to the Industrial segment. We delivered a strong fourth quarter with sales up 11%, driven by a combination of solid organic performance and contributions from the Color Service acquisitions. Organic growth of 5% was primarily the result of project completions in Powder Finishing systems as well as good growth in the Americas and EMEA, offsetting declines in Asia Pacific, particularly China. For the full year, China grew in both revenue and bookings. Incremental margins for this segment were remarkably strong at 76% for the quarter and 117% for the full year, reflecting the benefits of One Graco. Expansion markets declined 6% in the quarter, but grew for the full year with high single-digit full year sales growth in our semiconductor business. During the quarter, we had declines in our semiconductor, high-pressure valve and environmental businesses as compared to last year when we saw increased activity in all regions. Despite the quarterly decline, we had sequential revenue growth with this being our largest revenue quarter of the year. As Chris mentioned, our Electronic Motor business recognized upfront license fees resulting from the work our team has done to introduce this technology to OEMs and motor manufacturers. This proven technology is in Graco products today. And while we're optimistic about opportunities for signing more license agreements in the coming years, our revenue outlook does not include any estimates for upfront license fees in 2026. Moving on to our outlook. As we reflect on the past year, we are pleased that revenue grew in each segment and region. Both the industrial and expansion market segments grew organically for the full year, and we are optimistic about the growth in contract during the fourth quarter. We're also pleased with the performance and contributions made by COROB, Color Service and Radia this year, and we're hopeful that we will continue to see actionable opportunities in 2026. Graco has engaged employees that are focused on our key initiatives of product innovation, pursuing strategic acquisitions and advancing the One Graco operating model. We're offering 2026 revenue guidance of low single-digit organic growth on a constant currency basis and mid-single-digit growth after factoring in expected incremental sales from the Color Service and Radia acquisitions. In closing, as we enter our 100th year, I would like to thank our employees, suppliers, distributor partners and customers around the world for their contributions. While the last few years have been challenging for manufacturers like Graco, we navigated the obstacles and delivered meaningful value to our customers and shareholders. There are many things that contribute to our confidence in the future, but none more than our loyal and hard-working employees. That concludes our prepared remarks. Operator, we're ready for questions. Operator: [Operator Instructions] Our first question comes from Deane Dray of RBC Capital Markets. Deane Dray: I'll just start off with a clarification. We haven't seen one of this get called out before the upfront licensing fee associated with the electric pumps. And there's been some inbound questions about, is this a onetimer? Or is it just the nature of this new product? And so just kind of give us some background here. You said it's going to OEs and to motor manufacturers. Is this going to be a lumpy type of revenue stream? And just some color there to start, please. Mark Sheahan: Yes, I can start. And a handful of years ago, we bought a company called ETM, and we bought the company because they make a high torque, quiet compact motor that we thought would fit pretty well within some of the Graco product lines. We actually want to find the company because we like the technology so much. We also recognize that there was potential that we could introduce that technology to other OEMs. And so we had a team that was really looking to work with those OEM manufacturers to sell motors to them. Long story short, that didn't play out real well. So a couple of years ago, we pivoted to a team now that's really focused on licensing the technology to OEMs and motor manufacturers that are noncompetitive with Graco that see the benefits of having a compact, high torque, quiet motor for their types of applications that they've got. So it's probably going to be lumpy. I'm really happy with the work that the team has done in getting some upfront agreements. There will be royalties on the back end that we'll talk about when they're meaningful enough. And of course, we'll highlight any other lumpy payments as they come in throughout the year. We want to make sure, though, Dean, that you didn't feel like you needed to model it in, in terms of our outlook for the full year on the organic constant currency. So we really have not factored in any of these upfront fees into that analysis. The motors are in Graco products today. You can find them in our contractor products. They're very well received in the marketplace. You also find them in our diaphram pumps that go into the process industries. And in our industrial markets where we're using electric motors to move paints around in factories. So it's a proven technology. We're excited about it. And it's nice to see that some of the benefits of what we did on the M&A front are paying off there. David Lowe: Yes. I would just add to that, that because we already haven't successfully implemented in several of our products, into specific applications. Part of the process of an agreement with an OEM or another party is they will be used for what are defined as very specific applications. Deane Dray: That's all good to hear, and I appreciate that color. It's a little bit unique, but our bias would be just to include that in your operating results and not try to strip it out. But if you could highlight for us if there's any kind of lumpiness in the future quarters, that would be helpful. And then second question is more on the forward look. No surprise to us in the low single-digits organic guide. That's kind of where we were looking. What can you say in terms of the geographic conditions that you're looking at in '26. Interestingly, the traffic light slide only has the rearview mirror 2025, not the forward look. So what would be the broad brush changes any that you would highlight there? And anything about the last 5 weeks of inbound orders would be helpful, too. David Lowe: Okay. Yes, Dean, when you said we hadn't made -- we hadn't updated it to -- I took personal offense. We did review process. And we did review the things. And the way I would characterize it is in the markets, especially the yellowish markets. The order rates have been steady and remained steady for the most part, where we stand. I would say that the data is, while not in any sense deteriorating, the upward momentum, the catalyst for covering a little bit more green, I think, is in our discussions and our analysis is a bit premature. So I feel pretty good about where we stand today. And yes, it does look like what we presented to you in the fourth quarter. And stay tuned, and I'm hopeful that we'll be able to color some of those dots green in the months to come. Mark Sheahan: Yes, I'd probably say that we had a low single-digit guide last year. We're coming out with a low single-digit guide. So at top level looking at, it doesn't really surprise me a whole lot that the dots didn't change colors meaningfully. I'd sort of characterize the geographic conditions as we kind of see them as low single digits, up into crazy on the upside, certainly, hopefully, we're not going to experience another leg down. We're not anticipating that. So I would characterize our overall outlook, Dean, is pretty cautious at this point, but we feel pretty confident that we can deliver low single-digit growth in 2026. Deane Dray: And the recent order trends? Mark Sheahan: Yes, the recent order trends would support that outlook. Operator: Our next question is from Mike Halloran of Baird. Michael Halloran: So maybe just a question on the fourth quarter and then reverting back to some 3Q commentary. Did you see any signs of pull-forward demand in the fourth quarter, particularly on the contractor side. And then also in the third quarter, you referenced some green shoots. Any thoughts on whether you're still seeing signs of green shoots or to David's more recent comments. Is it just pretty steady out there at this point? And maybe specifically refer to some of the green shoots you were seeing before and maybe an update on that side? Mark Sheahan: Yes. I don't think there was any pull forward. I think it was kind of normal fourth quarter from that to a point. I mean, there's always stuff that happens at the end of the year, but there's nothing out of the ordinary that comes to mind. The one thing that we did highlight is that there was a little bit of a pickup in the home center channel, whether that's sustainable or not, where that goes from here, none of us really knows, but that was encouraging to us because that has been a headwind for us for a number of quarters now. So hopefully, we're starting to see some signs of life there. I was just with our global sales team over the weekend for a meeting that they held. And we've been looking at data and talking with a lot of people. But I think there's a sense that at least here in North America, kind of a flattish outlook again on residential housing. So not like any kind of a dramatic shift there. As I said in my opening comments, being held back a little bit by affordability. Commercial is actually -- the team is pretty bullish about commercial opportunities really throughout the country, multifamily and some of the infrastructure things that are going on. So I felt like most of our salespeople were upbeat on what's going on on the commercial front in the course, those are more expensive, higher-margin products. So that's good. And then surprisingly, talking with some of the manufacturers -- paint manufacturers there, actually starting to see some hope on residential repayment, which would be great for us. As you know, the turnover in homes has been anemic the last couple of years. And to the extent that we get houses turning over again, there is a little bit more of a renewed bullishness on the residential repaint side. Of course, we've got new products coming out, too, that the team is excited about. So -- all in all, I would say that going into this year, feel a little bit better about contractor, maybe those are green shoots than we would have a year ago. David Lowe: Yes. And I think that the only thing I would add is a number that we all track. Mortgage rates right now are somewhere around 6.10%, which I think is the lowest that we've seen in this last cycle over several years, going back to Q4 of '23. Rates, I think, peaked out at 7.8% -- 7.9%. So it's still not that 5 handle that we'd like to see, but it's getting pretty dog-gone close. And with the pent-up demand that Mark touched on, I won't say it's a green shoot, but it's certainly something that could be an extremely positive development as the spring rolls along. Michael Halloran: And then on the pricing side of things, what is the price assumption embedded in that low single digit? In other words, is there a volume growth assumption in that low single-digit organic growth number? And then also, could you just remind us when the pricing was implemented by segment? I know some of it was in that late 3Q time frame? Is there any that's coming in to start this year? Mark Sheahan: Yes. I think we're hoping to realize about 1.5% to -- 1% to 1.5% on the pricing front this year. Of course, it's sort of mix dependent and timing dependent. And then on the pricing rollouts, as you know, we did accelerate some of the 2026 price adjustments in the third and fourth quarter of 2025. So there wasn't -- and there haven't been a lot of price changes in Graco here in 2026. The timing of some of our larger customers and their price increases is more on a midyear basis. So we did see some benefit from those increases that we did in mid-2025, and we expect that being able to do that, those kinds of increases throughout 2026 as sort of our normal cadence. David Lowe: Yes. So I would just -- yes, especially here in North America, by midyear, we hope to have price adjustments made for key channel partners and across all the legacy product families. Operator: Our next question comes from the line of Saree Boroditsky with Jefferies. Saree Boroditsky: Maybe just starting out at high level, could you just update us on your One Graco initiative, and how we should think about any benefit to sales or margin performance for this year? Mark Sheahan: Yes. So I think one of the things I would point to is the inventory reductions that we've been seeing in our factories as a result of One Graco are pretty significant once we put all the operations under one leadership team. And we looked at knocking down some of the silos that were amongst our operation units. We really identified some areas where we could make some changes, do some consolidations of different facilities and do a better job of managing inventory than we've ever done. I think, as a company. So I'm pretty happy about that. We also did obviously reduce expenses pretty significantly. Here, and you saw that show up in 2026. So I think the number that we gave last year of around $15 million, if I'm remembering correctly, Chris, is nodding. We did realize that maybe even a little bit more. So we did drive quite a bit of efficiencies in the company as a result of that. The first year, when you go through a reorg, you're always going to have some growing pains, both on the internal side of the house and externally, I would say they've been minimal. I think that we've worked through any of the internal issues that we've had with sales and marketing teams in particular. And I think that as we go into 2026, these teams are fired up and ready to go. I mean sales people that now have access to multiple product lines gives them a lot more to talk to customers about. Same thing with channel partners where we had restrictions in the past. So it's hard for us to put a dollar value on the revenue impact in 2025 of the initiatives of One Graco, but we all feel very strongly as a management team that was the right thing to do, and it should give us some tailwind in 2026 and beyond. Saree Boroditsky: And do you have a cost saving number then for 2026? Mark Sheahan: Well, because we rolled it out right at the end of last year and we hit the ground running in 2025, the full year benefit of One Graco, as I said, was around $15 million. There's no ongoing restructuring that we're doing costs that we're taking out related to One Graco. Of course, we're watching expenses and managing things as we always do here. But there's no ongoing cost out happening at the company. Saree Boroditsky: Got it. Appreciate that. And then I think last quarter, you talked about orders coming in at low single digits. Just curious how orders performed into year-end and then so far in January. Mark Sheahan: Yes. I think what I would say is that we factor all that into the guide, right, that we're doing here for 2026. And what we've seen so far, it's early days. We're just getting through January here. We're not concerned at all on where the guide is in relation to the order rates that we're seeing from our business units. Operator: Our next question comes from Bryan Blair with Oppenheimer. Bryan Blair: I was wondering we could level set a little bit more on the upfront licensing agreements that your team has won. You're very clear in that they're noncompetitive customers or at least applications and very specific there in. What are the markets or applications where you're winning that are outside of Graco exposures? Mark Sheahan: Yes. I've been reluctant to share any specifics on customers without getting their clarification or clearance that it's okay. I would just mention that we're licensing the technology to motor manufacturers as well as some OEMs. So with respect to the motor manufacturers, it's limited in terms of the scope of the motors that they're actually putting ETM technology into. But once they're in, they can go into multiple different applications anything from the process industries to ag industry to robotics in some cases, where they want a small compact motor that will fit better than what they currently have available today. So it's really up to them to make sure that once it's introduced as they launch it to their customers. And with respect to specific OEMs, again, I'm not at liberty to speak to the names. But I will tell you that when we get in front of people, and we show them a Graco product that has the motor in it, that's functioning and working. It goes a long way toward building confidence with an OEM to say, okay, now, I need to redesign the product that I have to put those motor technology into it saves energy. It's quieter. It's more compact, it's lighter weight, all features that seem to resonate well with those OEM customers. Bryan Blair: Okay. That certainly makes sense. And then your team drove a pretty solid inorganic growth in '25. Messaging remains pretty favorable there. You obviously have abundant dry powder. I was just curious if you can offer any finer points on the overall size or scale of your funnel composition of the pipeline actionability? And what, if anything, has changed on those fronts over recent past. Mark Sheahan: I think what's changed is our confidence in being able to identify strategic companies that make sense for Graco. We've been really encouraged with the handful of ones that we've done here recently. They've all been hand in glove deals for us. There's mutual benefits on both sides. There's excitement amongst our teams when they actually see how a business that's acquired can fit with their customer base or with their channel. And so I think there's some momentum within Graco, is probably building with respect to M&A. Of course, we're going to stay disciplined. I think that that's the most important element of any deal that you do. You want to make sure that you're creating shareholder value and that the companies are -- there's mutual benefit on both sides. So I'm encouraged by that. We have well over 100 names in our pipeline at any given point in time. Some are actionable at different levels. Some are out there quite a ways. I will say that as I look into early 2026, there are opportunities that will come along and to the extent that it makes sense for us to be active and purchase them, we'll be ready to go. Operator: Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Jeffrey Hammond: Just back on the home center, as you talk to those customers, did you get the sense of like did inventories get too low, or they're getting ahead of a price increase, or if it's underlying demand is actually getting better? Just a little more color on that. Mark Sheahan: Yes. I mean the foot traffic is still pretty light there. So I don't think they've seen a big uptick in foot traffic. It may have been some channel activity there where they just felt like they needed to get things in better shape with their inventory. We didn't launch any new products or anything significant that really impacted our business. So it's a nice dynamic. It's -- we haven't seen it for a while. I don't have a lot of -- unfortunately, I don't have a lot of color to provide that would give you anything more than maybe what you'd get if you spoke with them. David Lowe: Yes. I just would underline Mark's last point, it was a bounce in a business. It was meaningful, but it follows three really depressing years. So I would be getting ahead of myself if I thought -- concluded that it suggests a major change. However, these people are good merchandisers. And when they order products they usually know what their needs are. Jeffrey Hammond: Okay, great. And then I think you had indicated after '24, a lot of our big capital projects are gone, but I think in CapEx, you have a tick up. Can you just talk about what's in the growth capital plans in 2016 to drive that? David Lowe: Well, in addition to our maintenance CapEx, which I think over the years, we talk a number in 40% to 50% range. We're going to be starting in a couple of months, the construction of our new corporate headquarters building in the French light campus, where we already have two existing structures. And I think that the planned number for that, I think we've communicated. It is about $50 million, and most of that money will be spent in '26. Mark Sheahan: Yes. And we're also vacating our campus here in Northeast Minneapolis, which we will sell, which will offset that, but we haven't factored that into the numbers that we've given you. We will disclose that if and when it happens, but it will be a noticeable reduction in the overall CapEx spend when we exit this facility. Operator: Our next question comes from Matt Summerville of D.A. Davidson. Matt Summerville: I was hoping you could kind of do a little bit of an end market around the horn in the industrial business, what you're seeing from your larger end market exposures and then maybe contrast that across the three regions? And then I have a follow-up. David Lowe: Okay. Well, I will take this one on. I made a list of end markets and a couple of areas I call out some regions. So bear with me here. This might be a useful list or less useful. On the positive side, we have seen steady activity in the automotive space, both with EVs and with legacy companies, both in the quarter and for the full year. It was really one of the business areas where we continue to see investments here in North America and in other markets, including Asia. Our famous dealer service market, think lubrication equipment, remains strong for the full year and had another positive quarter. So that was -- this is several years in a row where we've seen the dealer business perform satisfactorily. Despite some of the lumpiness in our semiconductor space, and especially here in North America around the timing of projects, the business showed some firmness in the Asia region. And in our Process Equipment segment, some of our channel partners, especially some of the MRO companies have called out seeing pretty good performance in the food and beverage space. Mark already touched on the bounce we've seen in home center, and I would add the foam insulation to that, but also it's the same thing off a very low level compared to where we were at a few years ago. Sort of on the flat or downside, the Tier 1 automotive has been a mixed picture for us, and that's typically a steady business. With some ups and down, mining has been soft, and that's one of the larger end user markets for our automatic and industrial lubrication equipment and Asia is, of course, a very big market for mining. Solar CapEx was down, although one of our sales executives just returned from Asia, and he says, well, the activity is down today or down in the prior quarter. Outside of China, the Asian manufacturers are seeing panel volume increases, and that probably bodes better things for us sometime in the future. And then I would add just a couple of other things. Certainly, here in North America, the construction-related industrial markets, furniture, cabinetry, white goods, window and door for the most part, are depressed. And I guess to maybe round it out and to give you a region, our protective coatings business was a little softer this year than it had been earlier in the year. We did see I don't know, some project order decline or less project activity in the Middle East where the oil and gas infrastructure is a big driver in spend for that equipment. Matt Summerville: Great. And then just maybe an update, having completed now three deals in the last 15 months or so, kind of how you're thinking about the actionability of your M&A pipeline here looking over the course of 2026 and whether or not you're optimistic that we see a couple of additional deals it over the line. Mark Sheahan: Yes, I'd characterize it as pretty good, Matt. You never really know how things are going to shake out. But as we are going into the first quarter here, there's things that we're looking at like every other company is. As I said before, I think that the thing that's really changed for us is we're very confident that the companies that we're pursuing are ones that really make sense to us. And I think we've got some momentum within our organization to be able to utilize as we look at future deals, where we actually are able to get some confidence that we can add value to those companies and they can revalue to us. So I'd say it's a good picture at this point. Operator: Our next question comes from Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: A couple more maybe on the modeling front. So in industrial, it seems like you're not quite turning the corner, but maybe the North America and Europe data suggests that maybe things are getting a little bit better. But how about on the margin front you had that mix headwind. I'm wondering how long if that continues into next year? Or how do you see margins playing out with those dynamics? Mark Sheahan: Yes. I think that the quarters are always a little bit difficult because you do get some lumpy projects in there. In this quarter, we did have that with our powder finishing business systems. A couple of big ones that shipped out and just sort of skewed the results. I mean, I think that the margins in industrial are fantastic. I've got no concerns whatsoever in terms of any kind of deterioration. If we can get volume rolling through the factories beyond this kind of low single digit, there's plenty of upside. You've seen the incremental margins this year. A lot of that was due to One Graco, but also decent margin performance on volumes that have been, as you said, kind of flattish here for a while. So yes, I feel good about where we're sitting on the profitability side in that business. It's really a volume story going forward. Andrew Buscaglia: Okay. Got it. Similar question on the modeling front with the expansion markets. You guys have done a great job getting those margins up in a short amount of time. I'm wondering, are there maybe the confidence is a little bit lower on the top line. I'm just wondering, are the higher-margin subsegments or subsectors that if they were to return to growth could be pretty influential on those margins going forward? Mark Sheahan: Yes. I mean, really all of the businesses within there are nice profitable businesses. So we don't really have any dogs in there. For sure, the semiconductor business has really high, nice margins as does our high-pressure business and our QED business. And then, of course, with the motor initiative that we've got going on there as well that just sort of adds on to the top of it. So I would say it's similar to the industrial from the standpoint that we've got the infrastructure in place. We've got the teams. And when the volumes are higher than what they are today, you'll love the incremental margins. Operator: Our next question comes from the line of Brad Hewitt of Wolfe Research. Bradley Hewitt: So I'm curious how backlog trended in the quarter. It looks like you got the backlog conversion in the Gama business as expected this quarter, but any additional color there would be helpful. Mark Sheahan: Yes. I think we were -- we did a really good job in manufacturing in Q4. Again, I kind of give some of the credit to One Graco and that team being organized and making sure that we're focused on getting products out to customers that wanted them by the end of the year. As we enter 2026, I think backlogs are at a decent level. No concerns there. And we're going to be pushing product out as quickly as we can. The powder business that you referenced is part of our backlog, obviously. And that can be lumpy because at times, you'll have projects, particularly in our SAT business, which is those vertical lines that are used to coat things like windows, aluminum extrusions, those types of things. These can be projects that can go 6 months or more. So when we look out, we have more visibility on the powder side than any other. And we're -- again, we factor all that into our organic outlook for the full year, which is, I think, very achievable. Bradley Hewitt: Okay. Great. And then curious if you could help us as we think about the phasing of organic growth throughout the year in 2026. Would you expect the lowest growth in Q1? And then I know Q2 and Q3, you have easier comps. So could we be looking at maybe like mid-single-digit growth in Q2, Q3? Any thoughts there on the phasing? David Lowe: I would just say, Brad, I think that our seasonality will probably hold this year. There's nothing that we look at that would change that. Typically, the way that we think about it is that if we have good business on the contractor side that we should have a stronger second and third quarter. And typically, we have project completion realization in the fourth quarter similar to what we've had this year. Bradley Hewitt: For Industrial? David Lowe: For industrial. Operator: [Operator Instructions] Our next question comes from the line of Walter Liptak of Seaport Research. Walter Liptak: I wanted to ask about, in 2025, you had that $100 million of incremental revenue. But in the profit walk, it was like $8 million in profits because of some extra costs. I wondered about like the delta there for 2026. Like how much revenue is going to be coming through with sort of a normalized profit in 2026, if that makes sense? David Lowe: I would say, I think Mark referenced this in his script that from a revenue standpoint, if we get full year revenue from all of our acquisitions, that brings us to about $190 million of revenue related to what we would consider our acquisitions, which would be a COROB, color service and Radia. And then from a standpoint on the margin side, when we factor in all of our purchase accounting and everything as such. I think that what you're going to see is pretty typical from these earnings rates that we saw this year, at least as a percentage of the earnings. Mark Sheahan: Yes, I think the COROB acquisition is fully banked at this point in terms of the numbers. We all got a full year in. So it's not really going to have a meaningful impact on contract. And that was obviously the biggest one that we did. Radia margins are really good. They're not going to be materially different than what the overall contractor margin rate is. And then color service, which is part of the powder business rolls up under industrial, again, is sort of in line with our profitability there as well. Walter Liptak: Okay. Great. And then so with the start of the year, maybe we could try a fun one. If we kind of like roll everything up, and you look at the year for positives and negatives. What I'm hearing from you is that the things that could go well could be maybe the lower mortgage rates, help the resi market or maybe some of these factory CapEx projects get lose? And then maybe on the negative side, you didn't say it, but are tariffs done for like downside impact. I guess I wonder if you could just run through your thoughts on what could go well, what could be a problem for this year. David Lowe: Well, the world is a -- we're reminded where we're headquartered, that the world is complicated, unpredictable place. And certainly, when we look at the things that could go well, yes, I think you touched on a couple of them that are highly relevant here and including the fact that, once again, we're launching some new products in some of our most important markets. And hopefully, that will give us some lift. And manufacturers and contractor end users are -- when they're looking ahead, they make their decisions based on ROIs, and we continue to believe that's what our equipment generates. On the messy side, only the Good Lord knows about what the trade environment is going to be like in 2026. Certainly, tariffs were a headwind for us that we made a mid-course correction with price adjustments. And I guess we've demonstrated interim price adjustments. And we've demonstrated that we try to be nimble as well. If we see armed conflict in the Middle East or something, that could have repercussions that we don't understand today. But I think over our 100 years, the world has almost always been a turbulent unpredictable place. Mark Sheahan: Yes. I think we're pretty well covered on the tariff front. We did our pricing actions. And as we're heading into '26, we don't expect headwind. You're going to -- obviously, they're baked into the numbers anyway. So -- and as David said, I mean, none of us is ever going to know what's going to happen. I think we demonstrated that we're willing to flex, and do what we need to do to drive value for our investors and our shareholders, and we're prepared to do that. These are uncertain markets. And Graco's in a good spot to be able to maneuver our way through them in a smart way. Operator: If there are no further questions, I will now turn the conference over to Mark Sheahan. Mark Sheahan: Okay. Well, great. Thanks, everybody, for participating. We're excited to wrap up '25 and get on to 2026. I think it's been a great year for Graco. It is our 100-year anniversary. Not many companies make it, 100 years. So we're super proud of that, and obviously, super proud of our employees for making sure that we're delivering good quality product every single day. So thank you so much. We're going to sign off. Have a great rest of the day. Operator: This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
Operator: Good afternoon. My name is Julian, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Manhattan Associates, Inc. Q4 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this question and answer period, simply press star then one on your telephone keypad. As a reminder, ladies and gentlemen, this call is being recorded today, January 27, 2026. I would now like to introduce you to our host, Mr. Michael Bauer, Head of Investor Relations of Manhattan Associates, Inc. Mr. Bauer, you may begin your conference. Michael Bauer: Great. Thanks, Julian, and good afternoon, everyone. Welcome to Manhattan Associates, Inc. 2025 Fourth Quarter Earnings Call. I will review our cautionary language and then turn the call over to our President and Chief Executive Officer, Eric Clark. During this call, including the Q&A session, we may make forward-looking statements regarding future events or Manhattan Associates, Inc.'s future financial performance. We caution you that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance, and actual results may differ materially from the projections contained in our forward-looking statements. I refer you to Manhattan Associates, Inc.'s SEC reports for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-Ks for fiscal year 2024 and the risk factor discussion in that report and any risk factor updates we provide in our subsequent Form 10-Qs. Please note that the turbulent global macro environment could impact our outperformance and cause actual results to differ materially from our projections. We are under no obligation to update these statements. In addition, our comments include certain non-GAAP financial measures to provide additional information to investors. We have reconciled all non-GAAP measures to the related GAAP measures in accordance with SEC rules. Find reconciliations scheduled in the Form 8-Ks we filed with the SEC earlier today and on our website at manh.com. Now I'll turn the call over to Eric. Eric Clark: Thank you, Mike. Good afternoon, everyone, and thank you for joining us as we review our better-than-expected fourth quarter and full-year 2025 results as well as provide our outlook for 2026. 2025 was a successful year for Manhattan Associates, Inc., and we ended the year strong, achieving record cloud bookings in the fourth quarter. In a volatile environment, Manhattan Associates, Inc. achieved annual records across RPO, cloud bookings, total revenue, operating income, free cash flow, and earnings per share. Recall back in April on my first earnings call, I highlighted how Manhattan Associates, Inc.'s strengths are well established as our platform, our products, and our people are recognized as world-class. Through strategic investments, we've strengthened each of these areas in 2025, positioning us to accelerate our momentum in 2026 and beyond. So let me briefly touch on each. In 2025, we extended our position as the leading innovator within the supply chain commerce universe and enabled faster implementation of our industry-leading solutions. While I will provide a more detailed platform and product update in a few minutes, I'm excited to say that several weeks ago, on the heels of a successful early access program, we announced the commercial availability of our initial set of AI agents and our agent foundry. Our offering enables customers to build or customize new agents directly in the active platform using natural language. Excitingly, results and feedback from our early adopters indicate that our AI agent workforce generates significant value. As increased automation and simplicity can drive higher productivity ROI, improve customer satisfaction. In 2025, our R&D team launched additional new offerings, including enterprise promise and fulfill, which is designed to optimize B2B order promising and fulfillment. As well as introduced numerous industry-leading features and functionality across our supply chain commerce solutions. On the people front, to improve our effectiveness and accelerate our selling velocity to both new and existing customers, in 2025 we made key hires and introduced several new programs within our sales and marketing organization. To briefly recap, we reorganized our entire global sales team under the leadership of our Chief Sales Officer Bob Howell. And added several new sales leaders and product specialists to the team. Additionally, we hired Greg Betts as our Chief Operating Officer and under his leadership, we have introduced several new programs to drive growth. Last week at our sales kickoff in Atlanta, we hosted a partner day that was attended by more than 100 people from across our partner community. Greg and his team introduced our updated partner program for global SIs, Manhattan specialists as well as technology partners like Google and Shopify. And a few weeks ago, we announced the hiring of Katie Foote as Chief Marketing Officer. Katie brings more than twenty years of marketing leadership for technology companies, most recently she was the CMO at Captivate IQ, and prior to that, she held several leadership roles at salesforce.com. I'm excited to say that Katie hit the ground running and spent her first week with Manhattan Associates, Inc. at NRF in New York. We're delighted to have her on the team. Now pivoting to quarterly results. Q4 was a record quarter that exceeded expectations. Revenue increased 6% to $270 million, highlighted by 20% growth in cloud and a return to growth in services. This resulted in adjusted earnings per diluted share increasing to $1.21. RPO increased 25% to $2.2 billion. In Q4, competitive win rates remained over 70% and more than 75% of our new cloud bookings were generated from net new logos. For the full year, our team did a fantastic job gaining market share. As new logos represented more than 55% of our 2025 new cloud bookings. With our growing opportunity for expansion from existing customers, we anticipate net new logos to revert to one-third of our new cloud bookings over time. Manhattan Associates, Inc. has always had strong cloud revenue visibility and that gives us confidence in the durability of our growth. To better assist investors' assessment of our business, today Dennis will provide additional color on renewals and annual recurring revenue. Many of our contracts will reach or approach full ramp pricing by the fourth year of subscription. So to better showcase this dynamic, we're introducing a four-year annualized value of recurring revenue or a ramped ARR. This ramped ARR alongside RPO will help investors quantify the pace of our cloud revenue growth over time. At the conclusion of 2025, our ramped ARR exceeded $600 million and was up 23% compared to the ramped ARR at the conclusion of 2024. From a vertical sales perspective, our end markets are diverse. And we have healthy established footprints across numerous sub-sectors, which include retail, grocery, food distribution, life sciences, industrial, technology, airlines, third-party logistics, and more. For example, Q4 deals included the following: A Fortune 100 home improvement company became a new logo active warehouse customer. An upscale department store chain became a new logo Active Omni and Active Warehouse customer. The largest global provider of medical surgical products became a new logo active warehouse customer, a lifestyle brand and omnichannel retailer of premium home furnishings that was an existing warehouse customer expanded to include Active Omni, a medical supplies equipment and services company became a new logo active supply chain planning customer a home furnishing wholesaler became a new logo active transportation and active warehouse customer. And many more as well. So looking out to the New Year, our pipeline remains strong across our product suite and we have numerous opportunities to drive growth. Including adding new customers, cross-selling our growing unified product portfolio converting our on-premise customers to the cloud, and renewing our initial sizable cohort of active warehouse customers. So now let me briefly provide some updates on our industry-leading products. As I stated earlier, we recently made our agentik.ai product set commercially available to our entire active customer community. Dennis Story: Our active agent offering consists of two primary elements. Eric Clark: Elements, a set of base agents that are ready to be activated immediately and our agent foundry offering which enables our customers to quickly build and deploy their own agents within the active platform. We designed our base AI agents in collaboration with a set of key customers to provide immediate valuable value to our customers by solving important day-to-day problems in areas like warehouse, transportation, contact center, and stores. Because we built our active agents directly into the platform, our customers do not need to implement costly and complex external data lakes to make them work. Our API-first architecture enables us to solve a growing list of high-impact problems with almost no configuration or additional upfront effort. And while our active agents are highly capable today, we have an aggressive product roadmap which will both enhance our existing agents with new features and deliver entirely new agents. Our agile software delivery process enables us to deliver these additional agent features on an incremental basis throughout 2026. In addition to these base agents, this month we also released our agent foundry. This intuitive tool enables our customers to build their own AI agents. Foundry provides a visual editor to allow customers to either start with an existing base agent and enhance it, to create an agent entirely from scratch. To achieve this, Foundry provides our customers with a comprehensive set of both base API and agentic tooling. And during our early access program this fall, our forward-deployed engineers use Foundry to enable our customers through a powerful new agents purpose-built to tackle specific operational challenges. In terms of commercialization, our goal is to make it easy for our customers to start their agentic journey with us and we are going to do that by offering a low-risk active agent pilot to get started. We are confident that the combination of our powerful base agents the flexibility provided by Foundry and the deep technical and domain expertise of our Manhattan forward-deployed engineers will provide a compelling reason for our customers to add an active agent after they complete their pilot. Dennis Story: Our active agents Eric Clark: made their public debut a few weeks ago at NRF where there was strong interest for these new AI capabilities and our active store offering, which is centered around our active point of sale application. Designed from the outset to be mobile-first and cloud-native active point of sale now also embeds a GenTick AI to help store associates become more effective sellers. With real-time insights into sales performance and the ability to understand what is selling well across the network our store associate agent provides prescriptive recommendations within the point of sale application. Because many of our active store customers also use our active OMS these selling insights and recommendations are enabled by a truly view of our customers' commerce activity. Speaking of order management, this quarter we are also releasing a powerful new fulfillment optimization simulation capability. Our customers can now experiment with a variety of optimization settings to ensure they are meeting the overall needs of their business at any given time. Many of our customers change their view of what optimal fulfillment means throughout the course of the year. During the holiday season, speed of delivery may predominate while at the end of the spring season, there is likely more emphasis on shipping distressed inventory to avoid markdowns. Our new simulation feature enables our customers to test a number of these strategies compare the outcomes and ensure the system is ready to pivot fulfillment strategies when the business calls for it. Like interactive inventory, we project fulfillment simulation to have strong cross-sell potential for our active Omni customers. And finally, we continue to experience strong sales and implementation results across our supply chain execution applications. Our active warehouse application continues to differentiate itself both its functional and technical superiority. During selection processes, the vast majority of prospects reached the conclusion that only Manhattan Associates, Inc.'s active warehouse application will meet their needs. And 2025 was also a strong year for our active transportation application with respect to both strategic wins and key go-lives around the globe. Our unification message continues to resonate Customers no longer want to select separate stacks for warehouse and transportation. They see the real power of a single platform optimizing inbound and outbound flow throughout their supply chain. That concludes my business update. I'll now turn it over to Dennis to report on our financial performance and outlook and then we'll move on to Q&A. So Dennis? Dennis Story: Thanks. Thank you, Eric. As Eric highlighted in 2025, we set records across bookings, our P&L, and cash flow. Congratulations to our team members around the globe for great execution in a volatile macro environment. I'll start by recapping our better-than-expected financial performance for the quarter and year. All growth rates are on an as-reported year-over-year basis unless otherwise stated. Regarding FX, it was a one-point tailwind to our Q4 revenue growth rate and did not have a material impact on our full-year revenue growth rate. For RPO, FX was less than a $1 million tailwind to sequential RPO growth and a $41 million tailwind to year-over-year RVO growth. As Eric highlighted, to better assist investors' assessment of our business today, we are providing additional color on renewals, and annual recurring revenue. ARR. Many of our contracts reach or approach full ramp pricing in the full year of the subscription agreement. And so to provide additional insight on our cloud revenue visibility, we are introducing a four-year annualized value of recurring revenue or ramped ARR. Our assumptions for ramped ARR are as follows. If a renewal is set to occur, during this four-year period, it renews at current pricing with no churn or price increases assumed. Also, if a pricing ramp schedule extends beyond the four-year window, which today that would be any ramps beyond 2029 that future uplift is not included. At the conclusion of 2025, our ramped ARR exceeded $600 million and was up 23% compared to the ramp period at the 2024. Please recall deals that include ramp pricing are only time-based which supports our strong cloud revenue visibility. So moving to Q4, total revenue was $270 million up 6% and full-year revenue totaled $1.08 billion up 4%. Excluding license and maintenance revenue, which removes the revenue compression by our cloud transition, Q4 revenue growth was 9% and full-year 5%. Q4 cloud revenue totaled $109 million up 20% and includes a customer liquidation headwind of $1.3 million that was not embedded in our guidance. This resulted in full-year cloud revenue increasing 21% to $408 million. As Eric stated, we achieved record cloud bookings in Q4 as we closed out 2025 with RPO of $2.2 billion growing 25% year over year and 7% sequentially. Our RPO strength was driven by continued new logo momentum. Which was a significant contributor to our approximately 20% growth in new cloud bookings for the year Renewals which does not include cross-sells were about 18% of total bookings in 2025, Contract duration remains at 5.5 to 6 years resulting in 38% of RPO to be recognized as revenue over the next 24 months. Q4 services revenue of $120 million was better than expected as solid execution returned this line item back to growth earlier than our original plan. For the full year services revenue declined 4% to $503 million. Q4 adjusted operating profit was $91 million with an operating margin of 33.8%. Full-year adjusted operating profit totaled $387 million with a 35.8% operating margin and represents over 100 basis points of improvement over 2024. The better-than-expected Q4 and 2025 results were driven by strong cloud revenue combined with operating leverage as our cloud business scales. Q4 earnings per share increased 3% to $1.21 and GAAP earnings per share increased 12% to $0.86 big whopper there. This resulted in full-year adjusted earnings per share increasing 7% to $5.06 and GAAP earnings per share to increase 3% to $3.6. As discussed in Q2 and Q3, our higher tax rate is due to an increase in tax reserves caused by the acceleration of our domestic R&D cost deductions under the July 4 U.S. Tax law change. As such this change was the predominant driver to the $15 million reduction in Q4 cash taxes and $36 million reduction in our annual cash taxes. So, moving to cash. Q4 operating cash flow increased 40% to $147 million with a 52.7% free cash flow margin and 34.4% adjusted EBITDA margin. Our full-year operating cash flow increased 32% to $389 million with a 34.6% free cash flow margin and 36.4% adjusted EBITDA margin. Turning to the balance sheet. Deferred revenue increased 21% year over year to $337 million. We ended the year with $329 million in cash, and zero debt. Accordingly, we leveraged our strong cash position and invested $75 million in share repurchases in the quarter resulting in $275 million in buybacks in 2025. Additionally, the board has approved the replenishment of our $100 million share repurchase authority. So moving on to our 2026 guidance. Our long-term and long-standing financial objective is to deliver sustainable double-digit top-line growth and top quartile operating margins benchmarked against enterprise software comps. Software comps these are drivers to our best-in-class return on invested capital as we maintain a balanced investment approach to growth and profitability. As noted on prior earnings calls, our goal is to update our RPO outlook on an annual basis. Additionally, as previously discussed, our bookings performance is impacted by the number and relative value of large deals we closed in any quarter which can potentially cause lumpiness or non-linear bookings throughout the year. All guidance references made on today's call will be at the midpoint of their respective ranges. So with that, for RPO, we are targeting $2.62 billion to $2.68 billion RPO, representing a range of 18% to 20% growth. Included in our target is an 18% to 20% contribution from renewals which implies double-digit growth in both new bookings and renewals when normalizing for FX movements. For full-year 2026, we expect total revenue of $1.133 billion to $1.153 billion. The $1.143 billion midpoint represents 10% growth excluding license and maintenance attrition, and 6% all in. For Q1, we are targeting $272 million to $274 million, which at the midpoint represents 10% growth excluding license and maintenance attrition and 4% all in. For the rest of the year, at the midpoint, we are targeting total revenue of about $287 million in Q2, $296 million in Q3, and accounting for retail peak seasonality $287 million in Q4. For 2026, adjusted operating margin we expect a range of 34.5% to 35%. Removing the impacts of license and maintenance attrition the 34.75% midpoint represents about 75 bps of margin expansion compared to 2025 and includes increased investment in our business particularly in sales and marketing and expanding our services teams. On a quarterly basis, at the midpoint adjusted operating margin is expected to be about 31%. In Q1, 34.7%, In Q2, 36.9%. Q3, and accounting for retail peak seasonality, 36.1% in Q4. This results in a full-year adjusted EPS guidance range of $5.04 to $5.2 and a GAAP EPS range of $3.37 to $3.53. For Q1, we are targeting adjusted earnings per share of $1.08 to $1.1 and GAAP earnings per share of $0.64 to $0.66. For Q2 through Q4, we expect GAAP earnings per share to be about $0.40 lower than adjusted EPS per quarter with the vast majority of accounting for our investment in equity-based compensation. So here are some more additional details on our 2026 outlook. We expect cloud revenue to increase 21% to $492 million which assumes $114 million in Q1, $121.5 million in Q2, $126 million in Q3, and $130.5 million in Q4. We expect services revenue to increase 3% to $517 million which assumes $124 million in Q1, $131.5 million in Q2, $137 million in Q3, and accounting for retail peak seasonality, $124 million in Q4. On attrition to cloud, we expect maintenance and license to represent about 4.4 headwind to total revenue growth in 2026. As such, we expect maintenance to decline 19% to $105.5 million which assumes $28 million in Q1, $27 million in Q2, $25.5 million in Q3, and $25 million in Q4. We expect license to be about $1 million per quarter and hardware to be between $6 million and $6.5 million per quarter. To support our strong bookings growth and the significant AgenTic AI opportunity, we have already onboarded about 100 new services associates in January and we anticipate these new hires coupled with license and maintenance attrition will result in consolidated subscription maintenance and services margin to be flat as reported compared to 2025. On a quarterly basis, we expect consolidated subscription maintenance and services margin to be about 57% in Q1, 59% in Q2, 60% in Q3, and accounting for retail peak seasonality, 60% in Q4. Removing the impacts of license and maintenance attrition our target implies 50 basis points of year-over-year improvement and we expect our effective tax rate to be 22% and our diluted share count to be 61 million shares which assumes no buyback activity. So in summary, 2025 was a great year of progress and execution. Thank you and back to Eric for some closing remarks. Eric Clark: Great. Thank you, Dennis. To recap, 2025 was a successful year for Manhattan Associates, Inc. and we ended the year on a strong note. Business fundamentals are solid and we enter 2026 with accelerating momentum across the organization. So a big thank you for joining the call and thank you to our global team for all the great work they do for our customers. And that concludes our prepared remarks and we'd be happy to take questions. Operator: Thank you. And with that, we will be conducting a question and answer session. And our first question comes from the line of Terry Tillman with Truist Securities. Please proceed with your question. Terry Tillman: Yeah. Hey, good afternoon, Eric, Dennis, and Mike. Appreciate the time here. And then first congrats on the 4Q bookings. It's impressive and also just the 4Q cash flow finish. I have a question maybe for you, Eric, first in terms of both cloud migrations for WMS and starting to drive that kind of muscle tissue around fast renewals. I think those were some focus areas going into the year. Just, or really throughout '25 and into '26, can you share any progress reports on both of those areas? Eric Clark: Great. Yes. Thanks, Terry. So I'll start with kind of that conversion and driving some of our on-prem customers onto active warehouse. You recall that we started that effort kind of mid-year in 2025 and we saw some early success we're now seeing, I would say, the fruits of that effort. And we're seeing the pipeline really start to build. We've already closed some of these deals in Q1, so that helped us get off to a quick start in Q1. And that's a part of, Dennis just talked about we've added 100 services headcount already in January. And, you know, that's a big difference from where we were a year ago in January. I think that says a lot about the confidence level we have in the book of business that we've built around services. So you combine the conversion opportunity with the new logo that we've brought in and what we see in terms of opportunity around forward-deployed engineers to help drive our AI efforts. And we're very bullish in that area. Yeah. Did I hit everything there, Terry? Terry Tillman: Yeah. Yeah. You did. I mean, I said that was maybe just another part of this first question, so I may accidentally do two and a half here. I apologize to everybody. Okay. It's not one of those things that gets a lot of attention we just care about the numbers. It's always about the numbers and spreadsheets. But you talked about fast implementation times and faster time to value, I think, last year. Again, that's not gonna get a lot of the accolades, but where are you in some of those, progress efforts? Eric Clark: Yes, great question. Thanks for asking. So we're making really good progress in those efforts and that's coming into play in some of our deployments. Even some of the that maybe were multiyear deployments that started years ago. And we're able to start accelerating those now. It's also coming into play in many of these, conversions that we're actually closing them as fixed fee, fixed timeline deals because we've got the confidence in that pace. So the other thing that'll where it comes into play, Terry, you know, we shared for the first time today the ramped ARR. And it grew 23% year over year. Part of what's driving that is we're able to sell more deals at a faster pace. We're driving a faster ramp of that revenue, and you're seeing that confidence come through in that area as well. Terry Tillman: That's great. I appreciate that, Eric. And I guess, Dennis, the 4Q free cash flow strength. I'm curious, though, looking in '26, is there any way you can share any commentary on cash taxes or anything that we need to think about and just maybe the relationship of free cash flow to EBIT or EBITDA on '26, just for some kind of parameters? Thanks. Dennis Story: Yeah. Terry, I think that's just it's similar from cash taxes. Operator: Yes, got it. Thanks. Thank you. And our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question. Brian Peterson: Thanks, gentlemen, and congrats on the quarter. So Eric, I wanted to dive into the RPO number that looks like a very strong number versus what we had expected. Particularly on the net new side. So I'd love to understand maybe in terms of deal timing, what products are out there, geos? Is there anything that you can share about what really drove that fourth quarter strength? Eric Clark: Yeah. Thank you. The great thing about that fourth quarter strength is it really comes across a variety of products and a variety of deal types. And I shared several examples there. We always talk about the big deals can be lumpy and you don't know when they're going to come, but I think Q4, we rounded out the year in a very complementary way with a lot of those deal types across a lot of deal across our entire product suite. So that gives us confidence in the pipeline that we've got going into next year as well. But the other thing, I'll kind of great RPO, you know, we're really proud of what we did in terms of RPO sequential growth quarter over quarter and year over year. But we also recognize that as we come into 2026, where we know it's a year where we've got kind of an uptick in renewals, we want to give you that ramped ARR so that we don't have to go focus on renewing every deal at five years. If we can renew some of these deals at three years, that gives us another opportunity to increase price sooner. But when the only metric we give you to for you to measure growth is RPO, that might give you concerns if we're only giving you RPO. So that's why we're now going to give you this combination of RPO and ramped ARR so you can have confidence in the growth that we're projecting. Brian Peterson: Got it. And I appreciate the new disclosures, guys. Dennis, I did have one clarification. You said 18% to 20% is coming for renewals in 2026. Is that the mix of the RPO target? I just want to make sure I understand the disclosure around that 18% to 20%. Dennis Story: Yes, yes, that is the mix. Eric Clark: Yes. So and again, if we held ourselves to make sure we renewed every deal at five years, it could be a higher number, but we think that's in the best interest of the company. So that's why we want to give ourselves the ability to renew some deals at three years as well. Brian Peterson: Got it. Thanks, guys. Dennis Story: Thanks, Brian. Thank you. Operator: And our next question comes from the line of George Kurosawa with Citi. Please proceed with your question. George Kurosawa: Great. Thanks for taking the questions. Maybe just to stay on this topic of renewals. I think if I got the numbers right, 18% of RPO bookings from renewals in 2025 and now expecting 18% to 20%. I think we were maybe estimating that might be a bit of a bigger uplift. Am I right in thinking here that maybe there's some level of conservatism baked into that or maybe there's these duration dynamics that you were just discussing? Anything else we should keep in mind? Eric Clark: I think those are the key things. And maybe those two things go together conservatism on duration. Again, if we really held ourselves to make sure that we renew every deal five years that 18% to 20% could be higher. And the total RPO growth year over year could be higher. But we think we've got a very sticky product and our customers are not leaving us. All of our customers are renewing. So having the opportunity to have another conversation about price increase in three years versus five years is an advantage to us. George Kurosawa: Okay. Okay. Very helpful. And then I wanted to touch on the services business. I think you mentioned you're looking to hire into that group. You're guiding to 3% growth for the year. Historically, that's been a line item that's maybe a little bit lower visibility relative to the rest of the business. What's kind of underpinning your confidence there? Eric Clark: Yes. So it's a few things. Number one, that strong bookings growth in Q4 and really strong in total for all of last year going to continue to drive services well into 2026. But then again, we put these conversion programs in place in the middle of last year they're really starting to bear fruit. We're seeing the pipeline. We're seeing the deal volume pick up. That's creating services opportunity. And then I think the big one is AgenTic AI. You know, you look at a lot of SaaS companies that are out there trying to sell AgenTic AI, and they don't have the army of services people that we have. And we see this as an opportunity to use that army of services people as a big advantage because we have the domain expertise. We can go in with forward-deployed engineers and help our customers realize value very, very quickly. This is the first time since Manhattan Associates, Inc. launched the cloud product where we've got an opportunity to go out to every cloud customer all at one time and have an immediate upsell opportunity that can add value from day one. So, you know, this is new for us, and we want to make sure that we get that message to all of our customers as quickly as possible. George Kurosawa: Great. Thanks for taking the questions. Eric Clark: Yep. Thank you. Operator: And our next question comes from the line of Joe Vruwink with Baird. Please proceed with your question. Joe Vruwink: Hi, great. Thanks for taking my questions. Lot of questions on the renewal component to RPO. Next year. I wanted to ask about the remainder, the new bookings component. And what's kind of interesting is, so new new logos, you know, so heavy and what you were able to achieve in 2025. You said your expectation is that balances back towards normal. And yet, there's still a pretty healthy bookings component for '26. So that would seem to be kind of the pace of migration or maybe cross-sell to existing customers kind of picking up the slack. Are you seeing kind of some early evidence? I know you talked about deals closing already here in 1Q around the more consultative approach to conversions. But what are some of the other things you're doing to accelerate the pace of migration because that new bookings number looks pretty good relative to where our expectations were. Eric Clark: Yeah. So, you know, when you think about new bookings us that includes new logo, it includes expansion within existing accounts and of course converting from on-prem to the cloud. We've talked about conversions quite a bit as you mentioned, but that expansion is a big opportunity for us. We've done really well in acquiring new logos. And we've got this renewal cycle of warehouse, active warehouse. So the opportunity to cross-sell and expand is really ripe for us as well, and that's a big focus area for us. We also consider that taking market share. Because when we cross-sell new products, we're taking that from someone else. So that's kind of continued focus on taking market share. So we'll do that in 2026 with new logos and cross-selling new products to existing customers. Joe Vruwink: Okay. That's great. And then on the services outlook, so I guess that's good that kind of the update maybe as hard as that was a year ago. You really haven't missed on a service communication since then, and now you're bringing people back. Are there aspects of the services pipeline where you would maybe say it's a lower risk factor? Know George just asked about this question, but I think about these 66 timeline propositions that would seem to actually provide a high degree of confidence and a services outlook are there are things around, you know, maybe a different go-to-market approach where you're trying to de-risk, what you're communicating tonight? Eric Clark: Yeah. So I think number one, we always try to de-risk what we're communicating and take a conservative approach. Of all of the revenue services is the tough one to predict a year from now. It's easier to predict closer to now. But we've got the confidence that we have in what we've shared is based on the things that I mentioned. Those all of that pipeline and new logo that we sold last year and in Q4 gives a whole lot of clarity. Those ramp timelines are fixed, that gives a whole lot of clarity to what we're doing. And the things that we're doing around conversions and creating fixed fee, yeah, those as that volume picks up, that gives us an opportunity potentially see upside in services as well. Joe Vruwink: Great. Thank you very much. Eric Clark: Thank you. Thank you. Operator: And our next question comes from the line of Dylan Becker with William Blair. Please proceed with your question. Dylan Becker: Hey, gentlemen. I appreciate the question here. Maybe Eric, starting with you, I think it's very clear that the RPO strength is quite exceptional. Guess maybe if you're to reconcile kind of that outperformance relative to maybe the contribution from some of these newer initiatives we've onboarded over the last maybe few quarters here, if we think about a dedicated migration team, partner emphasis, obviously, like, more of an expansion motion as well too. That something that you're starting to already see kind of some of the fruits of the labor from? And maybe how we think about that layering in over time as well too and contributing to strength throughout the balance of the year, maybe as those start to ramp and become more contributors over time? Eric Clark: Yes. So I think some of the things that some of the programs that we put in place in 2025 did have a positive impact. But realistically, most of the pipeline we close is a little bit longer-term sales cycle. So I think you've got a credit what the team had in place before we went into 2025. Maybe we influenced some of that in the second half and got a little bit better result. But largely, the result that we got was based on the preparation that happened before '25. Now that being said, I think we did a whole lot of great preparation in '25 for '26. And that's when I think we will really start to see the fruits from our labor around these programs. We put in place in the '25. Dylan Becker: Perfect. Okay, great. Thank you. And then maybe for Dennis, or if you have a comment as well too. On the fully ramped metric as well too. Obviously, some nice room for incremental kind of contribution step-ups relative to what we're doing today, from a cloud revenue perspective. I guess, how you think about, the in-year contribution of those ramps effectively kind of like what's committed, what you have visibility into? I know, Dennis, you called. Called out high levels of visibility here, but maybe kind of parsing through what's rolling off of kind of that ramped backlog and giving you conviction in that 20% growth versus kind of what's an incremental net new that you kind of have to go and get in a particular year? Eric Clark: So maybe I'll start with that just to make sure I understand the question very clearly. When we talk about that ramped ARR, what we're doing is at the 2025 everything that is sold we're looking at the ramps over the next four years. And then comparing that to the same thing a year ago. So in that ramped ARR, it doesn't assume any new sales. That is all committed revenue. And then everything new that we sell adds to that committed revenue. Is that kind of the question you're asking, or am I missing something there? Dylan Becker: It was more in the, in the context of how that flows through to reported cloud revenues. Right? Of what's the kind of step up in that ARR that you actually realize in a particular year just giving you kind of conviction in the durability of the 20% growth algorithm, if that makes sense? Eric Clark: Yeah. And the ramps vary. And in any given year, we've got as you know, some of our products like POS and order management ramp quicker, but some of the long complex warehouse do often take four years to fully ramp. And in any given year, we've got some that are four years in, some that are three years in and two years in and one year in. But you've seen the volume over the past several years of our sales growth. So we're you know, each one of those categories is kind of stepping up each year, which is compounding that growth each year. Dylan Becker: Very helpful. Thanks, Eric. Eric Clark: Yep. Thank you. And then maybe one thing I'll add to that, sorry, is, our GRR gross retention rates are world-class and that really gives us confidence. So Dennis talked about the assumptions around this new ramp ARR number is that we're assuming no churn and no price increase. Well, that also creates upside because there's more opportunity for price increase than there is return. Dylan Becker: Thank you. Operator: And our next question comes from the line of Parker Lane with Stifel. Please proceed with your question. Parker Lane: Hey guys, thanks for taking the questions here. Eric, great to see the commercial availability of the AI agents and the agent foundry. Was just wondering if you could go a little bit deeper on the monetization strategy around these agents if you expect that to be fairly static across the different types of agents you're providing, including those that are more customized. And when you look out the 2020 I know we're really early here, but what sort of momentum do you anticipate seeing within your base from an adoption standpoint? And perhaps any thoughts on how much that could contribute to growth here in the near term? Eric Clark: Yes, thank you for that. So number one, we're really excited about what we've launched and we think this is truly different in the market. We're in a unique position where we really have stuck to our model on creating a true API-driven microservices platform that is truly integrated. So we don't have to start the conversation with a project of data indexing and moving to a data lake. We start the projects by turning it on and you've got live agents working in your system that are natively working in your platform. So that's something that's really unique. And I think we've got a lot of customers that are looking for ways to figure out how to take advantage of AI. And this gives them a very easy opportunity to. And we're offering this at a very low-cost low-risk scenario. It's a ninety-day proof of concept. It will come with forward-deployed engineers that will make sure that they learn how to use all of the standard agents that they can turn on day one. And those forward-deployed engineers will also help them build at least one or two custom agents using our agent foundry. And train them how to build their own custom agents. Clearly, all of this is, so that when we get to the end of that ninety-day proof of concept, we've got customers that say, there's no way we can turn this off. It's adding so much value. We've got to use it. And that's when we monetize it. So, we're pricing this. We want to keep it very simple for our customers, so it's an uplift. Kind of like we do with labor and slotting and some of the other things that we have within our product. It's standard uplift, and that makes it easy for our salespeople to have the conversation and easy for our customers to buy. Parker Lane: Thanks, Eric. And Dennis, one for you. Just to clarify on the customer liquidation headwind you faced. Was that $1.3 million for the fourth quarter that wasn't contemplated in the guide? And if so, what's the annualized headwind you anticipate there in '26? Dennis Story: Yes, was in the quarter $1.3 million or $2.5 million annualized. Eric Clark: Okay, yep. Parker Lane: Got it. Okay. So that wasn't in our numbers a quarter ago. That happened quickly and surprisingly. But it's now baked into all of our numbers. Parker Lane: Okay. For clarification. Dennis Story: Thank you. Operator: And next is Christopher Quintero with Morgan Stanley. Please proceed with your question. Christopher Quintero: Hey, Eric. Hey, Dennis. Really appreciate the ARR disclosure here. That's super helpful, especially with all the different dynamics hitting the RPO metrics. So thank you for that additional color. Eric Clark: Yep. Of course. Christopher Quintero: I've got two questions on services. It's usually the number one question I get from investors is how do we think about the services business over the medium and long term? Clearly, it's really great to see that get back to growth. You have some easy comps from '25, but you also have a lot of renewals coming up. So is there any color you can give us around what is that kind of medium normalized kind of growth rate for the services business? Potentially look like here? Eric Clark: Yes. So it doesn't surprise me that you get that a lot because I think in the services, in IT services world that question is going around a lot. I think what's unique about our services business is that it is so domain specific. And that gives us a unique advantage across our products, but also when we're talking about things like AgenTik AI. You know, the real value in AgenTik AI is being able to tie it to that domain knowledge and domain expertise. And that's what we're doing with our forward-deployed engineers. All that being said, and, you know, based on some of the comments I made earlier, these are all the things that give us confidence for that mid-single-digit growth rate in services. We don't expect this to be a double-digit growth rate and we don't necessarily want it to be. We want to our focus is on growing the cloud double-digit. 20% plus. Christopher Quintero: Got it. That's super helpful, Eric. And then if we go back to, you know, this call last year, you all talked about some of those implementation, in-flight implementations that got pushed out. Any update on that? Like how did all those close in 2025? Are you still kind of working through some of those? Any additional color there would be helpful. Eric Clark: Yeah. I think there's, you know, a little bit of all over the board on some of those. But the reality is, I think, in a large part, none of them stopped. As we said a year ago, none of them are stopping. They were just slowing down. They're all back deploying again to some extent. Some of them are you know, now ahead of where they were, you know, ahead of schedule, and we continue to have these conversations. If you remember, we talked about not only are we offering fixed fee conversions, but in some cases, we're going out to some of these customers and offering fixed fee hey, let us do the next 10 DCs that we've already got the recipe for, let us go roll these out quickly. So there's a big effort to make sure all of those catch up or get ahead of their schedule plan. Christopher Quintero: Awesome. Thanks so much, Eric. Eric Clark: Yep. Thank you. Operator: Thank you. And our next question comes from the line of Guy Hardwick with Barclays. Please proceed with your question. Guy Hardwick: Hi, good evening. Hi, Eric. I also NRF and I was able to fortunate enough to speak to some Manhattan Associates, Inc. reps and obviously, a home den on the active agent subscriptions, which you mentioned in the in your prepared remarks. So I know it was asked a little bit earlier, but asking in a different way. Are you assuming any incremental subscription bookings from active agent subscription in that $2.62 to $2.68 billion RPO guidance for the year? Or is it within the SaaS revenue guidance? Or would anything be incremental if it's not? Eric Clark: Yes. So we've taken a very conservative approach. Anything we do in AI is incremental to what we've talked about today. Guy Hardwick: Okay. Got it. And just as a follow-up. I guess that given you in terms of the Q4 bookings, how much of was that a catch up from perhaps the bookings being a little bit disappointing in Q3? So how much was it of bookings, which should have fallen in Q3, fell falling in Q4? And then how much was down to your sales guys over delivering or perhaps delivering better than expected? Eric Clark: Yes. I think when we talked about Q3 bookings, was a little below what we wanted it to be. But at the time, I said we are still on track to hit our full-year number. And that is a little bit just the lumpiness but we beat our full-year guidance by $40 million. So it absolutely was more than just timing by quarter. It was overperformance by the team. Guy Hardwick: Thank you. Eric Clark: Thank you. Operator: Thank you. And our next question comes from the line of Mark Schappel with Loop Capital Markets. Please proceed with your question. Mark Schappel: Thank you for taking my question. Nice job on the quarter, especially on the RPO print. Eric, a question for you here. Could you just comment on the CIO sentiment you're seeing with respect to green lighting large WMS and TMS conversion projects and maybe how that sentiment has evolved over, say, past six to nine months? Eric Clark: Yeah, I would say, the sentiment really hasn't changed drastically. Over the past six to nine months. I would say that our customers that are in programs are really like everything we're doing about speeding them up, speed and simplicity, how can they get to their ROI faster. The reason companies embark on this is because it truly does create efficiency and it does create cost savings and it does create ROI for them. So the faster they can achieve that, the better. But you can I gave you several examples of Q4 companies and the types of companies that we sold to and what they bought? Many of them being new logos, we still see a very healthy of companies that are recognizing if they want to achieve things that they need to do to meet their business strategies, they need software that supports that. And there's not another provider in the market that can provide what we can in these spaces, and that's why we continue to see these very, very strong win rates against the competition. Mark Schappel: Great. Thank you. And then as a follow-up here, in terms of your sales motion, obviously, a very strong quarter for new logos again this quarter. Could you also talk a little bit about the mix this quarter with conversions and cross-sells? And also how we should expect that to or how we should expect that mix to evolve in the coming year? Eric Clark: Sure. We always say that over time that it's kind of the rule of thirds. One third will be new logo, one third will be expansion and one third will be conversion. But clearly what we saw in 2025 is we had 20 we had 55% come from new logos. So that was a pretty remarkable performance. Now if any one of those three categories is gonna be higher than the others, I would absolutely want it to be new logo because that means we're going out, we're taking market share. That being said, I think just being realistically, and the more new logo we win, the more opportunity we have for expansion. And we know we have a ripe, set of customers that are getting ready for conversion. So we're just kind of weighing that as, you know, probably the rule of thirds over a longer period of time will come back into play. But we see big opportunity in all of those categories. Mark Schappel: Thank you. Eric Clark: Thank you. Operator: And our last question comes from the line of Clark Wright with D. A. Davidson. Please proceed with your question. Clark Wright: Hi there. Thank you. Most of my questions have been asked here already, but just wanted to understand again going back to the services revenue. And the opportunity that you have there once the customer is converted to the cloud. What's driving really the upsell from there on out and how do you continue to drive value through services in your domain expertise moving forward? Eric Clark: Yeah. So once a customer converts to the cloud, keep in mind, every quarter they get quarterly updates. So new features and that come to them through release notes and then our teams will help them determine which of these features and functions can add value to you right away, which do you want to think about later, etcetera. So the customers that are having the most success and getting the most value out of this software platform that we've built are the ones that are really looking at that quarterly. So then it comes in the services that are related to that come in very small doses each quarter. As compared to back in the old on-prem days, maybe it was an upgrade every five or ten years. With no services in between. So now it's more of a steady dose of services throughout the life of the partnership. Clark Wright: Awesome. That's helpful. And then just in terms of oh, go ahead. Eric Clark: No, please go ahead. Clark Wright: I was just wondering in terms of the strengths of the new business that you're talking about, has there been any specific verticals where you've seen more traction than others? Eric Clark: Well, I think what's been exciting for us is it's been very diverse. People really know us as we're really strong in retail and a lot of people think about us as that retail strength. But when I kind of listed out the wins and talked about the wins that we had in Q4, it goes far beyond retail. And it's great to see we're getting more and more strength and more dominance outside of retail. Clark Wright: Thank you. Eric Clark: Thank you. Operator: Thank you. And ladies and gentlemen, with that, this does conclude today's question and answer session. I would now like to turn the floor back to Eric Clark for any closing remarks. Eric Clark: I know we ran a few minutes long, but thank you all for sticking with us. Really appreciate your time. We're pleased with where we are here in Q1 and excited about the year ahead. Operator: Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time, and have a wonderful day.
Operator: Good day, and welcome to the Qorvo, Inc. Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference over to Douglas DeLieto, Vice President of Investor Relations. Please go ahead. Thanks very much. Douglas DeLieto: Hello, everyone, and welcome to Qorvo's fiscal 2026 third quarter earnings call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today as well as the risk factors associated with our business and our annual report on Form 10-Ks filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our Investor Relations website at ir.qorvo.com under financial releases. Lastly, for detailed information regarding the Skyworks and Qorvo combination announced on October 28, I encourage you to review the press release, investor presentation, Qorvo merger proxy, and related materials available on our investor relations website at ir.qorvo.com under events and presentations. Today's call will focus on our fiscal third quarter results as well as our outlook for March. We will not be commenting on the proposed business combination. Joining us today are Bob Bruggeworth, President and CEO, Grant Brown, CFO, Dave Fullwood, Senior Vice President of Sales and Marketing, and other members of Qorvo's management team. And with that, I'll turn the call over to Bob. Robert Bruggeworth: Thanks, Doug, and welcome everyone to our call. In our fiscal third quarter, Qorvo delivered solid financial performance with notable strategic achievements across each operating segment. We continue to pursue our long-term growth strategy while executing on restructuring actions to optimize profitability and reduce capital intensity. In ACG, we are supporting the world's leading smartphone OEMs with best-in-class products for their highest value flagship and premium tier devices. In CSG, we enjoy broad representation in Wi-Fi applications and we are expanding our reach in automotive, enterprise, industrial, and other customer segments with our ultra-wideband technology. In HPA, we are growing across a range of customer applications such as defense and aerospace, satellite communications, power, and infrastructure. Within our factory network, we closed our Costa Rica facility in December a few months ahead of schedule and have transitioned to external partners. The transfer of SAW filter production to Greensboro, North Carolina, and Richardson, Texas remains on track. With these actions, we will be able to operate more efficiently with reduced capital intensity and we will continue to differentiate our products with onshore manufacturing of GaAs, GaN, BAW, SAW, and advanced multichip modules. Turning to quarterly highlights. In ACG, December quarterly revenue declined sequentially in line with the view we provided last quarter consistent with typical seasonality. At our largest customer, content gains on their ramping platform helped to support double-digit revenue growth compared to last December. We supply a diverse portfolio of high-performance discretes, tuners, ET PMICs, and integrated modules to our largest customer. Not all of which have been awarded on the upcoming platforms. However, at this time for the upcoming fiscal year, we expect revenue from our largest customer to be approximately flat. For our ET PMICs, increasing internal modem adoption provides a multi-year structural tailwind as platforms transition away from third-party modems. With regard to integrated modules, on the ultra-high band pad, we received lower share in the upcoming phone models than last year and we expect our ultra-high band pad revenue to decline year over year. As a placement, we have demonstrated success across multiple generations. We remain confident in our highly differentiated technology and our ability to compete effectively over subsequent generations. In our largest customers' cellular-enabled iPads, we were awarded the high band pad. Representing a product and technology milestone and new content for Qorvo on that platform. We are extremely pleased to have secured this placement. The win gives us the opportunity to demonstrate capability and execute at scale on that platform consistent with our long-term investment strategy. Turning to Android. We remain a leading supplier in premium and flagship smartphones while we continue to reduce our exposure to low-margin mass-tier smartphones. In December, total Android revenue declined sequentially in the low double digits. In March, we expect a greater than seasonal decline in Android revenue. For fiscal 2027, we expect Android revenue to decline by approximately $300 million versus fiscal 2026, driven primarily by our actions to reduce exposure to lower-margin segments and secondarily by the impact of memory pricing and availability on mass-tier Android build plans. Qorvo enjoys broad participation across smartphone OEMs and we are not seeing signs of memory pricing, or memory availability impacting the flagship and premium tiers. Our largest customer is expected to be approximately flat, ACG revenue is expected to decline in fiscal 2027 by the reduction in Android revenue. This is an intentional resizing of our Android business. We are reducing exposure to lower-margin segments while continuing to serve Android's high-value and premium and flagship tiers. We expect the improvement in product mix to support a higher gross margin in ACG. Additionally, with ongoing OpEx reduction efforts, we expect to deliver expanding operating margins in ACG on the healthier revenue mix. In CSG, we're on track with an automotive ultra-wideband program with a leading automotive tier one. Regarding this platform, we are very pleased to announce we did receive our first production orders during December. This program will span multiple years and support multiple OEMs. We continue to see expansion of our engagements across the automotive customer base. Use cases for Qorvo's automotive ultra-wideband technology include secure access, digital key, child presence detection, and short-range radar sensing. We are supplying both our ultra-wideband and Wi-Fi 7 solutions in collaboration with multiple tier-one manufacturers of network access points. We're seeing strong customer demand and initial deployments include hospitals, factories, and other enterprises requiring ultra-precision indoor navigation, and location awareness. Our Wi-Fi portfolio is broadly represented in flagship smartphones, fiber gateways, mesh networks, client devices, and SATCOM ground terminals. And we continue to expand our Wi-Fi, FEM, and filter portfolio to enable higher bandwidth lower latency interconnected networks. We delivered first Wi-Fi 8 samples during December and customer engagement in Wi-Fi 8 is increasing. Regarding the CSG restructuring discussed last quarter, these actions remain on track. During the quarter, we successfully divested our MEMS-based Sensing Solutions business. While this represents a headwind to year-over-year CSG growth, next fiscal year, it is one of multiple initiatives we are undertaking to improve CSG's profitability. Turning to HPA, we continue to see multi-year tailwinds in DNA data center power and infrastructure markets. In DNA, the passage of the fiscal '26 NDAA includes top priorities, such as Golden Dome, the F47 fighter, and the Navy's next-generation fighters, warships, and drones. Qorvo is a beneficiary of new platforms, upgrade cycles, RF content growth, and increases in defense spending. As an example, Golden Dome is a multi-layer defense system that requires significant RF content. For the full fiscal year '27, sales in DNA markets are expected to total approximately $500 million. In power management, our strategic emphasis on PMICs for enterprise-class SSDs has been met with continued data center growth where customer demand has been very strong. During the quarter, we taped out our first chip for our next-generation enterprise SSD platform. Other power opportunities for Qorvo include AESA radars, drones, robotics, wearables, and smartphones. There is strong interest globally in Qorvo's AESA solutions combining our FEMs, Beamform AICs power management, and power control. In infrastructure markets, there are increased content requirements in DOCSIS 4.0 systems that align well with our amplifier and control portfolios. Qorvo is a leading supplier of broadband amplifiers for DOCSIS 4.0 and we are well-positioned with all major suppliers. We're also a market leader in small signal receive and transmit components used across the RF chain of 5G radio access networks. While these products have historically been deployed in terrestrial 5G infrastructure, we are increasingly seeing the same RF building blocks adopted in adjacent applications. Such as drones, and low Earth orbit satellite communications including direct-to-cell satellite architectures. We are sharply focused on growing our highest-performing businesses, we are divesting or exiting businesses that underperform. In fiscal 2027, we forecast a mid-single-digit decline in full-year revenue for the company, as ACG declines and becomes more profitable, CSG is approximately flat and HPA continues its double-digit growth. As we move through fiscal 2027, we expect our defense and aerospace business will be larger than our Android business. That's a meaningful shift in the portfolio that reflects both the strategic resizing of our Android business and continued growth in HPA. This increasingly favorable mix positions us to deliver full-year FY 2027 gross margins above 50% and EPS approaching $7 per share. These outcomes reflect continued operating expense discipline, a structurally improved portfolio mix, and our sustained commitment to innovation and operations excellence. And with that, I'll turn it over to Grant. Grant Brown: Thanks, Bob, and good afternoon, everyone. Qorvo's fiscal third-quarter revenue of $993 million, non-GAAP gross margin of 49.1%, and non-GAAP diluted earnings of $2.17 per share all compared favorably to guidance. During the quarter, our largest customer represented approximately 53% of revenue. On the balance sheet, as of quarter-end, we held approximately $1.3 billion of cash and equivalents and approximately $1.5 billion of long-term debt outstanding with no near-term maturities. We ended the quarter with a net inventory balance of $530 million. This represents a sequential reduction of $75 million and a decrease of $111 million compared to where we ended last fiscal year. During the quarter, we generated operating cash flow of approximately $265 million and incurred $28 million of capital expenditures which resulted in free cash flow of $237 million. Regarding our outlook for fiscal Q4, guidance reflects continued momentum in HPA offset by our strategic pivot from lower-margin mass-tier Android and the normal seasonal decline at our largest customer. Our expectations for March are as follows. Revenue of $800 million plus or minus $25 million, non-GAAP gross margin between 48-49%, and non-GAAP diluted EPS of $1.20 plus or minus 15¢. Gross margin continues to improve on a year-over-year basis. In Q3, non-GAAP gross margin increased approximately 260 basis points versus last fiscal year, and we expect a similar improvement year over year in Q4. This improvement is a direct result of multiple initiatives. We've actively managed our product portfolio and pricing strategies to reduce exposure to mass-tier Android 5Gs. We've positioned the company to benefit from growth in DNA, which is margin accretive, divested or exited margin dilutive businesses and we continue to manage factory costs aggressively as we have consolidated our manufacturing footprint. We project non-GAAP operating expenses in March to be between $240 million and $250 million. Below the operating income line, non-operating expense is expected to be between $8 million to $10 million reflecting interest paid on our fixed-rate debt offset by interest income earned on our cash balances, FX gains or losses along with other items. Our non-GAAP tax rate for fiscal '26 is expected to be approximately 15%. We continue to monitor the situation as changes to tax policy in the US and internationally may evolve over time. At this time, please open the line for questions. Thank you. Operator: 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'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. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our queue. The first question comes from Thomas O'Malley with Barclays. Please go ahead. Thomas O'Malley: Hey, guys. Thanks for taking my question. So thanks for the color on the content. Think, Bob, you mentioned the ultra-high band potentially not having as much content there in this generation but you have some of the ET coming back in. If you look at the next several generations of content, it looks like with this dual sourcing, you've seen a lot more swimming in other people's lanes is the way I think I've heard talked about in the past where, you know, one guy would compete in, you know, a couple sockets, and now you've seen that proliferating to some other sockets, which is just kind of increased the competition. And you guys have called out a couple areas where you're seeing that. Maybe talk about the content roadmap on a go-forward basis. Like, do you think that there are other sockets you obviously talked about the high band or the mid-high band and the iPads. Like, do you see other sockets where you could have some more or do you feel like the wind's behind you or in front of you in terms of content over the next several generations? Thank you. Robert Bruggeworth: Yeah. Thanks a lot. Appreciate the question, Tom. And as you know, we don't like to comment on future generations or even architectures. But I will say that there continues to be an opportunity for us to continue to grow our footprint there. No doubt about it. It's been, as you know, a lot of it was sole source. As you can see, it does appear they're multi-sourcing more or at least dual sourcing. I should say, more sockets in the future. And you know, we're investing in R&D to continue to grow at our largest customer. Thomas O'Malley: Helpful. And then just a clarification on the second one. I think you mentioned into March, Android would be down more than seasonal. I'm sure there's a million different ways. Five, ten, fifteen years, you can look at seasonal. But in terms of what I have here, Android is actually up in the March quarter. I know you've seen some different seasonality. What do you mean by down more than seasonal? What is normal seasonal for March and Android? Robert Bruggeworth: Yeah. I appreciate the question, Tom. And you're exactly right. Typically, Android has been up in the March quarter. And as we've been strategically a lot of that lower margin business and we talked last quarter about even some of the Android ramps and other phones that we're not participating as much. Again, due to our strategic emphasis on making sure we're getting paid for the value we bring. And this year, it's going to be down quarter over quarter. So that's the big swing. You're correct. Operator: The next question comes from Peter Peng with JPMorgan. Please go ahead. Peter Peng: Are you there, Peter? Oh, hi. Hi. Thanks for taking my question. For just for the Android business, I think the prior expectation was you know, you're gonna exit by about $200 million, and now you guys are saying $300 million. So maybe just talk about whether that is just expedite exit. Is it the memory impact? What drove the, you know, accelerated pace? And then you know, as we think about longer term, what is the business revenue run rate, you know, after you're finishing, you know, everything on this business? Grant Brown: Hey, Peter. This is Grant. Let me take that one, and then Dave can fill in some more detail. So we've said that it'll be a multi-year event as we exit the lower margin or lower tier Android businesses. It could run approximately $150 million to $200 million in fiscal 2026 and then again in our fiscal 2027. Last quarter, we had mentioned that we expected the larger portion of that in our fiscal 2026 to hit in the second half, and especially impacting March. And that's exactly what we're seeing in results. And then in fiscal 2027, instead of the $150 to $200 million, we're taking that estimate up to $300 million that we could exit in fiscal 2027, and that's both due to our strategic from the business as well as some of the memory pricing and availability constraints that are impacting customers' build plans. Peter Peng: Perfect. And and then just on the gross margin, you talked about potentially getting to the, you know, the 50%. Maybe you can kinda lay it out on how we should think about that margin profile over the course of the 2027. Grant Brown: Yep. We're getting a lot of background noise when when we're talking. I don't know if it's on your end or not. Peter Peng: Let me Sorry. Go Sure. So I think your question was around margin profile. So as we look out into fiscal 2027, That is right. That is right. Okay. Yeah. So the the biggest driver for margin as we look out in fiscal 2027 is mix. That's both business mix as HPA becomes a larger percentage of the total, which is margin accretive. As well as product mix inside of the segments. Especially within ACG. We've talked at length about the exit from the lower tier Android business, which is having a a sizable effect. Obviously, our utilizations aren't where we'd like them to be. But, you know, the the biggest gains in gross margin for the moment are coming from that business mix I talked about. So there's still further headroom as we add additional volumes over time. I would compliment the operations team. They've had a you know, done a considerable job of pulling costs out while maintaining the capacity that we need. To strategically target very important pieces of business all while transferring multiple lines of production, which is not a small feat as Bob commented earlier, both on Costa Rica as well as the North Carolina transition to Texas. Thank you, guys. Operator: The next question comes from Gary Mobley with Loop Capital. Please go ahead. Gary Mobley: Hey, guys. Thanks for taking my question. And thanks for the explicit guidance, Bob, for fiscal year 2027. And specifically, on Apple. You're calling for revenue to be flat in fiscal year '27. With perhaps some content loss in the upcoming iPhone 18, you know, in in aggregate. So is that more or less one part volume growth offset equally by some some content decline. Maybe you can just help us out there in terms of, like, your volume assumption for iPhone units, I guess, you know, with that assumption. Robert Bruggeworth: Yeah. Thanks, Gary. And we're not gonna comment on our largest customers' volumes or We're just giving you an indication of what we think our revenue is going be given everything we know at this time. Gary Mobley: Got it. Got it. Okay. And then looking at your fourth quarter revenue guide, it's down about $70 million roughly on a year-over-year basis. How much of that decrease is a function of business divestments? I believe there might be two significant business divestments you know, within that year-over-year comparison. And I would assume the rest is is mostly Android related? Grant Brown: That's correct. The the vast majority of it is Android related. You know, it's relatively small from the the divestitures that we've made. And the Android component of that. Obviously, we'll see how that exactly plays out. We're seeing both our strategic exit as well as some of the customer forecast driven by some memory pricing concerns. Which is just starting to find its way into the customer dialogue. Gary Mobley: Got it. Thank you, guys. Operator: The next question comes from Christopher Rolland with Susquehanna. Please go ahead. Christopher Rolland: Thanks so much for the question. So I I I think previously you guys were quite optimistic around integrated modules and ramping integrated modules. Obviously, this dual sourcing is a setback, but perhaps it you can talk about your products here, how you feel about them and how you feel about your prospects moving forward. Particularly for integrated modules. Robert Bruggeworth: Yeah. Hey, Just to be clear, the ultra-high band has been a dual-sourced part for many, many years, probably five or six years. We've always had content in it. We just have less this year than prior years. And, you know, I talked about the high band pad and that's an area we hadn't been. So the dual sourcing is actually helping us in that case. That's how I'd actually answer your question. Christopher Rolland: Okay. Maybe, Gary, in terms of in terms of revenue, maybe, you know, there's always a considerable number of variables to consider in addition to content gains and losses, including the timing of certain different awards as well as the volume of of specific SKUs, the mix, launch cadence across those models. You know, but at least from a modeling perspective in terms of our assumptions, I think the key point is that all of our our underlying assumptions are are fully reflected in the fiscal 2027 outlook that Bob provided earlier. Robert Bruggeworth: Thanks, Chris. Christopher Rolland: Sorry. Me yeah. And just maybe maybe just following up there. You you did have some comments about not being totally decided for the year, but you it sounds like you guys have pretty good visibility here, and we probably shouldn't be expecting any more surprises, either positive or negative versus your flat guide year over year? Is that fair? Grant Brown: Yeah. That's fair. There there's always certain components, you know, particularly around tuners that are awarded later in the cycle. But but, yeah, everything is kinda reflected in the guide that five k. Robert Bruggeworth: Excellent. Thank you, guys. Grant Brown: Thanks, Chris. Operator: The next question comes from Krish Sankar with TD Cowen. Please go ahead. Robert Martin: Hello. This is Robert Martin on the line for, Krish. Thanks for taking my questions. You mentioned that Android sales are expected to decline roughly $300 million next year. And walk us through how the exiting of the low-end space will impact the business could you just walk us through a little bit more about how the current higher memory prices and costs are affecting your mobile business and how you think that might play out next year? Dave Fullwood: Yeah. This is Dave. Yeah. So that decline we're talking about is primarily as a result of the ongoing intentional resizing of the Android business that we've been talking about for almost a year now. Secondarily, what we're seeing related to the memory pricing and availability is OEMs adjust their build plans to react to that. It definitely pressures the mass tier. As customers prioritize the supply that they get towards the higher-end devices. So this has an acceleration effect on our strategy, but it really doesn't change the end result. But that that's why you're seeing you know, the the higher $300 million decline that we called out for FY '27 what we had called out earlier. And maybe I'll just add to that a little bit, Dave. As far as the profile of our revenue throughout the year. Know, as you start to think past March and into June, the dynamic that Dave was describing will play out. You know, it's it's a little too early to put too fine a point on it since we only guide in any detailed way for the next quarter. But know, it's worth pointing out that historical seasonality even in June, say, down five to 10% sequentially no longer applies for for the the reasons were mentioned in the strategic actions around Android. Are, you know, strategically managing down our Android exposure in the mass tier, as well as a seasonal downtick in our revenues from our largest customer. Normally, those would offset and we're not gonna see that. You know, we haven't seen it in March. We won't see it in June. And then secondarily, you know, as we've talked about our DNA business, a year-over-year basis, we continue to see a considerable strength there. But it'll be down as we look into June, which is pretty typical coming off of a very strong March. So, you know, as DNA has grown to be a larger contributor, to our top line, the impact on June seasonality has also grown. So the profile of our business will change because of you know, to a large degree, the Android exit as we were communicating earlier. Robert Martin: Got it. Thank you. That that's helpful. And makes sense for customers to prioritize the the higher end. Just real quick, in line with that, are you seeing any sort of changes in terms of inventory level at customers or this in line or or higher or lower than what you would typically expect at this time of year? Dave Fullwood: Yeah. I wouldn't say we've seen anything abnormal as it relates to inventory. It's just more of a reaction to how they're adjusting their build plans. Given the situation that's going on with the with the memory. Robert Martin: Okay. Thank you. Operator: The next question comes from Edward Snyder with Charter Equity Research. Please go ahead, sir. Edward Snyder: Thank you very much. Bob, you said you had lower share in the high band. Obviously, the iPad isn't going to be a big driver for unit volume. But the mix should favor your ET, and that's like a dollar 80 extra content. And, apparently, that's gonna be a significant shift given what we saw last year versus what we saw this year. So doesn't this imply that you're seeing significant share loss at ultra-high band? Or are there other parts that we don't know that you mentioned that you're not going not gonna be on in a new phone. I I know Dave talked about two So let's get added towards the end of it, but plus or minus on that isn't gonna be I wouldn't dig correctly if I'm wrong. I wouldn't think you're in the the dollar range of content. So I'm just trying to get my arms around the shift because the wind should be at your back of the fold. For ET itself, and it doesn't sound like that's the case at all. Frank Stewart: Yeah. Hey, Ed. This is Frank Stewart. Maybe just to reiterate, the things that we're excited about is the high band pad win that we got. The headwind that we have, is the loss of share in UHB. Working very hard to get that back in the following generation. We agree that as the internal modem is is used on more SKUs, that is a tailwind for us. When you put it all together together with all of our estimates of how all that plays out. Again, we can only talk to our expectations for revenue. When you play that out over our fiscal year, it it comes together with about flat year over year. Edward Snyder: Okay. I just wanna be sure we have all the moving parts together. But it's you're still gonna be in the ultra-high band. You just can see what we're sure. You're not gonna keep down with that. Again, in red. Frank Stewart: That's right. Edward Snyder: Alright. Yeah. I just wanna explore the case. And then Grant, underutilization charges, it sounds like, especially if you're gonna be flat, etcetera. Are you did you incur any this quarter? Do you expect any coming with them? Is that mostly gas at this at this stage? Because know you're gonna be shipping with a BAW because all I know you guys called the high band Historically, it's been called the mid-high band. It uses a lot of BAW. Use a lot of BAW. Mean, you're going into your product here, so maybe it actually. Maybe maybe you even have nearly a number of management to deal with before. So one, underutilization charges, and two, have things improved utilization wise involved? Do you anticipate they'll improve this year? Grant Brown: Thanks, Ed. It's you know, utilization is obviously not where we'd like it to be. So still have ample headroom, you know, to support some of these strategic areas that we're going after in our largest customer and elsewhere. But you know, there are no specific underutilization charges or period charges in the quarter. And, you know, the the ops team our side has done a terrific job of managing costs as we've been, you know, shutting down factories or we've been moving them, you know, from North Carolina to Texas, and all of the other activities they have going on. That we've discussed. It's it's a considerable effort and at the same time pulling out costs in order to support the gross margin improvements that we've been showing is is a significant effort. Edward Snyder: Okay. Frank Stewart: Thanks, Ed. Operator: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Robert Bruggeworth: I want to thank everyone for joining us today. And I hope everyone has a great evening. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Mike Beckman: Welcome to the Texas Instruments Fourth Quarter 2025 Earnings Conference Call. I'm Mike Beckman, of Investor Relations. I'm joined by our Chairman, President and Chief Executive Officer, Haviv Ilan, and our Chief Financial Officer, Rafael R. Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. This call will include forward-looking statements that involve risks and uncertainties that could cause Texas Instruments' results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained in the earnings release published today as well as Texas Instruments' most recent SEC filings for a more complete description. I would like to provide you some information that is important for your calendars. On Tuesday, February 24 at 10 AM Central Time, we will have our capital management call. Similar to what we've done in the past, Haviv, Rafael, and I will share our approach to capital allocation and summarize our progress as we prepare for the opportunity ahead. Moving on, today, we'll provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he will provide insight into fourth quarter revenue results and some details of what we are seeing in our end markets. Haviv will then provide the annual summary of revenue breakout by end market. Lastly, Rafael will cover the financial results and our guidance for the first quarter of 2026. With that, let me turn it over to Haviv. Haviv Ilan: Thanks, Mike. Let me start with a quick overview of the fourth quarter. Revenue came in about as expected at $4.4 billion, a decrease of 7% sequentially and an increase of 10% from the same quarter a year ago. Analog revenue grew 14% year over year. Embedded processing grew 8%, and our other segment declined from the year-ago quarter. The overall semiconductor market recovery is continuing, and we are well-positioned with inventory and capacity to meet immediate customer demand. Before I walk through our results, I'd like to share an update we've made to our end markets. To better reflect the growth opportunities we see for our analog and embedded products, we reorganized our end markets to include data center, which includes sectors related to data center compute, data center networking, and rack power and thermal management. As such, our end markets are now industrial, automotive, data center, personal electronics, and communications equipment. With that as a backdrop, I'll now provide some insight into our fourth quarter revenue by end market. First, the industrial market was up high teens year on year, with recovery continuing broadly across sectors and was down mid-single digits sequentially. The automotive market increased upper single digits year on year and was down low single digits sequentially. Data center grew around 70% year on year and mid-single digits sequentially. Personal electronics declined upper teens year on year and mid-teens sequentially. Lastly, communications equipment declined low single digits year on year and mid-teens sequentially. In addition, as we do at the end of each calendar year, I'll describe our estimated 2025 revenue by end market. Industrial was $5.8 billion, up 12% year on year and was 33% of revenue. Automotive was $5.8 billion, up 6% year on year and was 33% of revenue. Data center was $1.5 billion, up 64% year on year and was 9% of revenue. Personal electronics was $3.7 billion, up 7% year on year and was 21% of revenue. Communications equipment was about $500 million, up about 20% year on year and was 3% of revenue. In summary, industrial, automotive, and data center combined made up about 75% of Texas Instruments' revenue in 2025, up from about 43% in 2013. We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial, automotive, and data center. Our customers across all regions are increasingly turning to analog and embedded technology to make their end products more reliable, more affordable, and lower in power. This drives growing chip content per application or secular content growth, which will likely continue to drive faster growth in these end markets. Rafael will now review profitability, capital management, and our outlook. Rafael R. Lizardi: Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, fourth quarter revenue was $4.4 billion. Gross profit in the quarter was $2.5 billion or 56% of revenue. Sequentially, gross profit margin decreased 150 basis points. Operating expenses in the quarter were $967 million, up 3% from a year ago and about as expected. On a trailing twelve-month basis, operating expenses were $3.9 billion or 22% of revenue. Operating profit was $1.5 billion in the quarter or 33% of revenue and was up 7% from the year-ago quarter. Net income in the fourth quarter was $1.2 billion or $1.27 per share. Earnings per share included a 6¢ reduction not in our original guidance related to the non-cash impairment of goodwill in our other segment and other tax-related items. Let me now comment on our capital management results starting with our cash generation. Cash flow from operations was $2.3 billion in the quarter. Capital expenditures were $925 million in the quarter. In the quarter, we paid $1.3 billion in dividends and repurchased $403 million of our stock. We also increased our dividend per share by 4% in the fourth quarter, to $1.42 per share, marking our twenty-second consecutive year of dividend increases. In total, we have returned $6.5 billion in the past twelve months to owners. The balance sheet remains strong with $4.9 billion of cash and short-term investments at the end of the fourth quarter. Total debt outstanding was $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.8 billion, down $25 million from the prior quarter. Days were 222, up seven days sequentially. Let's look at some of these results for the year. In 2025, cash flow from operations was $7.2 billion, and capital expenditures were $4.6 billion as we continue to make progress on our capacity expansions. We're nearing the end of a six-year elevated CapEx cycle that uniquely positions Texas Instruments to deliver dependable low-cost 300-millimeter capacity at scale. Free cash flow for 2025 was $2.9 billion or 17% of revenue, representing an increase of 96% from 2024. Our free cash flow growth reflects the strength of our business model as well as our decisions to invest in 300-millimeter manufacturing assets and inventory. This supports our overall objective to maximize long-term free cash flow per share growth, which we believe is the primary driver of long-term value. In 2025, we received a $670 million cash benefit related to CHIPS Act incentives. Turning to our outlook for the first quarter, we expect Texas Instruments' revenue in the range of $4.32 billion to $4.68 billion and earnings per share to be in the range of $1.22 to $1.48. We continue to expect our effective tax rate in 2026 to be about 13 to 14%. In closing, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term. With that, let me turn it back to Mike. Mike Beckman: Thanks, Rafael. Operator, you can now open the lines for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you with an opportunity for an additional follow-up. Operator? Operator: Thank you. We will now be conducting a question and answer session. Ross Seymore: If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question. Ross Seymore: Hi, thanks for letting me ask a question. I guess my first question is, the first quarter guidance is significantly stronger than seasonal. If my math is right, it seems like it's the first time you've been up sequentially since right after the financial crisis, fifteen years ago, roughly. So is there anything unique going on by either end market or geography that's given you such an optimistic view versus relative or normal seasonality? Haviv Ilan: Ross, thanks for the question. I'll take it, and I'll let Mike add some more color as needed. First, let's start with the fourth quarter. We have seen a typical fourth quarter; revenue came in as expected. But if you look at the year-on-year results, we are seeing recovery continuing in industrial. It grew close to 20%. I think it was 18% year over year. And remember that in the industrial market, we still have a lot of room to go when you think about the previous peak. So if you will, the compare is still easy for industrial to continue to recover. The other market that I will highlight is the continued strength in data center. We are seeing this market now becoming a little bit more substantial as a percentage of our revenue. I expect this market to continue to grow in Q1. It's been growing for now seven quarters in a row for us. And we left the year at about $450 million a quarter revenue footprint, and I think that continues as we move forward. The last point I would say, we did see orders improving throughout the quarter. And what guides our guidance is the stronger booking. Mike, I don't know if you want to add anything. Mike Beckman: Yeah. And so we did see linearity revenue linearity through the quarter improve. So month one to month two to month three, we did see it continue to build. Same with backlog. We saw that continue to build through the quarter, and also, as we've talked in previous quarters, you know, turns business or what a customer comes in and wants an order shipped right away, we continue to see that run as well at higher levels. So, you know, that's factored into the guide. Have a follow-up, Ross? Ross Seymore: Yeah, I do. Just a question on the gross margin implications. Given what you guys are talking about with revenue, it seems like you had a nice beat at least versus what I was expecting in the fourth quarter. Rafael, can you just talk a little bit about the puts and takes on gross margin in your first quarter guide and maybe throughout the year if utilization is changing, inventory levels are where you want it or if they need to rise? Anything on that would be helpful. Thank you. Rafael R. Lizardi: Yeah, sure. Let me start with the fourth quarter. It came in a little better than expected. And once you account for that 6¢ reduction that we talked about in the prepared remarks. And that was a combination of revenue was a little better, mix end market mix was a little better, loadings was a little better, and OPEX was a little better. So it was a combination of multiple things there. On the first quarter, you know, we give you the range on EPS and the range on revenue. I would tell you, OPEX is up low single digits, and you should get into a reasonable number for gross margin. And the loadings will depend on demand, and we'll adjust those as needed. Ross Seymore: Thank you. Mike Beckman: Thanks for the questions, Ross. We'll move on to our next caller, please. Operator: Thank you. Our next question comes from the line of Jim Schneider with Goldman Sachs. Proceed with your question. Jim Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could maybe relative to your prior comments, maybe address inventory levels and where you expect those to go. You talked about taking loadings down a little bit to bring inventories down, and you accomplished that in the quarter. Do you think inventories are at a pretty good place either from a days or dollars basis? Or would you expect to want to take them down a little bit further at this point? Haviv Ilan: Let me start, and I'll let Rafael add some color on this, Jim. So, again, I think we said it along the fourth quarter when we had the chance that we are very pleased with the inventory position we have built. We are very proud of how we got there. It's across all of our technologies at the right level. So from a high level, the inventory we have right now, that's an asset that allows us to serve customers, especially in the current environment when, you know, we have a lot of real-time just-in-time demand that turns business, as Mike mentioned before, is high. And it allows us to support customers at a high level. Rafael, any more color on how we want to manage inventory moving forward? Rafael R. Lizardi: No. That's it. Mike Beckman: Alright. Jim, do you have a follow-up? Jim Schneider: Yes. I mean, clearly, industrial and automotive are doing right. Very well right now, that plus data center are your main focus. Can you maybe talk about sort of the prospects of a return to growth or a turnaround in the personal electronics and communications end markets and maybe some of the product areas like embedded processing associated with those? Thank you. Haviv Ilan: Yes. So just on the maybe on the electronics market, it did grow for the year. Right? The business grew for the full year at around, I think, 7% for PE. And we just saw a little bit of a weak Q4, I would say, below seasonality. Maybe, Mike, you can add a little bit more color on what you've seen there in Q4. Mike Beckman: Yeah. If you look inside the sectors there, home theater, entertainment, TV declined the most. On the other end of the spectrum, mobile phones actually performed the best out of that group. So it varied within probably not inconsistent with what you've probably seen around subsidies expiring, around in China for things like appliances and TV. So it's also if you think about where personal electronics is and its timing of the cycle and where it is, it was one of the first to correct and also go through its recovery. So there's also a tougher compare than it probably has compared to some of the other end markets. Jim Schneider: Alright. Well, thanks for the question, Jim. Mike Beckman: Move on to the next caller, please. Operator: Thank you. Our next question comes from the line of Harlan Sur with JPMorgan. Please proceed with your question. Harlan L. Sur: Good afternoon. Thanks for taking my question. Good to see the strong double-digit year-over-year growth in Industrial. Haviv, last quarter, you talked about seeing some hesitation by customers in your industrial business, especially around manufacturing activity, things like factory automation, is one of the larger segments of your industrial business. Are you still seeing that hesitancy, that sort of wait-and-see posture by customers? Or is the order activity there starting to now pick up, especially among your China-based industrial customers? Haviv Ilan: Yeah. Harlan, it's a great question. I think from a high-level perspective, let's remember, Industrial and I look at the quarterly revenue, even if I go back to Q3, which was, I think, the highest industrial quarter for 2025, it was still about 25% from the previous peaks in year 2022. Right? So I do believe that secular growth continues in industrial. We are looking at equipment and generation to generation. We see just more content growth per system. So I expect industrial to establish new highs in the future. This is why I talked in the last quarter about maybe a more moderate recovery, especially on the industrial side. And it did behave, you know, kind of seasonally in Q4. But as Mike alluded to, we are seeing a little bit of a pickup on orders, including in industrial. And, you know, I can't tell you why. We'll have to see how it plays out. But, you know, we have seen some, you know, noise in the last several months on issues regarding a certain supplier, and sometimes, you know, we all know about the memory shortages. So I don't know what makes the customers order more. We'll just have to look and see. I do want to remind us all that earlier in 2025, I say the '25, we saw a pickup of industrial, and then it kind of calmed down. We don't want to see how sustainable this wake-up in orders is. And, Mike, anything to add on the industrial side? Mike Beckman: I think you covered it well. I wouldn't add anything to that. Harlan, do you have a follow-up? Harlan L. Sur: Yeah. Thank you. Thanks for answering the last question. You guys have previously mentioned the team is ahead on the Sherman fab build-out, and on track to complete the build-out of fab two this year. Can you guys just give us an update here? And then on the potential $2 billion to $3 billion of gross CapEx this year, not if you guys are willing to articulate what that could be, but what is the size of the potential offsets? Right? You've got ITC, goes up 35%. And you still have $1.6 billion in direct funding or grant to capture. Just wondering if you can maybe quantify that capture this year. Haviv Ilan: Yeah. I'll start regarding the build-up of the fabs, and I'll let Rafael comment on the rest of the topics. Although, we want to save something for the February call. But first, the top, yeah, we are very pleased about the execution in Sherman. It's actually ramped ahead of schedule, high yield. We also see with the new equipment that we have, really, the factory is more capable than we originally hoped. So a high level of throughput is being planned for this factory. So I'm very pleased with that execution. And that will help us, you know, support our customers for the next five and ten years. We have a clean room in Sherman one that already has some production lines running. But remember, we also have Shell instrument two, and we can build into this capacity if we want if demand wants to be very strong, we can be in a great position to support it. On the Lehigh side, also on schedule, I'm very pleased with the transition. Or the insourcing progress from our foundry wafers into Lehigh. That's mainly an embedded process comment that that tailwind will continue for us in 2026. I think I've mentioned in '25, we've completed our 65-nanometer transition, and they are yielding at the same level as they used to in the foundries. And now we are busy with our 45-nanometer technology, mainly supporting our automotive radar business. That's also progressing well in Lehigh. Rafael, anything on the ITC or Yeah. No. So, Harlan, you asked about five or six in one, but let me see if we can Rafael R. Lizardi: I've addressed a couple. Let me address the next few. First on CapEx. We continue to expect CapEx for 2026 between $2 and $3 billion. So that's consistent with what we said before. On depreciation for '26, let me give you a new number. We now expect $2.2 to $2.4 billion on depreciation in 2026. And for 2027, we expect an upward pressure on that number, but at a slower rate of increase. So if you look at what we've increased the last few years, just it'll increase again, but slower. You asked about ITC and direct funding. Direct funding not changed. We expect up to $1.6 billion as we reach several milestones. And on ITC, investment tax credit, it is now 35% as of 01/01/2026. So anything that we put in place, any CapEx we put in place, both equipment, building, clean room, in 2026, we get back 35% on the ITC credit. Mike Beckman: Great. Thanks. Oh, thank you. We'll move on to our next caller, please. Operator: Thank you. Our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question. Vivek Arya: Thanks for taking my question. For the first one, Haviv, what do you think is, you know, driving this above seasonal Q1? First of all, how much above seasonal is it? And then what role is the pricing playing in that? Because there is some discussion about price increases from some of your peers. So is Texas Instruments raising prices in Q1? Is that part of what's driving it? And how would you characterize this? You know, how much above seasonal is it, and what's kind of the main driver of that? Haviv Ilan: Yeah. Let me just say for the second part of the question, the answer is no. It's not pricing related. Regarding the seasonality, no, it's more or less, you know, maybe a little bit above seasonal. Right? We usually see kind of a low single-digit to flat quarter. I think we've guided what Yeah. Low single-digit decline to flattish. And, again, the reason, Vivek, is the orders. We are just seeing growing orders, and it behaved the same through the quarter. I can't speculate on what, but I do know the industrial market, you know, there needs to be a correction. And the second point is data center is now a bigger part of our business. It starts to move the numbers for us. Right? This is a market that is now growing every quarter, and it's not insignificant. So I think that also helps change the guide compared to previous years. Mike, anything else on seasonality? No. I think you called it out. On seasonality. So Vivek, do you have a follow-up? Vivek Arya: Yes. Thank you. For my second question, there's a lot of talk of higher memory pricing impacting demand for consumer electronics, you know, PCs, phones, automotive. Have you seen it already? Have you heard that as a concern from your, you know, from your customers? And how are you thinking about the auto market right now? And just is memory pricing a headwind at all for your businesses that are exposed to consumers? Thank you. Haviv Ilan: High level, I would say that we haven't seen any implications although, you know, then that would be a speculation on my side, but it could be that when customers are seeing some issues on the memory side, do they want to, you know, replenish some of their inventory? That could be always the case. And, Mike, I don't know if you've seen any examples. Or Yeah. What I would add, though, is and, you know, we've heard about it, obviously. And I think not necessarily specifically that scenario, but it could be that. But, also, when a customer doesn't necessarily have everything they need to complete their bill of materials, when they finally have those parts they need, sometimes we'll come in very quickly and want to order parts. We did see some of that where customers come in at the last minute, want product shipped right away because they've just completed the bill of materials. Could be related to that or other different things. So with that, thank you, Vivek, for questions. We will move on to the next caller, please. Operator: Thank you. Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question. Timothy Arcuri: Thanks a lot. Rafael, I wanted to also ask on CapEx and sort of quickly it's going to fall off. I think you said this year, $2 billion to $3 billion. But the math would then say you're gonna kinda exit the year, like, run rating something like a billion 5. So the question is then, can it go lower than that? Because I seem to recall a comment at our conference in December that it could go, like, lower than 5% of revenue next year. So that would put it down to, like, a billion dollars, and that you'd like, that kinda being a floor. So you kinda talk about that? Could it go that low next year? Haviv Ilan: Tim, let me start with the second half, and then I'll let Rafael answer the first part. I made a comment because I was asked about maintenance CapEx. What is maintenance? We always have to spend money or to, you know, to fix equipment, to buy replacement parts, etcetera. So I characterize it as kind of mid-single-digit revenue. That's always kind of a run rate you can think about. There's never zero. In a company like Texas Instruments. That's what that was my point. This is when you don't have growth. Right? Now I'll let Rafael talk about CapEx beyond the maintenance. Rafael R. Lizardi: No. So you know, for this year, for 2026, $2 to $3 billion, and there you know, it's a range there. So if we go through the year, we'll update you on that number. And then beyond that, what we've said is it's about 1.2 times long-term revenue growth. So you take, you know, take a number for revenue growth. You do 1.2 times. So 10%, you get to 12% CapEx intensity. But that's a gross number before ITC benefits. So once you get those ITC benefits, you essentially get back to one to one. On that growth rate. So whatever growth rate you assume, you kinda get back to a net capital intensity of about the same level. Haviv Ilan: Tim? Timothy Arcuri: I do, Mike. Thanks. So I also wanted to ask about loadings. It looks like cash gross margin is up, like, 50 basis points or something in March. That would kinda suggest that loadings are going up just a smidge. The bigger question is sort of are you thinking about loadings that you wanna keep inventory sort of in this four eight range? And you just wanna match loadings with demand from here, or do you wanna bring inventory down, you know, over time versus that point eight number? Thanks. Rafael R. Lizardi: You know, as Haviv said earlier, we're very pleased with inventory levels. That's a good inventory in a number of fronts. The buffers that we have, and the position that we have to support potential revenue growth. The same goes with capacity. We are well-positioned with capacity. So we'll adjust loadings as needed depending on what we see for demand for the rest of the year. Mike Beckman: Alright, Tim. Thank you so much for the questions. We'll move on to our next caller. Operator: Thank you. Our next question comes from the line of Thomas O'Malley with Barclays. Proceed with your question. Thomas O'Malley: Hey, guys. Thanks for taking my question. Haviv, in your outlook for March, you talked about strength in data center, recovery in industrial continues and bookings are improving, turns are good. There was no mention of auto there. You guys have said previously, maybe the auto business is a little bit slower off the bottom than industrial. Any update on the auto business and how that trended through the quarter and kind of your updated view there? Haviv Ilan: Yeah. Great question. On the automotive market, I think we I think in Q4, we were slightly down. That looks digits. Low single digits. And we did see strength in automotive in Q3 and Q4. It's back to the level more or less of the peaks somewhere in 2023. This is an automotive peak. Remember, automotive was last into the cycle. Right? If you go back all the way back to the COVID cycle, they're the last ones to pick. They picked in Q3 2023. But I think what's happening in automotive, and it continues to happen, is secular growth continuing. So generation to generation, model to model, we just see more content per vehicle. Even if it's an ICE, a combustion engine vehicle rather than EVs, strength in China continued in Q4. And, typically, in Q1, if I need to comment about Q1, typically, Q1 is a quarter where at least in China, we see always with Chinese New Year, we always see a seasonally down quarter. I expect that to be the same in Q1. But, again, we are we've seen a single-digit drop versus the peak in automotive back to the same level. And I think secular growth continues into the foreseeable future, at least for the next five years. Okay. You have a follow-up, Tom? Thomas O'Malley: I just wanted to clarify a comment earlier. You mentioned that pricing didn't have anything to do with the above seasonal margin. You talked more about these end market trends. Is that because you raised pricing previously? You plan to in the future? The reason the question comes from your competitors are talking about an increase in pricing early in 2026 and being very clear about that. You guys feel like you don't wanna do that, or is it just something you'd rather not comment on? Appreciate it. Haviv Ilan: No. I think we've been clear along the year, and I just repeat it. And then, Mike, you can add a little bit more color. But we said that we expect the pricing hello. Pricing's price, we have 80,000 products. Prices always go up and down. But for the company, the overall price effect like for like in '25, we expected it to be low single digits down. Now we finished '25. It was exactly there. When you say low single digit, think about two or 3% down. That's my assumption for 2026. That's what we expect the market conditions to be. If anything changes with pricing, if, you know, we'll see a you know, of course, Texas Instruments will respond. But right now, that's our assumption moving forward. That's why I was so convinced that the Q1 you know, I think we have a little sequential growth there. It's not due to pricing. Mike, anything to add there on the pricing side? No. I think you called it out in that base case assumption of low single digit. Mike Beckman: Decline over time. You know, we'll have to see what the market presents to us, but continue to expect. Definitely no step function planned in Q1. I usually in Q1, pricing usually goes down a little because of yearly negotiations. That's usually what we see in Q1. We have a follow-up. No. That was a follow-up. Okay. Sorry about that. Yeah. Thanks, Tom, for the question. Move on to our next caller. Okay. Operator: Thank you. Our next question comes from the line of Joshua Buchalter with TD Cowen. Please proceed with your question. Joshua Buchalter: Yeah. Thank you for taking my question. Wanted to build in a sort of business a little bit more. Any details you can give us on the exposure across power embedded and then maybe non-power analog parts and then and any, you know, 70% is a growth is a pretty big number. Any sort of handicap you're able you're willing to give us on what that business could grow over the medium to long term? Thank you. Haviv Ilan: Yes. Definitely. I can take that. So, again, data center has grown nicely, as you said, in 2025. You know, as CapEx continues to be invested in data centers, we expect that growth to continue. In terms of our position, our business is based on the analog side. And there is also there is between power and signal chain, I would say it's kind of maybe a little bit more power, but both power and signal chain are very strong in data center. We see a lot of opportunity, a lot of diversity, of parts. I know most people like to talk about, you know, socket, if you call it the VRM or the VCORE voltage regulator, that's always a large a very large socket. But if you look at the rack and you open it up, there are thousands of different parts, and many of them are analog embedded parts. And Texas Instruments plays across the board there. As I've mentioned over the years, we have invested in our technology to be able to support the higher power, call it, rails. Think about the VCore. This is where a lot of the current going into an accelerator, accelerated computer or a CPU come from and Texas Instruments is building the technology in Sherman, Texas. This is where our BCD process is serving us very well there. That product is sampling, and we expect our opportunity in data center to further expand in the coming years. So Texas Instruments plans to play across the different sockets in data center, and I see it as long as the CapEx continues into this market, I see the opportunity as an attractive one. Alright. You have a follow-up, Josh? Joshua Buchalter: Yeah. Thank you for all the color there. I mean, I think it's been good William, and an interesting several years for the analog industry. And for a while, you've about the benefits of your US-based, you know, commercial, military, capacity. You feel like we're having, you know, with the industry and your guys from a cyclical standpoint being from a lot of inventory, but are we at the point where we expect, you know, yeah, I can get back into sort of the shared behavior. Everything's normal enough yet. Thank you. Mike Beckman: So Josh, I think there was a little trouble on the line, but I'm gonna repeat what I believe the was and then we'll answer it. So I think it was talking about the cycle and how it's been playing out. And with the capacity that we have in place are we in a position to be able to get back to market share gains? And maybe if you wanna start with the answer, I can also answer as well. Was that a question? I believe that was Josh? Joshua Buchalter: Yep. Yeah. Close enough. Thanks, Glenn. Haviv Ilan: Yeah. As we said, look. The cycle is this cycle has recovered slowly. You know? We just forget about Texas Instruments. Just look at the overall unit trend. You can look at the unit without memory. You can look at the ICs. It's been one of the slowest, if not the slowest recovery ever in our history. At a time where I think more semis are used in our life. I mentioned the secular growth in automotive. We see that across many, many hand equipments industrial, across the board, just more content per system. That just and, of course, the investment in data center that are becoming more and more substantial even for the analog and embedded portfolio that we have. So I do believe that there is gonna be a point of time where you all this capacity we've put in place and the inventory that we've positioned is gonna serve us well. We have seen cases where it served us very well with an immediate response to customer needs, and our customers value that a lot. And I believe there is more to do here. So let's see how the market wants to continue and develop. One thing is very clear to me. End equipments are being redesigned with more semis every day. They'll continue to be the case in the future. This is why I'm continuing to stay very optimistic and encouraged by the investments we've made in the past several years. Mike Beckman: Alright. Thanks, Josh. Move on to our next caller, please. Operator: Thank you. Our next question comes from the line of William Stein with Truist. Please proceed with your question. William Stein: Great. Thanks for taking my questions. First, I'm hoping you can talk a little bit more about the strong bookings you referred to. Would you be able to disclose the book to bill to us? And maybe even more interesting, has the duration of your backlog changed at all in the quarter? Mike Beckman: So maybe I'll take that one. So, Will, we did see throughout the quarter, you know, backlog did build, and I think, first of all, important to remember that we transact most of our revenue direct with our we don't sell through a channel. So we do see things typically pretty real-time. And that's part of the reason you heard us talk about the fact we have seen our turns business also exhibit strength over the last several quarters. You know, I don't have a number specifically to provide you for what bookings did, but it is reflected in our guidance. And I think, you know, going back to what Haviv said about where our end markets are, you know, industrial is going through recovery, and you saw that in the fourth quarter. You got data center end market that is growing for, I think, seven consecutive quarters. You know, those are all part of what factor into how we think about our guidance. Have a follow-up, Will? William Stein: Yes. I'll ask maybe the same question a little bit of a different way. Are you seeing either based on customer willingness to place the orders or of your own lead times to customers, have you seen an extension in the orders further out into the Haviv Ilan: The shorter answer is yes, but, again, not because of times. Our lead times are very competitive, unchanged think on average, below thirteen weeks. Many of our parts are weeks, part of our ambition and objective, as we prepare to the next cycle was to be to be able to maintain very competitively lead times across the cycle. So far, this cycle has not been very tough to meet. Right? It's, as I said, been a slow recovery, but our lead times continue to stay very, very competitive, probably the lowest in the industry, and our inventory position allows us to support customers. So I don't think customers are placing I mean, they are placing orders a little bit more forward, but they have the ability to change their opinion, even within this quarter. This is what Mike mentioned before. Our terms are very friendly, are very customer friendly. We want customers to be, you know, showing us their demand real-time and we are willing to carry this inventory, especially when it's so diverse and long-lived. To increase customer support. So that would be my high-level comment. Mike, anything else about what we see into the longevity of the inventory? Mike Beckman: Well, the inventory that we have in place has incredible longevity. No. No. But on the orders that was asked. Yeah. I'd say that if you look at does the customer need to put long-term backlog out in place when lead times are stable? They probably don't feel like they have to necessarily. So I have nothing to spike out, I would say. But what we have seen is a lot of customers wanting to come in, want product quickly. That isn't something we seen built over the past several quarters. Alright. With that, we'll move on to our next caller. And our last caller. Our last one. Yeah. Operator: Thank you. Our last question comes from the line of Chris Caso with Wolfe Research. Please proceed with your question. Chris Caso: Yes. Thanks. Good evening. I guess the first question is a clarification of somewhat you said about factory loadings. And you did say that you'd adjust loadings according to what you saw with demand. Take into consideration that you reduce those loadings more recently. Are there any plans in place now to increase those loadings? And, you know, what would you need to see in order to take those steps? Rafael R. Lizardi: What I would tell you is that we had something significant changing like we did back in the third quarter, we would tell you. We are not making any disclosure right now on which way the loadings are going. So it's just it's nothing significant versus where we've been running in the fourth quarter. Mike Beckman: And I just add a part of that is, you know, we have the ability to make those adjustments as we see things occur, and that's the flexibility we have in our manufacturing to be able to do that. Alright. Chris, you have a follow-up? Chris Caso: I do. And it's related to geographic revenue. You made some comments on China. Obviously, you have the New Year holiday. That hits in the first quarter. But, you know, if we look at the different regions, how does that stack up against what you would expect for normal seasonality each one of those regions in the first quarter? Haviv Ilan: Yeah. In general, I think we haven't seen anything specific on the only comment I've made, Chris, before was that typically Q1 in China for automotive is lower just because of Chinese New Year. But I think from the backlog comes through from, it's been pretty even, right, across the geographies. Mike? And then maybe I'll just talk about last quarter what we saw and, you know, we don't have a guidance by end by regions for the top level. But you know, China came in know, right about and on a sequential basis, much in line with what we saw at the top level, down about 7%. On a year-on-year for the fourth quarter, it was up about 16%. So you know, didn't see something on a sequential basis that stood out very differently there compared to the overall top-level results. Haviv Ilan: And I want to make a maybe before we let Mike finish the call, I want to make one more comment on the orders and everything. I just want to remind us all that Texas Instruments has invested in capacity and in the inventory over the last three or four years to be exactly ready for this type of environment. Right? We've seen a lot of real-time demand coming in in Q4 with we were able to support. We're seeing a little bit of strengthening in the orders right now in Q1. And we'll see how long-lived it will be. You know, the market has been jittery in the last twelve months. Sorry. And we'll just have to see how it plays out. This is also related to Rafael's comment about loading. We have the knobs to turn as needed, and we have the inventory to allow us time to adjust our loading, for example, as we go. So we are in a very good position as we come into 2026. We worked very hard to get here, and I'm very proud of our execution. And we'll be ready for any scenario that the market wants to present to us. Mike Beckman: Aleth, anything to you, Mike? Yeah. Thank you, Haviv, and thank you all of you for joining us today. Again, as we mentioned earlier, we look forward to sharing with you our capital management call on Tuesday, February 24 at 10 AM Central Time. A replay of this call will be available shortly on our website. And with that, have a great evening. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, good day, and welcome to Stride, Inc. Q2 2026 earnings conference call. Operator: As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then 0 on your touch-tone phone. I now hand the conference over to Mr. Abhishek. Thank you, and over to you, sir. Abhishek: Very good evening, and thank you for joining us today for Stride, Inc.'s earnings call for the second quarter and half-year ended financial year 2026. Today, we have with us Badri, Managing Director and Group CEO, Ayse Kumar, Executive Director, and Vikesh Kumar, Group CFO, to share the heart of the business and financials for the quarter. I hope you have gone through our results release and quarterly investor presentation that have been uploaded on our website as well as the Storm Exchange website. The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the installation team. I now hand over the call to Mr. Badri to make his opening comments. Badri: Thank you, Abhishek. Morning, good afternoon, and good evening to all who are joining in this call. We are extremely happy with the results. The performance demonstrates our consistent execution as we invest in sustainable long-term growth. I will cover this presentation and divide my speech into two parts. I will focus on all the growth metrics of the business. Group CFO, Vikesh, will cover all the metrics relating to efficiency as well as profitability. I will also speak about some qualitative aspects of the key businesses we have. In the end, we will take all the questions that need to be answered. From our perspective, Q2 has been very strong for us. Our revenue grew by 4.6% year on year. Gross margins are 14.6%. EBITDA grew by 25.4%, and operational PAT at 84%. All I want to say is that consistency and sustainable growth have helped us to create the operating leverage, and the multiplier effect is very clearly seen from our results. A 4.6% increase in revenue growth resulted in almost three times increase in gross margin growth, almost five to six times increase in EBITDA growth, and almost 20 times increase in operational PAT. This is based on the quarterly performance. As far as the yearly performance is concerned, the revenue grew by 5.5%, gross margin at 13.2%, and EBITDA 20% growth for the full first half and operational PAT at 82.6%. Again, the complete operating leverage is visible in the entire P&L. Overall, you can really see from the US market, I will go market by market now. The US market at $73 million grew two year on year. There has been intense competition in recent launches. Despite the competition, we have grown 2% year on year. We also launched three products in H1 FY26, and the total number of commercialized products stood at 70. We continue to rank top three in 37 products, and we added one more product to this list, which contributes almost 75% of our US revenue. We have given a long-term outlook to the street in terms of the $400 million by FY28. We are continuing to focus on that and continue to execute based on that plan. We have got 230 plus ANDAs, and the ANDAs filed and 215 plus ANDAs approved as of July. The company has invested in new segments of controlled substances, and we are spending the new R&D on all those programs which are beyond $400 million. I also want to cover some of the key points with respect to the US business and also the philosophy of the company in doing that business. As far as the US business is concerned, our strength has been on the timing of the launch. We wait for the market to get disrupted, and we launch it at the appropriate time. Second thing is in terms of the service levels. Our service levels continue to enjoy a very premium position as far as the US generic suppliers are concerned. We are able to maintain the service levels at a very high level, and it also creates a lot of stickiness as far as the business is concerned. Our business discipline has been in terms of focused discipline on the entire capital allocation. We are focused on programs which are beyond the $400 million, and we are starting to invest now. Profitability has been the focus to see the first quarter. We also dropped a few products from commercialization because they did not meet our profitability threshold. We are continuing to focus on that top profitability as we go forward. Our US strategy has played out quite well in the Chestnut Ridge plant, delivering good outcomes for us. Also, in terms of the overall context of the external environment in terms of tariffs, almost a third of the revenue comes from the US. The company continues to focus on execution and supply chain efficiencies. This is what has led us to a very consistent performance in the US in the last six quarters. As far as the other regulated markets are concerned, we are extremely happy with the progress of other regulated pockets. As you know, the other regulated markets are difficult to operate, and given that each market has got a regulatory pathway, making it a very high entry value. We are able to see green shoots in these markets. As has been reiterated in the past, our rest of the world market, which we call it as another regulated markets plus the growth markets, have registered a very strong growth at 14% with other related markets at almost about 16% year on year. There are a number of markets which the company is focused on, which have got B2B market, B2C across all geographies, which are in various stages of evolution. If you go back and see the last six quarters, the growth has been quite muted. In the last two quarters, we have grown almost about 14 to 15% in these markets. We believe that all pivots are in place, and it has formed a new base. We should be able to launch from now. Overall, if you really see, we are very happy with the 14% growth, including the other related pockets and the growth markets, and 16% in the other related markets. We believe that the new dollars will come from these markets as we start to spend and increase our regulatory efforts. Our long-term objective of mirroring the US market in the next two to three years' time remains intact. We believe that we have got all pivots in place to grow from here on. We are pleased with the base that has formed, and you will start to see accelerated growth in these markets. Coming to the other regulated markets, we had a 16% year on year growth. The deal momentum continues in Europe with large Pan EU partners being onboarded. Onboarding a partner takes time, and we have already started to see green shoots in these markets. As far as the UK markets and other markets are concerned, it's very steady, and it has formed a new base. We are confident of good growth in the near term. The portfolio maximization and the portfolio buildup in the last quarters on the investments which have been made on various programs have resulted in this growth. As far as the growth markets are concerned, the growth markets' revenue at $17 million grew 7% year on year. When we say growth markets, this consists of new markets where the new dollars are expected to come in the near future. Our Africa is very, very tall in this quarter. We are also starting to invest our regulatory efforts on the growth markets. A number of filings are being done. We should be able to see substantial growth beyond FY28 in these markets. All the work is in progress, and we should be able to see a new amount of dollars coming in beyond FY27, FY28 in these markets for which all pivots are in place, products are in place, regulatory strategies in place, and the go-to-market is also planned out. As far as the access markets are concerned, it's very lumpy, and the donor funding environment continues to remain challenging. It's very opportunistic for us, and it will continue to be lumpy. We believe our second half should be slightly better than the first half. But, again, it has to be seen over the next two quarters how it pans out. It all depends on the donor agency's decisions at that point in time. Overall, if you really see, we are very pleased with the entire results. We are focusing on long-term growth. We are also focusing on EPS growth. We believe that all the pivots are in place for us from a long-run perspective and to make the company extremely valuable in the near future. With this, I will hand it over to Vikesh to cover the profitability and the efficiency metrics that have gone into the results. Then we will open the floor for questions from the management side. Thank you, and I will hand it over to Vikesh. Vikesh Kumar: Thank you, Badri. Good morning, good afternoon, and good evening to all of you. As Badri mentioned, it's very pleasing to report yet another quarterly performance. Our performance has been exceptional across metrics of profitability, efficiency, and growth. I will start with the profitability metrics. First, I will focus on the gross margins. Our gross margins for the quarter are at 706 growth. It's a 90 crore increase from what we reported in '25, with a gross margin percentage of 57.8%. It's a 500 basis points improvement from our gross margins last year. For H1, our gross margins are at 1,381 crores, with a gross margin percentage of 59%. So even for H1, our gross margins have improved by 410 basis points over H1 of last year. Coming to EBITDA, we are reporting a very strong EBITDA of 232 crores for the quarter, with an EBITDA margin of 19%. As Badri already mentioned, it's a 25% EBITDA growth year on year. For H1, we are reporting a 450 crore EBITDA with an EBITDA margin of 19.2%. The EBITDA margin has also moved from 15.8% to 19% in Q2. So that's a 320 basis points improvement for the quarter. Similarly, for H1, with 19.2%, we've improved by 230 basis points over H1 of last year. Coming to the operational PAT, our operational PAT for the quarter is at 140 crores. 140 crores is the highest ever operational PAT that we've reported in a quarter. It's an exceptional performance from a PAT perspective. An operational EPS at 15.2 is again our highest ever quarterly EPS. For H1, our operational PAT is at 154 crores with an operational EPS of 27.6 rupees. Our reported PAT for the quarter is at 132 crores, and our reported PAT for H1 is at 137 crores. All in all, if you look at all the profitability metrics, you can see the multiplier effect flowing in, and the EBITDA to operating PAT conversion is also at a very healthy 57%. Focusing on a couple of other line items of the P&L, our operating costs have remained steady, in line with previous quarters at 39% of sales, which is also visible in the EBITDA margin expansion. Our gross finance costs continue to improve. For the quarter, our gross finance costs are at 40.46 crores. Our net finance costs for the quarter are significantly better at 20 crores due to a finance income that we reported in this quarter. For H1, our net finance costs are at 61 crores, which is significantly lower than the 105 crores of net finance cost we reported for H1 of last year. We expect our gross finance cost to continue to improve while the net finance cost for H2 may slightly go up due to the income that we've had in H1. Our ETR for Q2 and for H1 has been around 15%, and we expect it to be in the range of 15 to 20% for the year. Moving to the efficiency metrics, I'll start with the operational cash. We are reporting an operational cash of 394 crores for H1, which is about an 87% of EBITDA to operational cash conversion. This strong operational cash has helped us deliver a free cash of 73 crores, which we have used for debt reduction. Our net debt at the end of Q2 stands at 1,449 crores. We were also adversely impacted by forex on our net debt. That impact was almost 71 crores. Despite this impact, we were able to reduce our net debt by 73 crores, and consequently, our EBITDA to net debt ratio is now at 1.65x, improving from 1.9x that we reported at the end of March. We have also invested significantly in CapEx. Our investments in CapEx for H1 are at 149 crores. So in addition to maintenance CapEx, we've also made investments for growth, including acquisitions of intangibles for future growth. Our cash-to-cash cycle remains steady at 113 days. We've improved by three days quarter on quarter. Our ROCE has now improved to 16%, compared to 14.9% in March 2025. Our ROCE does not include our both our capital employed and our ROCE not include the investments in one source, which is currently valued at 339 crores. This 339 crores is also not adjusted in our net debt and EBITDA to net debt ratio. Overall, it has been a comprehensive performance across metrics, and that is clearly visible both in profitability and the strength of our balance sheet. We hope to continue and sustain this momentum as we focus on our growth levers for the future. Thank you, and we can now open up for questions. Abhishek: Dhanesh, you can take the Q&A, please. Operator: Thank you, sir. Ladies and gentlemen, we'll now begin with the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use a headset while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question comes from the line of Anand Mundra from Soar Wealth. Please go ahead. Anand Mundra: Hello. Good evening, sir. My question is with respect to other regulated markets. It has been strong this quarter. What are the key drivers, and is this growth sustainable? Is it clear to assume that other regulatory markets should grow faster than the US going forward? Badri: These are the questions regarding other regulated markets. Yes. As far as the other regulated markets, I'll put it like this. Like, other one is in terms of rest of the world markets, you have to look at it as a bucket. Other regulated markets plus the growth markets minus the access markets. If you really see this quarter, we have reached a very important threshold of 10,300,000,000.0 rupees. That's thousand crores we crossed in this market. If you really see the last trajectory of the last six quarters, this market has been forming in various geographies. This is the first time we have just broken that trend, and we believe that is very sustainable in the future. Our long-term objective of mirroring the US market in the next two, three years and with the rest of the world markets, it consists of, again, other regulated markets and the growth markets minus the access markets. We believe that we can mirror the US market in three years' time from now. We have got enough pivots in place, and you should not look at it from quarter to quarter. Over the period of three years, I think we should be able to get there. Anand Mundra: Okay. So if I look at the US market, it is flat for the last six, seven quarters. So not for one, two quarters, but we have come back to the same level what we were doing it quarters back. Badri: Yeah. If you really see that we have also specifically said that as far as the US market is concerned, there has been some intense competition in certain select molecules. If you really see the entire buildup for the US market, focused on profitability, and we are focused on various other metrics which are outside the in we are also focusing on a number of metrics. We believe that long-term is intact. As far as we are concerned, we are focusing on long-term. We are focusing on value. Both on the quarter on quarter trend. We believe that we have got enough products as well as these strategies in place to get there in the next two and a half years to three years' time frame. Vikesh Kumar: Yeah. Okay. Badri, just one point I would want to add. So specifically on the US market, in '25, we had reported roughly about $6,566,000,000 dollars in terms of revenue. Then over the last five quarters, we've been upwards of $7,070,000,000. It is a very calibrated approach that we focus on profitability rather than revenue growth. You will see that, be it in the US or in other regulated markets. So other regulated markets, historically, for many quarters, we were at 40,000,000, and now we've stepped up to that, you know, to that 44,000,000 range, and we expect to remain there. Similarly for the US, you know, four quarters back, we had stepped up from 65,000,000 to a 70,000,000 plus. We have studied in that range despite the competition that has been there on certain molecules. We have been able to maintain and grow revenues. Our focus continues to remain on profitability rather than chasing revenue growth. Anand Mundra: Understood, sir. So the second question is with respect to profitability only. It is largely driven by an increase in our gross margin. So this 58-60% gross margin, is this sustainable, sir, given the rising competitive intensity in the US? Badri: Yes. We have remained in that range for the last four quarters. Anand Mundra: This is helpful, sir. The third question with respect to our other income, which is 18.5 crore, this is being reported as a part of finance cost you have reduced. What is this related to, sir? Vikesh Kumar: So this is related to interest on certain refunds that we've got. Largely, we've seen this income coming in year on year, so it is more a timing of the income rather than that. So the way we are looking at it is net finance cost for H1 is at about 60 crores. 61 crores. With this level of income not repeating in H2, it may slightly go up. But overall, we've seen our gross finance cost coming down quarter on quarter for the last many quarters. Anand Mundra: On a run rate basis, it's clear to assume 40 crores, sir? Vikesh Kumar: It should be less than that. Anand Mundra: Okay. Okay. Thank you, sir. Thanks a lot. Operator: Thank you. Our next question comes from the line of Akash Jain from Moneycom's Analytics. Please go ahead. Akash Jain: Yes. Thank you. I think it has been an extremely positive effect on margins, and I think the management team should get fully accurate on that. I think I just want to also understand a little bit on is there an interplay between margins and revenue? Because I think a little bit of that you referred to earlier. But, for example, are we forgoing or are we stopping some reducing some revenues going to profitability? Just to understand a little bit what are we is some of this margin also come at the cost of revenue? Because the margins look great. But the revenue has been obviously, the retail has been lower than what we had expected and one will write it up here. So just a little bit qualitative and qualitative aspect of is happening on revenue growth versus trying to manage and try to do much. Vikesh Kumar: Yes. So I will take this. So if you look at the EBITDA, while the margin has been healthy, even the absolute growth in EBITDA and profits has been healthier, and which is where you also see the multiplier effect right at EBITDA and at PAT. So the focus is both on absolute profit growth and margin growth. So what we are saying is we don't want to we want to take in revenues that either meet our strategic margin thresholds in terms of profitability or they should help our under recoveries, which helps in improving our operating leverage. That philosophy has played out. So we don't factor it it is just that we don't want to do loss leaders or don't want to chase extremely low margin products just for the sake of revenue. It's a very calibrated approach. We've achieved leadership positions in the products that we sell, and we want to maintain that niche. Akash Jain: So we have said that we will launch 60 parts in the US in the next three years. But I think if you look at actual, the number has been significantly lower than the run rate that is required. So I just understand it. Right? And in the light of the fact that you said that the target for doubling US revenues. So the sorry. The target for revenue growth in the US image and tax is also what you are guided earlier. So how do I understand the move to that in terms of filings and approvals versus revenue growth versus what you're seeing actually next one? Vikesh Kumar: So if you follow our historical trends as well, it has been a very calibrated approach in terms of launch. Right? We don't launch products as soon as we get approvals. We wait for the right timing both in terms of pricing and market. We prepare ourselves. And make sure that when we launch, we launch it at a very profitable and at a very stable level. That strategy has really played out well for us. So we continue to remain focused on that. Given that we've got the pipeline, we've got the products, from a long-term standpoint, we see that to be intact, which is what we continue to mention. While there are some near-term headwinds, our long-term remains intact. Akash Jain: Okay. Thank you. Thank you. Operator: Our next question comes from the line of Amrish Kumar from Capital. Yeah. Congratulations on a very strong set of numbers. So the first question would be on our Beyond Generics. So we had launched our nasal spray. Is there any update on that in this quarter? Badri: We have one question. Yeah. We have already filed for one product, and we expect to file a few more in the next twelve months. Amrish Kumar: Okay. And the second question is on the balance sheet. So it was happening to see that the debt coming down. With the free cash flow this first half. So do we foresee some more debt reduction going forward? I mean, some reduction in further finance cost? Gross finance cost. No. Vikesh Kumar: We will continue to focus on profitability and efficiency. Okay. So we expect finance cost to come down, and from a free cash generation, whatever free cash we generate, our aim will be to reduce that. Amrish Kumar: Okay. And, sir, when delivering on the same points of the previous two speakers, so last our run rate is about $300,000,000 in the US currently, more or less. And in this rate, it was increasing very fast by about 25% till about a year back. We are still maintaining that we will go from current $304,100,000,000 dollars by FY '28. So are we going to see some step-up jump, or will we see gradual increase from here? Badri: Yeah. It will be very steady. That's all we can say that in the next two two and a half years. Should be able to get there. Is our hope. But, of course, external events are there. We have to watch out, and we want to take step by step. Most important thing is we are focused on sustainability of that. Revenue or sustainability of that target. Important for us and as a company, and that's what we are focusing on. Amrish Kumar: Got it, sir. Got it. Okay. Thank you so much, and congratulations on sitting on a very strong set of numbers. Thank you so much. Operator: Thank you. Our next question comes from the line of Krishna Mehta, an individual investor. Please go ahead. Krishna Mehta: Hi, sir. So on our CapEx intensity, it has increased to 149 crores in H1 FY26. Could you highlight the major areas of investment? And what will be your incremental spend in H2 FY26 and FY27? Vikesh Kumar: So I already touched upon the CapEx spends. It has gone towards maintenance CapEx as well as for future growth. So including certain investments for intangibles that we have done. We expect to maintain it at similar levels for H2. Krishna Mehta: Thank you, sir. Operator: Thank you. Our next question comes from the line of Rupesh Tatia from Long Equity Partners. Please go ahead. Rupesh Tatia: Yeah. Hi. Hi, Badri. Hi, Rakesh. I'm on a fantastic set of numbers. I have a few questions. First question, because I reported the PAT is 131 crore. Operational PAT you said in the presentation is 140 crore. So can you do some reconciliation maybe line by line? And, also, this 71 crore, the advanced currency impact what portion of that you know, is routed through P&L? Vikesh Kumar: So on the first part, the difference between the operational PAT and reported PAT is the exceptional items. So these are expenses related to past events and that are incurred in the quarter and are not relating to the performance for the quarter. So that is the exceptional loss. It's just one item that's the reconciliation item. Rupesh Tatia: So these are, like, one-offs, basically? Vikesh Kumar: Yeah. These are one-offs. Rupesh Tatia: And the 71 crore, what has grown in terms of the 200? In terms of the 71 crores, so that is the balance sheet position as of the date, as of the date. So if you look at the average rate versus the closing rate, the closing rate is much higher than the average rate. So the performance exchange does not flow through in the P&L. Whereas from a balance sheet standpoint, it gets restated by the end of the quarter rate. So there is some portion of that that would have flown through the P&L, but it is what happens is it comes the impact in the P&L comes with a lag. Rupesh Tatia: Okay. Whereas the balance sheet is immediate. Balance sheet is immediate because it is as of that date. Rupesh Tatia: Okay. Okay. Understood. And second question, Badri, is where are we on the controlled substances execution? I think in one of the investor conferences, I think hosted by Antti, you said we can hit $25,000,000 near term. So, I mean, what is near term? Have you figured out how quotas work? Have you launched the products? Get some color or qualitative and quantitative around that would be very helpful. Badri: Yeah. As far as the controlled substance is concerned, this is the first full year of execution from a We had some approvals of few products. This year also, we have launched one of the products in the controlled substance space. So this is a business which we are seeding in, and we are also very hard to execute it much better. The full impact of the controlled substances will be seen only from the next year onwards. I will put it that way because there are time lead times which happen between the quota allocation, purchase of API, manufacturing, and then selling. So all of this and this will be a very good investment here where the entire various legs of the control substances. We should see the full impact of that in the next year. Rupesh Tatia: And just one clarification, but is there that we have 15, 16, and that and the $34,000,000 per product kind of No. Revenue realization. Badri: No. I don't think so. That is right. Overall, as a controlled substances has a bracket, you could really see if you are able to get to the full potential, it will be slightly meaningful in the coming years. Rupesh Tatia: Okay. Okay. And final question, Ravi, where Q4 exit on that US $80,000,000 other regulator in that market, 50,000,000. Is that good? Does it have good probability that we will get there by Q4? Badri: We don't want to make any forward-looking statements within the year. All I can say the risk? Let me ask you another way. What is the risk to those numbers? That $400,000,000 were a three-year period, you should look at us long-term. Quarterly, that can be here and there, but it all depends on the market. All I can say is that our aim is to grow. If you see the other regulated markets, has other regulated many say, rest of the world markets, which includes other regulated markets plus growth markets minus the access markets have reached a 10,000,000,000 mark. There is a thousand crores. When we see all of that, we should see it as a basket. Most important thing for us is to grow wherever the opportunity is. That's what we are trying to focus on, not losing sight of the long-term what we have kept for ourselves. Rupesh Tatia: Okay. And just final clarification. Historically, H2 has been better than H1. So Yes, sir. Yeah. I'm really sorry. Operator: Mister Tatya, I'm really sorry to interrupt you. I request you please email your question. One very simple question. I'm sorry. Is this a very simple question? Badri: Yeah. Please go ahead. Rupesh Tatia: Yeah. Yeah. Yeah. So H2 historically has been better than H1, so nothing has been renewed this year as well. Right? Badri: Yes. Rupesh Tatia: Okay. Thank you. Operator: Thank you, sir. Our next question comes from the line of Prateek Uthari from UniqueBMS. Please go ahead. Prateek Uthari: Yes. Hi. Good evening, and thank you. Sir, one question on competition. So last quarter, we had called out some intense pricing pressure in the UK. Again, this quarter, are talking about I mean, in the presentation, have spoken about the US, we are writing discontinued five six production first half. Just across two markets, anything to read into it, how to look at I mean, is this just one of some products coming in? Is this I mean, some intense increase completion that we saw three, four years back? Some color, please. Badri: See, Prateek, just to give you a clarity on this. It's a competition. Is something which no company has got control of. Right? So from our perspective, at the end of the day, you have to look at it as a book portfolio. Some you will gain, some you will lose. Right? So from that perspective, you really see there is definitely some competition in the marketplace. What is more important for us to focus is that how we are ahead of the competition. That's what the company is working on. But the most important thing is we don't want to compromise the profitability of the company at the cost of top-line growth. That has been the philosophy all throughout. If you really see that this quarter, we have added one more product to the 37 out of 70 products or at a market-leading position. So it has to be it is a trade-off between the competition and the profitability as well as the you know, what you want to do as a company. Our disciplined execution has really helped us to get here. I think that is the right way to look at us. If you don't want to be looked at every quarter in terms of ups and downs. But overall, what we are chasing is something which is very value-driven, the volume or the price-driven. Prateek Uthari: It's actually the point that I was coming from was because it happened over two quarters, two geographies, some and hence the question. Right? Because and yeah, I mean, is it just some product specific? I mean, is it just the number of peers finding has gone up or maybe last two years were good for the US generic market? And now someone's taking price type or market share at cost of pricing. I mean, obviously, we're too soon to call out any trend, but but what you're saying is you're not done. Badri: Correct. There is no specific trend. All I am saying is competition will come and go. What Stride, Inc. will do is to how to stay ahead of the competition is what we are focusing on. Quarter on quarter is something which you should not even look at. From a long-term perspective, I think we have got we have got enough strategies in place and we'll continue to execute on our strength which will give us all the value which we are chasing. Prateek Uthari: Yes, ma'am. Point again. So second one, R&D, we were to double our R&D spend from $10,000,000 last year to 20. So, I mean, is run rate already hitting our P&L? Have we run that up? Vikesh Kumar: Yes. We have we said that it will be between 15 to $20,000,000. We are on track to spend that. R&D expense. Prateek Uthari: Fair enough. And earlier, Vikesh mentioned about this spend on intangibles, and that is what we see in the balance sheet. Intangibles have gone up about 100 crores. So let me just highlight this is just few registrations, etcetera, or it's gonna highlight the nature of this intended? Nikesh, you would like to take that? Vikesh Kumar: Yeah. So it is few intangibles. There's more few NDAs that we have acquired, and it is for near to medium-term growth. So it is in the 100 growth. It is a combination of the acquisition as well as exchange rate impact because exchange has also moved significantly in the last six months. So that is also that will also impact when you compare year on year numbers. Operator: You, Mister Kotari. Please rejoin the queue if you have more questions. Thank you. Operator: Our next question comes from the line of Nitin Agarwal from DAM Capital. Please go ahead. Nitin Agarwal: Badri, congratulations on our team for a very good job. Performance. Just one question on the R&D. Now R&D, the $1,520,000,000 dollars that you're looking to spend, are there any particular areas that you're gonna be focusing on more that you can highlight? Badri: So we have said that we'll be focusing on nasal space and the Beyond Generics. There are certain specific domains we have identified within. It's early days. But we are committed to focus on that. But nasal spray is one thing something which we need to call out at this point of time. Nitin Agarwal: Okay. And secondly, Vijay, on the CapEx, so this year is about 300 crores or thereabouts. Is this a run rate we should work with on these future years also? Vikesh Kumar: Our maintenance CapEx is going to be between the 100 to $1.50 crores, and the rest is more quarterly driven rather than being a trend. So it is more event-driven. Is what I would say. Nitin Agarwal: Okay. And lastly, on the overheads, I think we've done a pretty commendable job in terms of setting out creating operating leverage on the overheads over the last few quarters. I mean, do you still see opportunities to create more operating leverage on the overhead part of the business and this overhead going forward? Vikesh Kumar: So we still have some level of under recoveries across our plans, and that is where we are focused on to get in the incremental revenues without the need to spend in new operating costs. So there are surely some legs that are left as far as the operating leverage is concerned. Nitin Agarwal: Okay. Sure. Thank you so much. Operator: Thank you, sir. Our next question comes from the line of Siddhartha Bhattacharya from Autumn Investment. Please go ahead. Siddhartha Bhattacharya: Hi. I'm audible. Vikesh Kumar: Yes. Siddhartha Bhattacharya: Alright. Yeah. So a couple of questions. First, I wanted to understand about the gross margin expansion. You know, how structural is that and, you know or is that a function of the product mix that we did during this quarter? Or the first half? You know, if you could throw some light on that. Vikesh Kumar: It is fairly structural. I mean, if you look at the last six quarters, we've been in that range. And expanding in a very calibrated manner. So H1 FY '25, we were at 55%. H1 FY '26, we are at 59%. Q3, 458%, and so it is in line, and it has got to do with the discipline that we follow across markets in terms of how we onboard new business. Siddhartha Bhattacharya: Okay. Alright. And the second question I have is that H1 to H1, I look at numbers, you know, your gross margin increase not really translated into corresponding EBITDA increase. Know, which tells me that there is some variable cost that has grown much faster than the gross margin increase. So going ahead, you think that will sort of taper down lead to EBITDA expansion? In the coming quarters? Vikesh Kumar: Yes. So if you see Q1 of last year, the expenses were significantly lower. The revenue was lower. And from Q2 onwards and that is where the year on year, difference, you're able to see much more stocker. But when you look at Q3, Q4, the last four quarters, it has been fairly in a very steady range. Siddhartha Bhattacharya: Okay. Okay. Okay. Got that. Thank you so much. Operator: Thank you. Our next question comes from the line of Sarvesh Gupta from Maximal Capital. Please go ahead. Sarvesh Gupta: Hi, team, and congratulations on a steady set of numbers. So first question is on the tariffs. So now that we have seen one month post tariffs in the quarter gone by and one month in this quarter, how do you if you can throw some color on the impact on of the tariffs that we are seeing on our business. Badri: Currently, there is no impact, and we continue to watch the external development. Things are changing every day. But at least some clarity has come in that tariffs are not going to be there in the near term. But it's as good as news every day. Right? So we have to watch out. So far, there has been no impact for us for Synty Pharmaceuticals. Sarvesh Gupta: Understood. And, you know, you said that the other regulated market business would mirror the US business. So now the US business itself on a quarterly run rate can grow to maybe $100,000,000 in another two, three years. So do we mean that the other regulated business will also reach to that level in that time frame, thereby increasing by almost two and a half times? Badri: Yeah. I just want to make a small correction. What you said. And you said that US market, we have got a plan to go to 400,000,000,000. I named the other than you other than US which I call it as rest of the world, which consists of both other regulated markets and the growth markets reached at 10,300,000,000.0 rupees, thousand 30 crore which is the first time we are crossing thousand crores in that market. And that's growing steadily at about 14% on a start for the last two quarters. And if you keep up the same trajectory, we should be able to mirror the market the US market in the next two, three years. From now? That's the thing I said. You have to I didn't say other regulated markets. Other regulated markets plus growth markets minus plus group markets. That's it. Sarvesh Gupta: So that should also reach a run rate of $100,000,000 in two, three years. Badri: Yeah. That is what that is what is our plan. And it will it's, again, that's a long-term aspiration. When it will happen, we don't know. But we are working towards it with the growth whatever trajectory that is there. We believe that it can catch up. Sarvesh Gupta: And finally, on the expensed out things versus capitalized, so you have $1,520,000,000 dollars of R&D that you mentioned. Then you have a maintenance CapEx of 100 to 150 crores. And then you have filing related intangible expenses, I think. So how much of these items are going through the P&L, and how much is going to get capitalized. And under what time frame. Vikesh Kumar: So everything that we spend internally except for the filing fees goes through the P&L. Anything that is bought out is what goes through the balance sheet. Sarvesh Gupta: No. So this R&D expense and maintenance CapEx, are they going to the P&L? Vikesh Kumar: Maintenance CapEx is for the factories. That does not put into R&D. Sarvesh Gupta: And the R&D expense of $1,520,000,000 dollars? Vikesh Kumar: It's already in the P&L, in the reported numbers. Sarvesh Gupta: Oh, okay. Thank you. And all the best. Operator: Thank you, sir. Our next question comes from the line of Kiran from Table Free Capital. Please go ahead. Kiran: Hi. Congratulations, sir, on a very good set of numbers. Couple of questions. One, we are talking about 200,000,000 in the US, maybe 200, $220,000,000. I mean, just in one so one plus growth market is 400,000,000. So I'm thinking one will be somewhere around $202.50. So again, not asking for a quarter to quarter, but at least from a run rate perspective, we should at least start hitting $80.85, 90 in the US and probably 15 other related markets. Do you see this happening in FY '27? Again, not for a particular quarter, but at least some run rate growth that we have to see to reach 400. Right? It's not certainly down to 400. Badri: Yeah. So just to reiterate. This is an aspirational goal. Right? And we are starting to see growth. All we are saying is that the last six quarters of market formation has resulted in a growth. For the rest of the world markets, excluding access markets. We believe that if you are able to grow in the same trajectory, we should be able to mirror that market in the next two years. That's what we are expeditiously working on. You will see that the narrowing in as we go along from quarter to quarter. Between US family, rest of the world markets, includes both the other regulated markets and the growth markets. Kiran: My question was different. So my question is simply was we should see some run rate increasing. Right? At least in the US markets to 80, eighty five. Growth markets, not growth market, I think the world markets to 40, 50, So I'm asking is that one rate that we're gonna see in FY '27? That eighty eighty five kind of run rate in US and forty five fifty in Warren next year? Badri: Yes. Because, see, I don't want to get into specifics on how you are thinking in terms of modeling. But all I can say is if I have to mirror the markets in two, three years, all of it, what you said is true. Kiran: Got it, sir. Got it. Second question, sir, in terms of nasal sprays, we said we'll launch one nasal spray. Most of our nasal sprays are going in so R&D is also going around majorly in nasal spray. Is there any particular therapy area, sir? Because some industry players do thousand crores molecule in a single product. Right, in nasal spray. So just wanted to understand if there's any therapy area that you can talk about. Badri: No. We are not going to specifically talk about any therapy play. All we are saying is that we filed one product, we are in the process of filing few more in the next twelve months. Once we get an approval and then we'll have to look at launch, at least it is about eighteen months to twenty-four months away from the current date. Operator: Okay. So please rejoin the queue for more questions. Thank you. Operator: Our next question comes from the line of Chirag Shah from White Pine Investment Management. Thank you. Please go ahead. Chirag Shah: Yeah. Thanks for this opportunity, and congrats for a good set of numbers. Sir, these questions. First question is on currency. So what is our average rate of duration when you will see the benefit of top INR depreciation in DNS, That's one. Second, on this intangible and or and that you have what if you can give more color on that in terms of number or what kind of opportunities size it will target if everything plays to the playbook? And third was on this on the on the US competition, you know, in general, a lot there's competition that we see. If you can just give us color, how should one look at it simply because we all have refreshed memory of competitive intensity what happened after COVID. Which lasted very long. But if you go back into the history, generally, it's is the competition or short term one to two quarter, event or and how is the generally tends to be? Vikesh Kumar: Yeah. Thanks, Chirag. On the currency, I did not follow your question. Chirag Shah: I will repeat it. I think we indicated minimal amount of heavy loss accounting hedge loss, when I say hedge loss, given the currency. So how what is the duration of our current budget? Outstanding And from when can we see the benefit of current current INR, for example? Vikesh Kumar: So we are seeing the benefit of the current INR rates. You should also appreciate that we have a large part of our operations outside of India. Where there are costs that are in USD. But, largely, the way we really focus on is that on a net basis, the currency impact benefit flows through. We see that load flowing through in terms of the P&L. The impact on the balance sheet comes in when the depreciation is far steeper than what it is during the course of the period where the currency benefits come, come with a lag over subsequent quarters. If the currency rate stays. So if the currency stay rate stays, that benefit should flow through the next few quarters. As far as the ANDAs or the products, the products are they are in line with our strategic profile in terms of how we look at products internally. We expect to launch them in the near to medium term. So those are very small tuck-ins that we really saw value in and took them over, but we cannot get into specifics of it. They will form part of our pipeline. And growth in the near term near term to medium term. As for the competition and the intensity, it is very specific to the new launches that we've had over the last twelve months. If you really see across the rest of the portfolio or the large part of the portfolio, we are not seeing any erosions. In fact, we continue to maintain our market leadership position both in terms of volumes, and which is where you also see that gross margins are steady. What the impact on these products meant is that what could have been a very solid growth that growth did not come through because of these impacts. Chirag Shah: Just a clarification. So first on HP, what I was referring to is whatever balance sheet law hedges losses that we have booked would be with to the outstanding product you would have taken for forward booking of revenue. Right? Potential revenue. Vikesh Kumar: We have not booked any balance sheet loss or hedges. I mean, that impact is not much. What I spoke about was the impact of restatement of foreign currency debt. Chirag Shah: Okay. Okay. Restate. What about restatements? Okay. I understand now. More of foreign currency debt. We don't have any significant outstanding hedges that are impacting. Chirag Shah: And just clarification on this competitive intensity, but generally in the past, if we exclude the post-COVID period intensity, how long does of you will be in a better position to make a guess than us understanding that it's a forward-looking statement. It may or may not hold to. I understand that. But how long it's in the law? How long it lasts? Forget about the intensity, but generally, because there are multiple if you can just hyper understand because we all think that when competition testing, it can last for two, three years and the price erosion could be very severe. Given the recent experience of post-COVID. Vikesh Kumar: Yeah. I mean, like we had said, our focus remains on profitable expansion. We continue to remain focused on that. We expect that through our EVD programs and cost improvement, cost improvement plans, we will be able to offset the mitigation. We'll be able to mitigate and offset these impacts. It is just that when an impact comes in, it comes immediate, whereas your improvement takes six to twelve months to get back those margins. So that is what we are focused on. That we need to recoup. It's a competitive market. We have to continuously work on our cost and keep improving our cost across line items. And retain our leadership positions. Operator: Thank you, sir. Ladies and gentlemen, due to the time constraint, that was the last question for today. I now hand the conference over to the management for the closing comments. Badri: Thank you, everyone, and wish you a very happy weekend. All we are saying is that we'll continue to focus on long-term sustainable business with EPS accretion. Operator: Thank you. On behalf of Stride, Inc., that concludes this conference. Thank you for joining us. You may now disconnect your lines.
Operator: Good afternoon, and welcome to the F5, Inc. First Quarter Fiscal 2026 Financial Results Conference Call. Also, today's conference is being recorded. And I'll now turn the conference over to Ms. Suzanne DuLong. Thank you, ma'am. You may begin. Suzanne DuLong: Hello, and welcome. I'm Suzanne DuLong, Vice President of Investor Relations. We are here to discuss our first quarter fiscal year 2026 financial results. François Locoh-Donou, F5's President and CEO, and Cooper Werner, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also here to answer questions during the Q&A session. Today's press release is available on our website at f5.com where an archived version of today's audio will be available through April 27, 2026. We will post the slide deck accompanying today's webcast to our IR site following this call. To access the replay of today's webcast by phone, dial (877) 660-6853 or (201) 612-7415 and use meeting ID 13757533. The telephonic replay will be available through midnight Pacific time, January 28, 2026. For additional information or follow-up questions, please reach out to me directly at s.Dulong@f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect, and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck. Please note that F5 has no duty to update any information presented in this call. I will now turn the call over to François. François Locoh-Donou: Thank you, Suzanne, and hello, everyone. We are very pleased to report strong Q1 results with 7% revenue growth driven by 11% product revenue growth, our sixth consecutive quarter of double-digit product growth. This includes a robust 37% systems revenue growth in the quarter. Our growth continues to be fueled by durable demand drivers including hybrid multi-cloud adoption, scaling AI investment, and the demand for converged platforms. Our EMEA region delivered a particularly strong quarter. We are seeing momentum from emerging trends, which may prove durable. Regulations and mandates for resiliency and digital sovereignty are prompting customers to accelerate hybrid multi-cloud deployments, driving increased demand for F5 solutions. We are especially pleased with our Q1 results following the security incident at the start of the quarter. Our global sales and support teams mobilized rapidly, enabling customers to take action and get back to business quickly. They managed more than 9,000 additional support cases and earned positive customer feedback on our response efforts. As a result, we experienced minimal demand disruption in Q1. Unexpected positive outcomes emerged, including customers gaining a deeper understanding and appreciation of F5's critical role in their infrastructure, and opportunities to strengthen relationships, including deeper engagement with CSOs. We remain focused on protecting customers and earning their trust, recognizing the responsibilities that come with our critical role. We are hyper-focused on three areas: further investing in the security of our operations, including security automation, enhancing the security of our products and development environments, and supporting the broader security community by sharing our learnings and innovations such as introducing endpoint detection and response, or EDR capabilities to perimeter devices. As we look ahead, we see three forces reshaping customer infrastructure decisions, and they are all accelerating simultaneously. The first is hybrid multi-cloud. Workloads now span on-premises, private cloud, and multiple public clouds. Customers want flexibility without lock-in, and hybrid multi-cloud has become the dominant operating model as a result. The second is enterprise AI. Customers are shifting from general-purpose systems to AI-centric data centers. These environments require far higher levels of data movement and compute, and these new requirements are putting real pressure on networking, storage, and application delivery layers. Finally, organizations are replacing fragmented point products with converged platforms because complexity now directly impacts performance, uptime, and risk. Consolidation is no longer simply a cost exercise. It is how customers simplify operations and improve resilience. I will double-click on the first trend. Hybrid multi-cloud adoption has been driven by enterprises' need for flexibility, cost efficiency, vendor lock-in prevention, and data gravity. Today, drivers like regulations, including NIST 2, GDPR, and DORA, are accelerating hybrid multi-cloud adoption by imposing greater resilience and digital sovereignty requirements, especially outside the US. Organizations are also modernizing infrastructures to enhance security, performance, and efficiency. They are repatriating sensitive workloads to ensure compliance and deploying advanced ADC and API security solutions. These trends underscore why hybrid multi-cloud is the leading operating model. F5 is purpose-built to lead in this space. Our unmatched ability to provide delivery and security for every app, deployable anywhere and in any form factor, sets us apart. With a platform architected for hybrid multi-cloud, it is no surprise that customers are turning to F5 to secure and scale their environments. Let me share a few examples of some hybrid multi-cloud wins from Q1. F5 is powering the hybrid multi-cloud strategy for a regional banking leader. The customer needed more capacity, a modern application infrastructure for digital banking services, and AI-based application development. F5 is building an AI-ready infrastructure with enhanced security using BIG-IP for automated and simplified operations, NGINX for cloud-native performance, and distributed cloud services for bot defense and DDoS mitigation. Second, a media and Internet provider selected F5 to standardize application delivery across its on-premises and cloud environments. With F5, the customer uses the same ingress and security approach everywhere its applications and AI services run, ensuring predictable performance, security, and user experience. Teams can deploy or expand applications across environments without changing operational practices. This provides a reliable foundation for scaling AI and modern applications in a hybrid multi-cloud environment. Finally, a large operator of veterinary clinics is leveraging F5 to strengthen the resilience of its hybrid multi-cloud architecture. The customer needed to modernize their infrastructure and reduce risks tied to cloud concentration and vendor lock-in. F5 is delivering consistent networking and security functions and eliminating cloud-native dependencies. With F5, the customer is creating a durable foundation for future API and AI use cases. Now let us look more closely at AI. AI-related investment is scaling as enterprises prepare for increased network capacity and services to support AI workloads, generative AI, and inferencing demands. The resulting AI-related demand is fueling growth across our portfolio. AI is fundamentally transforming application behavior, and we are seeing three consistent patterns driving demand for F5 solutions. In AI data delivery, multimodal data growth is pushing terabit-scale ingestion. With idle GPUs costing real money, customers need sustained end-to-end high-throughput data pipelines across network, storage, and application delivery. BIG-IP solves the AI training and inference throughput bottlenecks traditional infrastructure cannot handle. In AI runtime security, customers are moving quickly on generative AI, but security and compliance often become bottlenecks to deployment and ROI. Generative systems raise the stakes by accessing and acting on sensitive data, driving demand for stronger runtime controls and guardrails. F5 safeguards AI applications, APIs, and models from abuse, data leaks, and attacks like prompt injection. We ensure visibility, control, and trust. With our Q4 acquisition of Calypso.ai, we enhanced our runtime security offerings with real-time threat defense, red teaming models, and robust guardrails. We are preventing prompt injections and ensuring models act as intended even under attack. In AI factory load balancing, as AI deployments scale, intelligent traffic distribution across models, clusters, and GPUs is critical, creating new demand for load balancing across and within the AI factory. F5 optimizes traffic and GPU utilization, increasing token throughput, reducing time to first token, and lowering per-token cost. These trends highlight a clear reality: AI is accelerating demand for application delivery and security, areas where F5 excels. In Q1, we added nearly as many AI customers as we did in all of FY '25. This growing demand is a testament to our layer seven expertise and decades of experience connecting applications and users, key differentiators in a rapidly evolving market. I will highlight a few of our AI wins from the quarter. In an AI data delivery use case, one of the largest global technology OEMs is expanding its BIG-IP infrastructure to support a new high-bandwidth AI data ingestion use case. The customer is repatriating large amounts of IoT data from the cloud to enable AI and analytics workloads. F5 is modernizing their S3 data delivery tier with BIG-IP for ultra-high performance. We are also accelerating their internal large language model development, powering large-scale data ingestion into AI storage and pipelines. In AI runtime security, a global financial services leader is leveraging F5 to integrate generative AI into its AI trust framework. F5 is ensuring security, regulatory compliance, and continuous access controls at scale. F5's AI guardrails with programmable risk-based controls reinforced with continuous F5 AI Red Team testing are enhancing trust, resilience, and regulatory readiness across every AI interaction. F5's approach seamlessly integrates with the customer's existing identity access management and governance systems and is providing advanced protection against emerging threats while delivering low-latency performance. And finally, in an AI factory load balancing win with a major energy and chemicals company, our team successfully leveraged a tech refresh into an expanded AI use case. The customer is shifting from public AI consumption to hosting private AI models and needed a solution to reduce latency and prevent timeouts. F5 is ensuring faster, more reliable AI responses, with hardware-level handling of layer four traffic and SSL processing, significantly improving time to first token. All of these examples highlight how customers are building their AI infrastructure with F5. Let's shift gears to the third trend: converged networking and security platforms. Growing hybrid multi-cloud complexity has customers desperate for ways to reduce cost and improve the performance of fragmented point solutions. F5's application delivery and security platform, or ADSP, is the first platform to unite high-performance traffic management with advanced application and API security across hybrid and multi-cloud environments. ADSP converges security, scalability, and operational efficiency. It enables customers to consolidate multiple point solutions in one unified platform, simplifying operations and reducing risk. ADSP also delivers valuable XSOPS capabilities for customers like policy management, analytics, and automation. Let me highlight a few Q1 wins that demonstrate how customers are adopting ADSP, converging solutions, and simplifying operations. In banking, a long-standing BIG-IP customer is modernizing its infrastructure, consolidating networking, application delivery, and security with F5. The customer is modernizing its digital banking applications and needed increased capacity and improved resilience to comply with central banking regulations. Today, the customer is leveraging a powerful combination of BIG-IP, NGINX, and distributed cloud services for traffic management, WAF, and DDoS protection. A global consumer products company standardized on a converged F5 platform to address governance and reliability concerns. By expanding its use of NGINX and refreshing its BIG-IP footprint, the customer consolidated application delivery and security controls, ensuring consistent performance. Finally, a foreign national law enforcement agency selected a converged F5 platform to support its national open data initiative. The customer's disparate infrastructures struggled with ransomware threats, high false positives, and limited scalability. F5's converged solution enabled the agency to consolidate load balancing, API protection, authentication, and threat mitigation. And these are just a few of the examples of customers leveraging F5's platform to consolidate vendors, simplify operations, and reduce risk. F5 is unmatched in delivering complete application delivery and security across hybrid multi-cloud environments. Our vision for a unified converged platform is fueled by our commitment to customer-focused innovation. And we are continuing to invest to create even greater value for our customers. In November, we launched F5 BIG-IP version 21.0, scaling the core for the most demanding AI workloads. This release delivers the significant control plane enhancements required to handle the scale and complexity of modern traffic. Crucially, we have applied this performance directly to AI data delivery, introducing native support for the model context protocol or MCP and S3. This ensures that BIG-IP is optimized for the high-throughput storage and retrieval workloads that are critical to AI architectures. We are also bringing our advanced API security to the data center. One of the primary challenges our customers face is the risk of shadow APIs, endpoints that are active but invisible within their private networks. We have now enabled our API discovery engines to run locally in customer environments. This means we can deliver the exact same discovery and security capabilities on-premises that our customers already rely on in F5 distributed cloud services. This allows customers to maintain a consistent API security posture in any environment. In summary, our first-quarter performance underscores F5's strong alignment with durable market demand drivers including hybrid multi-cloud adoption, the acceleration of AI, and the increasing need for converged platforms. We remain deeply committed to driving innovation and to delivering cutting-edge solutions that address our customers' rapidly evolving application delivery and security challenges. Now I will turn the call over to Cooper who will walk you through our Q1 results and our outlook. Cooper? Cooper Werner: Thank you, François, and hello, everyone. I will review our Q1 results before I update our outlook for FY '26 and provide our guidance for Q2. We delivered a strong Q1, growing revenue 7% to $822 million with a mix of 50% product revenue and 50% services revenue. Demand in the quarter came from continued hybrid multi-cloud adoption, fueled by customers' need for flexibility and their efforts to modernize architectures. AI regulations, the resulting need for greater resilience and data sovereignty are also emerging as hybrid multi-cloud accelerants. As François mentioned, we saw minimal demand impact from the security incident in Q1. Product revenue totaled $410 million, increasing 11% year over year, while services revenue of $412 million grew 4% year over year. Systems revenue totaled $218 million, up 37% over Q1 FY '25, driven by strong tech refresh and capacity expansion in connection with hybrid multi-cloud adoption and growing AI demand. Our software revenue of $192 million was down 8% year over year. This met our expectations given the exceptionally strong results in Q1 '25, including the sizable 8-figure renewal we discussed last year. Subscription-based software revenue totaled $164 million, up 1% year on year. Perpetual licensed software totaled $27 million, down year over year against exceptionally strong results from Q1 '25. Revenue from recurring sources contributed 69% of our Q1 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our services revenue. Shifting to revenue distribution by region, revenue from The Americas grew 2% year over year, representing 53% of total revenue. As François highlighted, EMEA delivered exceptional 24% growth, representing 31% of revenue. And APAC declined 1% and represented 16% of revenue. Looking at our major verticals, enterprise customers represented 64% of Q1's product bookings. Government customers represented a strong 23% of product bookings, including 8% from 13% of Q1 product bookings. Our continued financial discipline contributed to our strong Q1 operating results. GAAP gross margin was 81.5%. Non-GAAP gross margin was 83.8%. Our GAAP operating expenses were $456 million. Our non-GAAP operating expenses were $375 million. Our GAAP operating margin was 26%. Our non-GAAP operating margin was 38.2%, an improvement of 80 basis points year over year. Our GAAP effective tax rate for the quarter was 19.2%. Our non-GAAP effective tax rate was 19.8%. Our GAAP net income for the quarter was $180 million or $3.1 per share. Our non-GAAP net income was $259 million or $4.45 per share, reflecting 16% EPS growth from the year-ago period. I will now turn to cash flow and balance sheet metrics. We generated $159 million in cash flow from operations in Q1. CapEx was $10 million. DSO for the quarter was fifty-four days. Cash and investments totaled approximately $1.22 billion at quarter-end. Deferred revenue was $2.1 billion, up 6% from the year-ago period. In Q1, we repurchased $300 million worth of F5 shares at an average price of $249 per share. We ended the quarter with approximately 6,400 employees. I will now speak to our fiscal year 2026 outlook. With strong close rates in Q1 and solid pipeline creation, we are raising our FY '26 outlook. We now expect FY 2026 revenue growth of between 5% to 6%, up from our prior outlook of 0% to 4%. For the year, we now expect mid-single-digit software revenue growth, double-digit systems revenue growth, and low single-digit services revenue growth. We estimate FY 2026 gross margin in a range of 82.5% to 83.5%. This reflects a modest reduction to our prior range, accounting for an anticipated impact to product COGS in the second half related to rising memory costs. We estimate FY '26 non-GAAP operating margin to be in a range of 34% to 35%, up from our prior range of 33.5% to 34.5%. We continue to expect our FY 2026 non-GAAP effective tax rate will be in a range of 21% to 22%. We expect FY 2026 non-GAAP EPS in a range of $15.65 to $16.05, up from the prior range of $14.50 to $15.50. Finally, we continue to expect our full-year share repurchase to be at least 50% of our free cash flow. Given the $300 million repurchased in Q1, we anticipate repurchase activity will be lower in the remaining quarters of FY 2026. Turning to our Q2 outlook. We expect Q2 revenue in a range of $770 million to $790 million, reflecting approximately 7% growth at the midpoint. We expect non-GAAP gross margin in the range of 82.5% to 83%. We estimate Q2 non-GAAP operating expenses of $390 million to $408 million. As a reminder, our operating margins are typically lowest in fiscal Q2, due to January payroll tax resets and expenses from our large customer event in March. We expect Q2 share-based compensation expense of approximately $70 million to $72 million. We anticipate Q2 non-GAAP EPS in a range of $3.34 to $3.46 per share. I will now pass the call back to François. François Locoh-Donou: Thank you, Cooper. In closing, I will say that F5's mission to help each other thrive and build a better digital world has never been more vital or more relevant. As we look ahead, we see our strengths aligning with the most significant secular trends reshaping the enterprise: hybrid multi-cloud adoption, the AI revolution, and the growing demand for converged platforms. We expect these trends will provide tailwinds for continued growth in fiscal year 2026 and beyond. Operator, please open the call to questions. Operator: Thank you. We will now be conducting a question and answer session. We ask that you please press 1 on your telephone keypad if you would like to ask a question. You may press 2 if you'd like to remove your question from the queue. The first question comes from the line of Matt Hedberg with RBC. Please proceed with your question. Matt Hedberg: Great, guys. Thanks for taking my question. Congrats really on the results. Really good to see, especially following the security incident last year. François, you spent a lot of time talking about some of the drivers, and I thought it was super helpful. The one that continues to pique my interest is AI. And, you know, we're basically three years after the release of ChatGPT. And, you know, it seems like non-AI native enterprise customers are accelerating their AI adoption. And I guess based on the results, I'd assume that customer cohort is becoming now more AI leaning. Wonder if you could talk a little bit more about this trend. And I guess, like how durable could that be? Because it feels like we could be very early in that cycle. François Locoh-Donou: Thank you, Matt. I'll start with where you left off, which is we absolutely are very early in the cycle. But let's talk a little bit about how we've seen AI develop over the last couple of years. As you started, of course, we've seen a lot of investment from hyperscalers in CapEx and building out AI infrastructure. We've then seen enterprise, especially either AI-native enterprises or large enterprises that were very forward-leaning in AI, start by investing in training and starting to build models and train those models. But now we're entering a different phase of the cycle where these AI-leaning enterprises are now shifting from training to moving AI applications into production. So you're seeing a shift from training to inference. And with that comes new requirements. Specifically, as enterprises move to production, their data pipelines need to be hardened. They need to be able to connect their data stores to their AI models, and they need to be able to do that at speed, at scale, with very low latency. That requires significant performance from their topic management solutions. It requires low latency, high scale, high throughput, high performance, and that is perfect for F5. That's kind of the first requirement. And then the second requirement as they move into production is security, specifically runtime security. It becomes really, really important. And so this quarter, what we saw was a little bit of an inflection around enterprise adoption and AI. We won as many new customers in AI just in the last ninety days as we had for all of FY '25. And interestingly, the mix in FY '25 was very oriented towards data delivery, basically high-performance load balancing for these data pipelines. But this quarter, the mix was almost balanced between data delivery and security, and we saw a lot more requirements for security. As we project forward, I think the trend is durable because the enterprises that are doing that today are kind of the largest enterprises that are very forward-leaning in AI. But we will see, I think we'll see a lot more enterprises adopt AI in the future. And the early enterprises are doing so right now. Will also scale in production pretty significantly. An example I'll give you of that is we signed a multimillion-dollar deal with a global technology OEM this quarter. Who have repatriated part of their data from the cloud because they're collecting more data from their customers. They know their data is more valuable. They're having a lot more telemetry from customers, from their products, and they're putting all this data in large data lakes on-prem. But they then need to leverage their data in their AI applications. And connecting their data to their AI applications requires significant enhancements to their infrastructure, and that is just gonna scale more and more in the future. So we think the trend is durable, both in terms of data delivery and in security. And then the last thing I'll say about security is that a lot of the security that we've seen so far when I talked about runtime security was really almost traditional security applied to AI applications. We are now in the early days of seeing AI models also go into production. They are specific threats for AI models that we now address with our AI guardrails, and we had a very strong start to our AI guardrail solution this quarter. Really with strong adoption from some of the largest enterprises in sectors like financial services or technology or even management consulting, for these AI guardrail solutions. So we're pretty excited about the quality of customers that we are seeing in the early stage of this, and we think the trend is only going to grow from here. Matt Hedberg: Congrats. François Locoh-Donou: Thank you, Matt. Operator: And the next question comes from the line of Tim Long with Barclays. Please proceed with your question. Tim Long: Thank you. Maybe if I could do one software, one on hardware. Just on the software side, I get that tough year over year, comparison in the December, but the sequential know, looks like it was a little worse than normal. So, you know, how do we think about that in the quarter and how we can get to mid-single digits get that business accelerating? And then just on the hardware side, I'm just hoping you could break down your views a little bit, but it continues to perform very well. Market share versus market growth, it seems like we're starting to see hardware that you're selling or systems that you're selling in maybe new use cases. So maybe the market growth is dynamic is changing. Just love, opinions on both of those. Thank you. Cooper Werner: Yeah, Tim. So this is Cooper. I'll speak to the software performance. So you're right. We did have a pretty strong compare from the Q1 period of a year ago. We had the large 8-figure renewal that we had referenced. We also had a pretty strong quarter with our perpetual software business that was tied to a couple of specific deals in the service provider space. So there's a little bit of an anomalous growth quarter a year ago. But our performance in the quarter in '26 was right in line. It was actually slightly ahead of our expectations. And I think as we look ahead, we're pleased both in terms of the execution that we saw in Q1 and that there was no demand disruption related to new software projects. So things move forward in a pretty orderly fashion. But also as we look ahead to the renewal cohort for the rest of the year, which is pretty strong, the utilization rates that we're seeing with customers are very healthy, and we see that as a good indicator that we should have a strong finish for the remainder of the year. And so that gives us confidence that we'll be able to grow the business in the mid-single-digit range. François Locoh-Donou: And, Tim, let's talk about the hardware. Although the trends we're seeing really apply to both hardware and software. But if you step back really, the thing that has changed in the market is that hybrid multi-cloud deployments hybrid multi-cloud architectures for enterprises are now the new normal. And we've seen that shift happen over the last two, three years, but it is accelerating now. Now over the last three years, hybrid multi-cloud architectures have been driven by, first of all, enterprises wanting to have the flexibility to deploy apps in any environment, cost optimization, control, those have been the drivers of hybrid multi-cloud deployments. And we have been ideally positioned for hybrid multi-cloud because of the unique flexibility we provide with hardware, software, and SaaS. We're absolutely unique in the world of delivery and security. In being able to do all of that. Now we are seeing now, and these have accelerated really over the last three to six months, we're seeing two new catalysts that are accelerating that and driving demand ultimately for both hardware and software. But in the near term, we're still in very strong demand for hardware. These two new catalysts are, number one, regulation. Especially outside of The US there is regulation that has come into force or will come into force that is forcing companies to adopt a stronger stance on resilience and a stronger stance on digital sovereignty. It means that companies need, for example, to be able to fail over from one cloud back to on-premise and to have true hybrid resilience in their environment. It means, for example, that they need to have consistent security controls across all of their infrastructure environments. Regulations like NIST 2, DORA, cyber resilience regulations that have come into force in '25 and all the way through '27 will come into force. Are really causing reinvestment in data center and stronger resilience between data center and the cloud and we are perfectly positioned to benefit for that. And we're seeing those tailwinds in the business. This is one of the reasons that we had a very strong quarter in Europe this quarter. And then the second new catalyst driving also strong hardware demand is enterprise adoption of AI is accelerating. I shared that earlier, but AI is hyper hybrid. And it accelerates hybrid multi-cloud architectures. And we are seeing that contribute meaningfully to the hardware demand that we saw this quarter. Tim Long: Okay. Thank you, and I hope those sirens are current for you guys. François Locoh-Donou: No. We're fine, Tim. Thank you. Operator: And the next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question. Samik Chatterjee: Hi. Thanks for taking my question. François, maybe if I can start off with similarly on the hardware side and the upgrade cycle you're seeing from your customers as well as the incremental use cases? But there is the sort of end of software support, I believe, in early 2027. How much of the momentum that you're seeing on the hardware is you would tie to sort of the Viprion and the I Series, which are going through the upgrades versus maybe on the rest of the portfolio? And has the security incident led to any sort of BIG-IP coming in for those upgrades? And I have a quick follow-up after that. Thank you. François Locoh-Donou: I think, Samik, clearly, we are in addition to the trends I've just talked about, which are macro trends, there is a trend that is specific to F5 at the moment, which is that we are in the middle of a refresh cycle. You mentioned the dates. Looking to refresh their infrastructure. That said, what we are seeing is this refresh cycle is obviously stronger than past refresh cycles because what we are seeing is not just refresh, but a lot of expansion for customers. And from all the conversations we're having with customers and the data points we're seeing, we think the refresh is stronger and has a lot of expansion because customers are also getting their infrastructure ready for AI, the deployments of AI infrastructure and getting their capacity ready for AI. We think that's a substantial driver. The others I've just talked about, hybrid multi-cloud also accelerating this refresh cycle. Cooper Werner: Yeah. And Samik, I would add we're continuing to see strength on not just from the refresh motion that has a lot of expansion also outside of the refresh motion. We're seeing continued capacity expansion with existing customers. We're seeing we think, some readiness for AI workloads. Then, of course, some of the data sovereignty and regulation drivers that François mentioned earlier. Samik Chatterjee: Got it. Got it. And for my follow-up, I imagine this will be a question for everyone this season, earning season is, sort of you did highlight the increasing memory costs and sort of what you're budgeting for it. But maybe if you can outline sort of how are you managing it through your supply chain and to are there any sort of concerns around capacity or sort of supply constraints as well that you're baking your guide, just outside of price? Is there a supply constraint to be thought of as well? Thank you. François Locoh-Donou: Talik, this is an important topic of discussion. And as you know, memory prices have gone up substantially and there are worries about supply in the industry. Now you know we went through that in 2022. Effectively with the same management team as we have today. So we did learn from what we saw in the supply chain crisis of 2022. We took a lot of actions early as it relates to memory. We raised our forecast and volume request with our suppliers several months ago. We give our suppliers extended visibility to our needs. We qualified additional suppliers to have more diversity, which started executing on broker buys. So we did early a lot of the elements of the playbook that we have to do in 2022. And I think because of all these actions that we have taken, in terms of supply, I think we feel very confident about where we are in the near term. Of course, as you go further into the future, there is some risk around supply for us as for anybody else in the ecosystem. And we are all aware of it and trying to take as many actions as possible to prevent having some shortage of components. Today, with the group of suppliers that we've put in place, we have not seen decommits from these suppliers, but we have seen, of course, substantial price increases. And so we're monitoring that very, very closely to ensure that we can continue to have the right supply, not just in the near term, but also beyond the next couple of quarters. Samik Chatterjee: Got it. Got it. Great. Thank you. Thanks for taking my questions. Operator: And the next question comes from the line of George Notter with Wolfe Research. Please proceed with your question. George Notter: Hi, guys. Thanks very much. I just wanted to kind of button up the whole discussion of the security breach. I'm just curious about, you know, have you seen any evidence of your customers in turn getting breached since you first discovered the situation? I'm wondering if you know, you guys are continuing to provide patches to your BIG-IP software code. You know, I'm wondering if there was any disruptions in the field and sales organizations that kind of inhibited you from selling how long did that whole distraction last? And, you know, any impact you can kind of tie to the December results? Thanks. François Locoh-Donou: Thank you, George. No. We have not seen any evidence of customers being breached as a result of our security incident. And, of course, I should caveat and say we are not aware of any customers having reported any such incident to us. And I would say, generally, you know, we feel that our response, our collective response, both our customers, our partners, and F5, our collective response to the security incident has been very successful. If I go back in time, back to where we were in October, you know, we had to mobilize very rapidly. We mobilized our development teams to ensure that we had the right releases for our customers immediately upon disclosure so they could take actions and protect themselves. We mobilized our support teams to be ready to take thousands and thousands of support calls which did happen, but we were able to take all these calls with minimum wait times and attend to customers very quickly so they could perform upgrades in record time. And we mobilized our sales teams to engage and support customers quickly. Our customers were both extraordinarily patient with us and empathetic, but also acted with a sense of urgency around the actions they needed to take to protect themselves. And as a result of this, the partnership and the work with our customers, the disruption was actually kept to a minimum. We of course had disruption because customers had to mobilize their resources to do their upgrades, and we were extraordinarily thankful for that. But we also saw minimal disruption in demand for F5. In terms of where we are on patches, we provided, of course, significant patches to a number of versions of software around October 15, and made those available to all of our customers. A lot of our customers upgraded really quickly. That has the benefit that today, you know, if I spoke to where we were at this time a year ago, we had about 15% of our customers on our latest release. As I speak to you today, we have over 50% of our customers that are on our latest software release, and that is kind of a testament to the speed with which our customers acted but we're also really happy with where the estate is at. We're going to remain, of course, vigilant with all of this. We have made significant enhancements to our security posture and we are continuing to make enhancements to our overall security environment, our development environment, our product environment. So, you know, we will consider this an evergreen journey, but so far, we are very pleased with the response from our customers and the way that they have continued to, of course, invest in F5. And frankly, we're taking this as an opportunity not just to maintain the trust that our customers have in us, but to strengthen that trust they have in us. And we've had the opportunity to engage with dozens and dozens of CSOs over the last several months. I have personally spoken to dozens and dozens of our customers. In every single one of these conversations, they have expressed their appreciation for F5's response and I'm immensely proud of the way that all F5ers have rallied together with our partners and our customers on this incident. George Notter: That's great. Just as a quick follow-up, any financial impacts, you know, revenue that you lost or costs that you incurred incrementally that you can point to in the December results? Thanks a lot. Cooper Werner: Yeah. No. We really didn't see any noticeable impact. You know, we talked about as we went into the call in October that we hadn't yet seen any change in terms of some of the sales metrics that we track around pipeline and close rates, but it was a very short period of time as we reported it. I think that something we're really happy with was just with the response that we have with customers, they were able to move pretty quickly through their remediation activities. And as a result, they were able to get back to business in a short period of time. And so that trend really held through all the way through the quarter in terms of a normal velocity around pipeline generation, you know, predictable close rates. And so it just it was kind of a very healthy execution throughout the quarter. And importantly, also a strong pipeline build as we head into Q2. Suzanne DuLong: Thank you. Operator: And the next question comes from the line of Simon Leopold with Raymond James. Simon Leopold: Thanks for taking the question. I've got two pretty straightforward, I hope. First one is regarding the progress in AI. You've given metrics around customer numbers. I'm wondering if we could frame it in terms of revenue. In other words, what rough percentage of revenue is coming from AI projects today? And then what do you expect full year longer term as a portion of mix? You've had success raising product prices. Passing through the higher costs. I'm wondering if you could maybe help us bridge what portion of your systems revenue growth could you attribute to your price hikes? Thank you. François Locoh-Donou: Simon, I'll start with, I think, the first part, and Cooper will take the second part. Look. We have not, of course, broken out AI revenue in part because we feel it's too early. We wanna see more quarters behind us on AI. We have shared, I think, in the past that AI if we isolate our answer here to use cases that we know are AI. And I say that because there's part of our business that may well be related to AI, but it's not visible to us. And so if we isolate this for use cases that we know are a direct AI use case, we said that, you know, last year, it was kind of single-digit millions of dollars every quarter. You know, this quarter, it was above that. It was, you know, half yearly in the double-digit millions of dollars quarter, but we're not, you know, prepared to go beyond that and qualify that. And in terms of the future, you know, our view when we look at the trends over the last few quarters, our view is that it is likely to grow. Because, you know, we're seeing more use cases emerge, not just data delivery, which is an important and growing use case, security is also going to be a growing use case. We think that runtime security in AI is going to be a multibillion-dollar market. We're just scratching the surface of the very early innings of this market. So clearly, there's a lot of growth potential. But we're going to take it one quarter at a time. Cooper Werner: Yeah. And then in terms of the pricing increases, and the impact on revenue, so that where we see the biggest impact is in the systems business. Because those are applied to, you know, they're effectively all net new sales. And so we had a price increase that we introduced last January, so January 2025. And so we're still realizing the benefit of that. That was a roughly mid-single-digit price increase. You know, we had that factored into our outlook for the year. And so we'll continue to look to monetize. On the software side, a little bit more of a muted impact because a lot of our software sales are sold in multiyear agreements. And so it takes time for some of the pricing increases to matriculate through that business, but we are seeing a healthy pickup from the pricing on the software side as well. Suzanne DuLong: Thank you. Operator: And the next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question. Michael Ng: Hi, good afternoon. I just have two. First, just on the systems revenue outlook, it's very encouraging to hear about the double-digit revenue growth for the full year. I think the guidance implies around like mid-teens system revenue growth for the full year. And if that's right, could you just maybe talk a little bit about the revenue shape throughout the rest of the year? Is there anything that you would call out that might drive a deceleration relative to the obviously very strong growth that we saw in the December? And then second, I wanted to ask about the EPS upgrade. You beat the midpoint in the December by 85¢. The full year was raised by 85¢. You know, just given what sounds like a very constructive outlook for the top line for the rest of the year, is there anything that you would call out in terms of like incremental costs that would prevent, you know, more of the top line upside flowing down to the bottom line for the full year? Thank you very much. Cooper Werner: Yes. So I'll handle both. So on the revenue guide, I think you can see if you take the midpoint of the guidance for the full year, it implies kind of a 4% to 5% growth in the second half and a little bit higher it's around 7% for the first half. So to your point, it does reflect a little bit of a deceleration. I don't think there's anything that we're seeing today that where we have visibility that there will be a deceleration. It's really just that it's early in the year. And so we've seen tremendous strength in the first quarter. We have a good pipeline in the second quarter, and I think what you're seeing is us take a little bit of a measured approach to how we look in the out quarters for the year, but nothing specific that suggests that the business should slow down. And so then to the EPS question, the two things I would point to is we have the gross margin. We took the guidance down a little bit tied to the pricing increases. So that has a little bit of an effect on the operating margin guide. And then just based on the strength that we're seeing in some of these trends, these that we think are pretty sustainable beyond FY '26, we're making some targeted investments that we think can really help drive a better growth outlook in FY '27 and beyond. So we're looking at sales capacity, you know, where we see additional opportunity that we wanna get in front of with some early investments. We're making some investments in the road map, you know, things. And we talked about XOps. So capabilities that we can bring to customers around analytics and telemetry that we think ultimately will drive a higher rate of adoption across the portfolio. And then some just some other features on our road map. So we think it's an opportune time for us to really invest in future growth just given the increased outlook we've got for this current year. Michael Ng: Great. Thanks, Cooper. That's very clear. Appreciate the response. Operator: Great. Thank you, Michael. And the next question comes from the line of Ryan Koontz with Needham and Company. Please proceed with your question. Ryan Koontz: Great. Thanks for the question, and congrats on a great quarter here. When you asked about the strength in EMEA, you mentioned sovereignty. I wonder if you could just double click on that a bit and expand on, you know, how long that dialogue's been going on. Is this relatively new phenomenon you didn't see happening so quickly? Or and if there was any contribution of, you know, deferred upgrades or expansions from customers that may have pushed them off while they were going through the kind of the recovery from the breach. Thank you. François Locoh-Donou: Thank you, Ryan. Well, there's an element of both. So the dialogue around, you know, sort of hybrid multi-cloud deployment in Europe driven by the need for digital sovereignty, the need for more resilience, has been going on for several quarters, but we did see an acceleration this quarter. If I go back to why that is, I think, first of all, these regulations have come into force or will come into force already in 2025. And organizations that are not compliant are moving quickly to be compliant before they face some penalties. In some cases, I would say in the majority of cases, we're seeing that translate into new projects. Customers that need both some hardware and some software or software as a service to be able to deliver consistent security or consistent delivery across all their infrastructure environments. And there are some cases where we saw customers that perhaps should have refreshed their equipment several moons ago, did not do so, and were not in compliance, and in the face of coming enforcement decided to refresh quickly and upgrade their equipment. And we're seeing that come to us by way of extra hardware demand. So we're seeing both, but it is a durable trend because there is for two reasons. One is there is more regulation coming. You know, NIST 2 and DORA are already in place, so there's a cyber resilience act that is coming. I think the enforcement date for that will be in 2027. And the regulations vary by countries. So I think we're gonna see that deploy across multiple countries. And then the other phenomenon is there are a number of large enterprises that have expressed to us that because they don't know yet how new regulations will be applied, it's very difficult for them to forecast where they should have their data or where they should have their workloads to be in compliance with this regulation. And in the face of that uncertainty, a partner like F5 is ideal because we give them the flexibility to deploy their licenses of F5 in any environment they want today or in the future. And also to deploy it with whatever form factor they may want today or in the future, whether it's hardware, software, or software as a service. And so we are at this time for that uncertainty and for matters of digital sovereignty this perfect company that has the perfect flexibility, the perfect number of models, and the perfect scalability for what these large enterprises are facing. And I think that is going to continue for some time. Ryan Koontz: Super helpful, François. Thank you. Operator: And the next question comes from the line of Tal Liani with Bank of America. Please proceed with your question. Tomer Zilberman: Hey, guys. It's Tomer Zilberman on for Tal. Maybe going back to one of your earlier answers, you talked about second half implied deceleration to around 4% to 5% growth. How do you balance that between the fact that as we approach next quarter and really the next three quarters, you're starting to lap much more difficult comparisons within systems as I think 180 to 190 million kind of quarterly run rate. Versus, you know, maybe some of your large enterprises refreshing well ahead of that 2027 end of service? Cooper Werner: Yeah. So just a couple of factors. So it isn't anything to do with the cadence of the refresh. So we're still relatively early in that opportunity. We have not seen any kind of an acceleration in terms of, you know, decommissioning on the legacy base. So I think it's been orderly. The strength in the refresh has really been around the expansion, and that's tied to the dynamics that François has been outlining that customers are facing today. So I don't think that we expect that to really slow down in the second half of the year. It again, it's just more about where we're sitting in the cycle. It's, you know, a new calendar year. So budgets are still getting cemented with customers. There are some fluid dynamics in just in the macro, and so I think we're just being a little bit pragmatic with how we approach the second half. But the underlying pipeline trends that we're seeing and the momentum in the business is very strong as we entered the quarter, and that's reflected in the Q2 guide. So it's more to do with just, you know, where we sit in the calendar as we're kind of looking ahead on our guidance. Tomer Zilberman: Got it. And maybe just as one quick follow-up on the software side, do you see the renewal cohort equally balanced throughout the remainder of the year, or do you think that's more clustered around the second half? Cooper Werner: No. It's more balanced than it has been in prior years. We actually expect to have a pretty strong growth quarter in Q2 and then healthy growth in the second half of the year. Tomer Zilberman: Got it. Thanks. Operator: And the next question comes from the line of Meta Marshall with Morgan Stanley. Meta Marshall: Great. Thanks. A couple of quick ones for me. François, you mentioned kind of a lot of strength around these hybrid implementations. Just wondering have there been any trends that have developed between kind of virtual ADCs versus product or hardware versus the last time you kind of went through one of these cycles? And then second question, you know, maybe building on Ryan's question, the government business or public sector business was probably the highest concentration it's been in three plus years. Just wondering, you know, was there any kind of strength within Europe on the public sector side that was concentrated? François Locoh-Donou: Thank you, Meta. I'll actually handle both, and I'll start with the last question. Government sector was very strong. That was driven by North America. In fact. And, you know, it may come as a surprise because we had, I think, the longest government shutdown in history in the quarter, over forty days of shutdown. And, of course, we had, you know, at entering the quarter, we had the expectation of some disruption with the security incident. But we had a very strong quarter with the Fed here in the US. Frankly, I'm very proud of the execution of our federal team here who, you know, put their shoulders behind the wheel. And despite not having as much time to interact with customers because of the shutdown, we're able to engage in the right conversations and get really interesting projects started. Interestingly, the strength in government came from new use cases. Specifically on modern applications. And also, we started to see our first AI use cases in government. So we feel very good about what we saw in the Fed this quarter and our ability to execute, despite the shutdown. And, you know, the continued trust that we have from our customers there. In terms of your question around have we seen a different dynamic between software and hardware in these hybrid multi-cloud architectures, I would say that, you know, part of what's really appealing for customers of F5 is the ability we give them to choose between hardware and software and to implement their software licenses across any environment. Over the last, I think you will continue to see a trend towards more customers wanting to move to software because ultimately it gives them more flexibility. And especially flexibility against the uncertainty that I talked about. But over the last couple of quarters, we have seen very strong demand for hardware. So I would say at the moment, the dynamic is we're seeing more customers wanting to spend in hardware in part because of some of the use cases in AI data delivery where they really need the performance of hardware for high throughput. In part because of some of the security use cases. So we're seeing that strong demand in hardware. I think, you know, over time, you will continue to see our software grow, and we feel pretty confident about our software growth for the long term. I would add that one element that is going to fuel all of this, and we really started to see the quarter is in the past, our customers, if they were purchasing, you know, hardware or software from F5 versus software as a service. Those were two completely different experiences. And we have talked about building our application delivery and security platform. And some of that innovation is now making its way into production for our customers and it's fueling their desire to have converged platforms. They all want to have simpler operating environments, and a number of the wins that we had this quarter were customers consolidating spend on F5 because they had multiple point security products or point delivery products. And they went to F5 because we were a single vendor that could deliver across all of their environments and replace multiple of their point vendors. And then on top of that, we're starting to give them a single experience from a single console. Cooper mentioned some of the XSOPS innovation that we are investing in. That gives them the ability to deploy policies from a single console across multiple environments. This quarter, we took the API discovery capabilities that were in F5 distributed cloud and we're making them available on BIG-IP. So we're bringing that API discovery capability to the data center on-premise. That is a massive issue for customers. No one addresses that properly today. And so the consistency that we're bringing around these security and delivery capabilities across hardware, software, across on-premise and cloud, is unique and that convergence, I think it's gonna continue to fuel our growth into the hybrid multi-cloud environment. Cooper Werner: And then, Meta, I also wanted to add on the government question. So the US Fed was absolutely the headline around the strength that we're seeing, but that said, we also saw fairly strong results in EMEA as well. With a number of government agencies, particularly around the same data sovereignty concerns. You can imagine those are top of mind for government entities, and so that drove a lot of strength in EMEA in addition to the strength we were seeing in the Fed. Meta Marshall: Perfect. Alright. Great. Thanks so much, guys. Operator: And our final question comes from the line of James Fish with Piper Sandler. Please proceed with your question. James Fish: Hey, guys. Thanks for squeezing me in here. Just circling back on product refresh. Kind of capacity plus expansion are you seeing typically in I get it. It's hard to tell exactly what your AI exposure to Simon's earlier question, but how are you able to tell that these are capacity plus increases related to sort of traditional general environment versus sort of AI modernization? Cooper Werner: Yeah. So one thing that we're seeing is a lot of customers have higher security needs, which is driving a performance. So we've been seeing this for the last couple of quarters, and this trend is continuing where customers are refreshing very often higher up in the portfolio so we're seeing a higher ASP at that time of refresh and then also additional capacities in terms of more units. So it's I'd say it's a combination of kind of getting in front of some of the performance needs for security as well as getting in front of the kind of downstream performances they're anticipating related to AI workloads. And so the customers are just being a little bit more front and center in terms of their planning than we had seen in prior cycles. James Fish: Yeah. Thanks, guys. Suzanne DuLong: Thank you. Thank you. Operator: Ladies and gentlemen, that does conclude our question and answer session. I would like to turn the floor back over to Suzanne DuLong for any closing comments. Suzanne DuLong: Thank you, everyone, for joining us today. We look forward to seeing many of you out and about during the quarter. Operator: Ladies and gentlemen, thank you for your participation. That does conclude today's teleconference. Please disconnect your lines and have a wonderful day.
Operator: Ladies and gentlemen, welcome to Hanmi Financial Corporation's Fourth Quarter and Full Year 2025 Conference Call. As a reminder, today's call is being recorded for replay purposes. All participants are in a listen-only mode, and a question and answer session will follow the formal presentation. If anyone requires operator assistance, I would now like to turn the call over to Ben Brodkowitz, Investor Relations for the company. Please go ahead. Ben Brodkowitz: Thank you, Operator, and thank you all for joining us today to discuss Hanmi Financial Corporation's fourth quarter and full year 2025 results. This afternoon, Hanmi Financial Corporation issued its earnings release and supplemental slide presentation to accompany today's call. Both documents are available in the IR section of the company's website at hanmi.com. I'm here today with Bonita I. Lee, President and Chief Executive Officer of Hanmi Financial Corporation, Anthony I. Kim, Chief Banking Officer, and Romolo C. Santarosa, Chief Financial Officer. Bonita I. Lee will begin today's call with an overview, Anthony I. Kim will discuss loan and deposit activities, Romolo C. Santarosa will provide details on our financial performance, and then Bonita I. Lee will provide closing comments before we open the call up for your questions. Before we begin, I would like to remind you that today's comments may include forward-looking statements under the federal securities laws. Forward-looking statements are based on current plans, expectations, events, and financial industry trends that may affect the company's future operating results and financial position. Our actual results may differ materially from those contemplated by our forward-looking statements, which involve risks and uncertainties. A discussion of the factors that could cause our actual results to differ materially from these forward-looking statements can be found in our SEC filings, including our reports on Forms 10-K and 10-Q. In particular, we direct you to the discussion of certain risk factors affecting our business contained in our earnings release, our investor presentation, and in our SEC filings. With that, I would now like to turn the call over to Bonita I. Lee. Bonita? Please go ahead. Bonita I. Lee: Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2025 results. Our teams delivered a solid performance in the fourth quarter, capping a strong year of growth for Hanmi Financial Corporation. We believe we executed well on our priorities and advanced key initiatives we laid out at the start of the year. Specifically, we further enhanced the diversification of our loan portfolio and achieved mid-single-digit loan growth guidance. We made investments in our banking teams, which led to a significant increase in loan production. We managed the deposit cost and generated net interest margin expansion throughout 2025. Noninterest-bearing deposits continue to represent 30% of total deposits, a tribute to the stability of our customer base. At the same time, we maintained disciplined expense management and upheld strong credit quality across the portfolio. The strength and consistency of our operational performance underscore the effectiveness of our relationship-based banking model and reinforce our confidence in the strategy we are executing. Now turning to some highlights for the fourth quarter. Net income for the fourth quarter was $21.2 million or 70¢ per diluted share, down 3.7% due to lower noninterest income. However, net interest income increased by 2.9%, and net interest margin expanded by six basis points to 3.28% from the prior quarter, reflecting a lower cost of funds and higher average loan balances. Return on average assets and return on average equity during the quarter were 1.07% and 10.14%, respectively. For the full year of 2025, net income reached $76.1 million or $2.51 per diluted share, an increase of 22%, and we generated a return on average equity of 9.3%. As previously guided, we generated loan growth of $312 million or 5%. Net interest income increased by 16.5%, and our net interest margin expanded by 37 basis points through a combination of lower interest-bearing deposit costs and higher average loan balances. Noninterest income increased by 7.6%, primarily due to an increase from the gain on sale of SBA loans driven by a 39% increase in loans sold. Pre-provision net revenue increased by 31.5%, highlighting the reduction in funding cost and well-managed noninterest expenses throughout the year. As I just mentioned, we made significant strides in growing and diversifying our loan portfolio and deposit franchise in 2025. Loan production for the full year increased by 36%, driven by the investments we made in our banking team. Residential and C&I loan production was up 90% and 42%, respectively. As part of our ongoing portfolio diversification initiative, we expanded our C&I portfolio by 25% through a deliberate effort to grow this strategic vertical. At the same time, we reduced our commercial real estate exposure from 63.1% to 61.3% of total loans. Deposits grew by 3.8% in 2025, and we maintained a healthy mix of noninterest-bearing deposits. This consistent performance reflects the strength of the loan relationships we have built with our customers who depend on us to provide high-quality banking products and services. In today's highly competitive banking environment, our ability to cultivate enduring customer relationships remains a meaningful competitive advantage. As we diversify our loan portfolio, we maintain our firm commitment to asset quality. Asset quality remains excellent, reflecting our focus on high-quality loans, disciplined underwriting, and prudent credit administration. Additionally, nonperforming assets as a percentage of total assets and allowance of credit losses as a percentage of total loans both remain healthy at 0.26% and 1.07%, respectively. Our focus on disciplined expense management continues. Although noninterest expense increased by 4.6% for the year, this was primarily driven by salaries and benefits related to merit increases and the investment we made in acquiring new banking talent. Importantly, our efficiency ratio for the full year improved to 54.7% from 60.3% last year. Finally, with our strong financial and capital ratios, we are in a great position to advance our growth strategy and generate healthy returns for our shareholders. During 2025, we returned $42 million of capital to shareholders through $9 million in share repurchases and $33 million in dividends. I'll now turn the call over to Anthony I. Kim, our Chief Banking Officer, to discuss our fourth quarter loan production and deposit details. Anthony I. Kim: Thank you, Bonita, and thank you all for joining us today. I'll begin by providing additional details on our loan production. Fourth quarter loan production was $375 million, down $196 million or 34% from the prior quarter, with a weighted average interest rate of 6.9% compared to 6.91% last quarter. Although production was down from the high level we saw in the third quarter, originations for the full year were consistent across categories with continued strength in C&I, residential, and SBA loans. By maintaining disciplined underwriting practices, we ensure that we engage only in opportunities that meet our conservative underwriting standards. CRE production was $126 million, down 29% from the prior quarter, and we remain pleased with the quality of our CRE portfolio. It has a weighted average loan-to-value ratio of approximately 47.4% and a weighted average debt service coverage ratio of 2.2 times. SBA loan production is consistent with the prior quarter at approximately $44 million, reflecting the positive impact of our recent team additions and the momentum we're building among small businesses across our markets. During the quarter, we sold approximately $29.9 million of SBA loans and recognized a gain of $1.8 million. C&I production was $82 million during the fourth quarter, a decrease of $129 million or 61%. While down for the quarter, we're pleased with our annual production in this strategic vertical driven by the previously mentioned investments in our C&I teams, the momentum of our USKC initiative, and our strategic efforts to further expand the portfolio. Total commitments for our commercial lines of credit remain healthy at $1.3 billion in the fourth quarter, with outstanding balances of $520 million. This resulted in a utilization rate of 40%, slightly higher compared to the prior quarter. Residential mortgage loan production was $70 million for the fourth quarter, down 32% from the previous quarter. Residential mortgage loans represent approximately 16% of our total loan portfolio, consistent with the previous quarter. We sold $33.5 million of residential mortgages during the fourth quarter, resulting in a gain on sale of $600,000. We'll continue to explore additional sales based on market conditions. USKC loan balances of $862 million represented approximately 13% of our total loan portfolio. Turning to deposits. In the fourth quarter, deposits decreased by 1.3% from the prior quarter, driven by a decline in demand deposits, money market, and savings, partially offset by an increase in time deposits. Deposit balances for USKC customers decreased slightly by 1.5%. However, we maintained the $1 billion level from last quarter and grew deposits 24% year over year. At quarter-end, the corporate credit deposits represented 15% of our total deposits and 16% of our demand deposits. Last year at this time, we opened a representative office in Seoul, South Korea, which marked a key milestone for Hanmi Financial Corporation. Through this office, we are strengthening relationships and supporting our customers' ability to expand into the US market. This office complements our existing Korea desk in key cities across the US. It was instrumental in helping us achieve $1 billion in USKC deposits. The composition of our deposit base remains stable, underscoring the effectiveness of our relationship banking model. During the fourth quarter, noninterest-bearing deposits remained healthy at approximately 30% of total bank deposits. Now I'll hand the call over to Romolo C. Santarosa, our Chief Financial Officer, for more details on our fourth quarter financial results. Romolo C. Santarosa: Thank you, Anthony. For the fourth quarter, net interest income grew 2.9% from the previous quarter to $62.9 million as the average rate on interest-bearing deposits declined 20 basis points while the average yield on loans declined by only nine basis points and the average balance of loans increased by 2.4%. Average interest-earning assets and average interest-bearing liabilities both increased by 1%. However, average yields on interest-earning assets declined six basis points while average rates on interest-bearing liabilities declined 19 basis points. Hanmi Financial Corporation reduced deposit interest rates twice during the fourth quarter after the Fed lowered the federal funds rate by 50 basis points. The average rate on interest-bearing deposits for the fourth quarter was 3.36%, and the average balance increased slightly to $4.71 billion. Fourth quarter average loans increased by 2.4% to $6.46 billion with an average rate of 5.94%. Turning to the deposit portfolio, the average rate on non-maturity savings and money market accounts decreased 40 basis points to 2.82%, while the average balance increased marginally by 0.4%. Average time deposits also increased slightly by 0.5%, and the average rate fell by just four basis points to 3.93%. However, the composition of that portfolio shifted away from time deposits over the insurance limit. The weighted average maturity of the time deposit portfolio continues to be under 12 months. Moving to net interest margin, which was up six basis points to 3.28%, again, primarily due to lower rates on interest-bearing deposits. The decrease in deposit rates benefited net interest margin by approximately 14 basis points. Changes in the average rate on borrowings and changes in the average yield on other interest-earning assets offset the benefit of falling deposit rates on net interest margin while changes in loan yields had a nil effect. Hanmi Financial Corporation's December deposit rate reductions continue to affect January's month-to-date average rates. Interest-bearing deposits are 15 basis points lower than in the fourth quarter, and the month-to-date average rate on savings and money market accounts are 26 basis points lower. Noninterest income for the fourth quarter of $8.3 million was down from the third quarter. The decline was primarily due to lower gains on sales of mortgage loans and the absence of bank-owned life insurance income. As a reminder, the timing of mortgage loan sales was uneven this year with a delay in second-quarter sales, which closed early in the third quarter resulting in no sales in Q2. In addition, the third quarter included death benefit payouts from our bank-owned life insurance portfolio, while there were no such proceeds in the fourth quarter. Noninterest expenses for the fourth quarter were $39.1 million and increased $1.7 million from the third quarter because of several items. First, other real estate owned expenses increased by $400,000, reflecting a full quarter of operating expenses for a hospitality property, which also included $300,000 of past due property taxes. Additionally, there was a $900,000 increase spread across seasonal advertising and promotion expenses, as well as higher data processing and professional fees from a higher level of activities. Lastly, salaries and benefits increased by $300,000 largely because of a mix shift in personnel. Overall, the efficiency ratio remained favorable at 54.95%. Credit loss expense declined to $1.9 million as asset quality continued to be favorable with low net charge-offs to loans of 10 basis points. Delinquent loans to loans at 0.27%, criticized loans to loans at 1.48%, and nonperforming assets to total assets of 0.26%. Hanmi Financial Corporation's tangible common equity per share increased 2.5% to $26.27 per share, and the ratio of tangible common equity to tangible common assets was 9.99% at year-end. Hanmi Financial Corporation repurchased 73,600 shares during the fourth quarter at an average price of $26.75. I will now turn it back to Bonita I. Lee. Bonita I. Lee: Okay, Ron. Excuse me. I want to thank the entire Hanmi Financial Corporation team for their exceptional efforts over the past year. Their dedication is essential towards serving our customers and communities well. I would now like to outline some of our top priorities for 2026, which are firmly aligned with our long-term strategic vision. First, we expect to generate low to mid-single-digit loan growth with a continued emphasis on further diversifying the portfolio. Second, we are focused on growing deposits to support loan growth while maintaining a stable, well-balanced funding mix. Our efforts will continue to focus on deepening existing customer relationships, attracting new accounts, and strengthening our core deposit franchise with a particular emphasis on noninterest-bearing deposits. Third, we intend to sustain our commitment to disciplined expense management while we are investing selectively in talent and technology to support our long-term growth. We remain focused on operating efficiently, prioritizing initiatives that drive productivity, and maintaining cost discipline across the organization. Finally, we plan to prudently manage credit to maintain strong asset quality. Conservative underwriting standards, active portfolio monitoring, and robust risk analysis remain foundational to how we operate and will continue to guide our decision-making as the economic environment evolves. In summary, we believe we enter 2026 in a strong position to build on our momentum and create meaningful value for shareholders. We expect healthy loan and deposit growth, ongoing NIM expansion, disciplined expense management, and sustained credit strengths to support consistent and durable performance. We are excited about the opportunities ahead and look forward to sharing our progress with you. Thank you. We'll now open the call for your questions. Operator, please go ahead. Operator: Thank you. Star one on your telephone keypad, and a confirmation tone will indicate your line is in the queue. And our first question comes from the line of Matthew Clark with Piper Sandler. Please proceed. Matthew Clark: Hi, good afternoon, everyone. Thanks for the questions. To start with the hospitality credit that was downgraded to special mention. Can you just provide some color on what the situation is there and how you expect it to play out? Bonita I. Lee: Sure. So periodically, we proactively monitor all our significant size loans. And as a part of our periodic review, you know, we decided to place this particular loan in the special mention category. It is a seasoned loan with a very strong sponsor with high liquidity. However, the property is going through a property improvement plan, PIP, in anticipation of all the activities that are expected in terms of the World Cup and then also for the Olympics in the coming years. So the property is in Southern California. So we don't foresee any loss probabilities on this credit. As I said, it is a very seasoned credit. But, you know, it is due to our proactive monitoring process that we decided to place the loan in the special mention category. Matthew Clark: Okay. And then as it relates to your expense outlook for this year. Any thoughts around the growth there and whether or not some of these OREO costs might continue for a couple of quarters? Romolo C. Santarosa: No. With respect to OREO, again, there was a bulge particularly with respect to past due taxes. So one of the properties is anticipated to sell. The other one, that'll take a little bit longer. So I think there will be continued expense depending on how long it's going to take for the sale to close. But I think the bulge we saw is probably a bit more rearview mirror and not really indicative of the ongoing run rate. Matthew Clark: Okay. And then for the year, are you thinking mid-single-digit expense growth? Is that fair? Romolo C. Santarosa: I think that's fair, Matthew. You know, when we look back over the calendar year, which is always a little bit easier to perhaps measure, we had about a 4.6% increase. The year prior, it was 3.5%. I did see, of course, healthcare is going to run higher than anyone's expectation for a 3% kind of inflation. Service fees seem to run a little bit richer. So I think middle single digit's probably the right expectation over a twelve-month scenario. Matthew Clark: Okay. And then just on the CD repricing schedule, can you remind us what you have maturing here in the first and second quarter and the roll-off rates and new offering rates? Anthony I. Kim: Sure. It's the details on page 10 of your investor deck. So a little over $900 million CDs are rolling off in the first half at 4.01%. And then followed by another little less than $900 million maturing in the second quarter with a weighted average of 3.95%. So essentially, approximately $1.8 billion is maturing at high threes and low fours in the first half of the year. And in the fourth quarter, we were able to retain about 80% of maturing $700 million of retail CDs at around 3.66, and December retention pricing was a little less than 3.66, 3.57. So we're hoping to reprice maturing CDs in the first half of the year with anywhere between 3.5 to 3.6. And that'll benefit us to lower the deposit cost. Matthew Clark: Great. Sorry. Missed that. Last one for me, just on the buyback. You have a lot of capital. Why not get more aggressive on the buyback here? Romolo C. Santarosa: Again, Matthew, the Board evaluates the capital return each quarter. As you know, in the fourth quarter, relative to our previous share performance, we started to see share prices well above our tangible book. And so that was rewarding, but it also has a little bit of a minimizing effect. So we'll address that again here in 2026, and I think we'll be able to, you know, continue share repurchases. The absolute dollar amounts, I think, again, will be a facts and circumstances market condition type of idea. Matthew Clark: Okay. Great. Thank you. Operator: The next question comes from the line of Gary Tenner with D. A. Davidson. Please proceed. Gary Tenner: Ron, I appreciate the color you gave on the January deposit costs. And a moment ago, there was some discussion about the repricing of the CD book. I guess I'm a little surprised that there's not been a little more pricing power in the CD book kind of in this more recent part of the cutting cycle. So just wonder if you could comment on competition within your customer base on that side of things because the pricing power on the money market side, obviously, is very strong. Romolo C. Santarosa: Yes. I'll let Anthony talk a little bit more about the market. But I also watched wholesale funding, particularly in the broker market. And notwithstanding the rate reductions that occurred in the fourth quarter, brokered money really hasn't moved much. I can still see $3.70, $3.80 for, you know, twelve months money and a little bit higher for shorter-term money. So that marketplace has not responded as you might think relative to the actions on the fed funds. And I would just also observe before turning it over to Anthony, we're still in an inverted curve on the very short end. You know, it really starts to look like a curve when you get, let's just say, two years it could move a little bit from the inside, but on the very short end, it's still very inverted. So I'll stop with that. Anthony, competition? Anthony I. Kim: Yeah. Obviously, you know, in a declining rate environment, customers wanted to lock in their funds in the CD with a higher rate. So competition is getting intense. As you can see, I mean, our CD retention rate has been around 90%, and we chose not to retain some of the CDs at irrational rates. So our CD retention rate went down to 80%. And some of our competitors are still offering high threes, low fours. So within our corridor, there are still some of the things that are actually running CD promotions above 3.85%. So, I mean, we look at our, you know, deposit relationship, you know, one at a time, and we provide the rates that warrant the relationship. But it is fairly competitive still, and it's also a little bit disruptive in the sense that, you know, some of these smaller shops are still running CD deposit campaigns. Gary Tenner: Okay. Thanks for that. And then just to follow-up on the question regarding the buyback. It sounds like, obviously, it's a board-level decision, and I think everybody knows you've got a lot of capital. How about the dividend? That's kind of is that a first-quarter decision in terms of thinking about a higher payout from the board perspective? Romolo C. Santarosa: Yes. Typically, that would be reviewed at least once a year, and we're at that year mark, if you will, looking not only backwards on what we've accomplished but looking forward on what we see 2026 to entail. Gary Tenner: Got it. Thank you. Operator: The next question comes from the line of Kelly Motta with KBW. Please proceed. Kelly Motta: Hey. Good afternoon. Thanks for the question. Let's see. Ron, maybe circling back to expenses, I appreciate the kind of mid-single-digit outlook you provided for the course of the year. Just given Q4 was a bit elevated from some discrete items that you called out, but there's also some seasonality in Q1. Can you kind of help us out with how we should be thinking about the jumping-off point from $39 million in the fourth quarter, just trying to make sure my cadence is properly aligning? Thank you. Romolo C. Santarosa: So for our business, in terms of seasonality, there are, I think, I'll say, let's say, three events that are somewhat predictable. So fourth quarter, we do have a higher spend with advertising and promotion, given the holidays and things of that sort. First quarter traditionally are the payroll tax phenomenon that we see in salaries and benefits. And then second quarter is typically where we see the annual merits. So those are the somewhat seasonal notions. So relative to your jumping-off point, I have to think about it a little bit. But while the advertising promotion ideas, those will kind of fade, I can start to see a pickup in payroll. I have to study the numbers closer to see if they offset, but I guess that would be my starting point. The little bit of mix shift we saw in the personnel complement because personnel has been roughly the same, a very rounded idea, like 600. And so we still behave in that same idea. So we saw just a little bit of that. So I think that's probably where you see the swap of the increase from advertising the benefit there, it would move up to the top. That's about it. The activity year-end, just you can call it seasonal, although I hesitate to say that, but there's usually at year-end a little bit of pickup in activities. For a host of different reasons, but there always seem to be activities that kind of creep in or crop up at the year-end mark. So I know that's not very strong, but I'd have to really ponder hard, Kelly, to figure out if you should stay on that number or start with that number. Really, I really don't know. Kelly Motta: Okay. Fair enough. And then looking at slide six, it's nice to see the yield on new production is really held in really nicely. Wondering if that's a function of mix or, you know, if you're able to get, you know, some better, more rational spreads on loans here as rates have come down. Any commentary and color would be helpful. Anthony I. Kim: Yeah. So we remain focused on maintaining appropriate yield on the new loans. So we're being very selective in our loan originations, prioritizing our returns. So we are being selective. Kelly Motta: Got it. That's helpful. I'll step back. Thanks so much. Operator: As a reminder, to enter the question queue, please press 1 on your telephone keypad. And the next question will come again from the line of Matthew Clark with Piper Sandler. Please proceed. Matthew Clark: Hey, thanks for the follow-up. Just wanted to ask about the prepays and payoffs in the quarter and how that compared to 3Q. See the production at $375 million, but I'm just curious how the other side of the equation played out. Bonita I. Lee: So just comparing to the third quarter, payoffs were a little bit elevated. I think it's probably more meaningful to look at the whole year because there are fluctuations from quarter to quarter. But, you know, comparing 2025 to 2024, although our loan production was up 36% year over year, when we track the payoffs and paydowns and also net line utilization as well as loans sold, it is definitely higher. Just on the loan payoffs and the paydown category, just on those two items, just comparing them annually, it's 13% higher than the prior year. Matthew Clark: Okay. Great. Thanks again. Operator: Thank you. There are no further questions at this time. I'd like to turn the call back over to Bonita I. Lee for closing remarks. Bonita I. Lee: Thank you for joining our call today. We appreciate your interest in Hanmi Financial Corporation and look forward to sharing our continued progress with you throughout the year. Operator: This does conclude today's conference. You may disconnect your lines at this time. And we thank you for your participation. Have a good night.
Operator: Good morning, and welcome to the West African Resources Investor Webinar and Conference Call.[Operator Instructions] I'll now hand over to West African Executive Chairman and CEO, Richard Hyde. Thank you, Richard. Richard Hyde: Thanks, Nathan. Good morning, and welcome to the December 2025 Investor Conference Call for West African Resources, and thanks for joining us today. Joining me on the call today, we have our Chief Financial Officer, Padraig O'Donoghue; and our General Manager of Finance, Todd Giltay; our Chief Operating Officer, Lyndon Hopkins, is on site at the moment in Burkina. The December 2025 quarter delivered another strong period of gold production across both our Sanbrado and Kiaka gold operations in Burkina Faso with just over 112,000 ounces of gold produced across the operations, delivering an operating run rate that bodes well for our gold production in calendar year 2026. Our total gold production for calendar year 2025 was a touch over 300,000 ounces of gold with Kiaka stepping up in Q4. This was well within our production guidance for the year. What's more is that we completed this achievement with no significant health, safety or social incidents, which is especially important to us and demonstrates our commitment to operating in a safe and responsible manner at all times. We sold 105,995 ounces of gold at an average price of USD 4,058 per ounce for the quarter, and we remain fully unhedged, therefore, allowing WAF to take full advantage of the record gold prices we are currently seeing. With all our sustaining costs -- sorry, with our all-in sustaining costs averaging USD 1,561 per ounce across the two operations, we've been able to deliver AUD 389 million of cash -- sorry, cash flow in the quarter, and that's after making income tax payments of AUD 48 million. Our cash balance at 31 December 2025 is AUD 584 million, plus we still held another AUD 177 million worth of unsold gold bullion, and that's just due to timing of shipments. Looking at our sites, the Kiaka ramp-up has been excellent since its second quarter start-up. And its performance in Q4 really demonstrated that. This is the first full quarter of operations for the site. It produced 62,287 ounces of gold for the quarter, surpassing production at Sanbrado for the first time. Kiaka's costs continue to improve as production has increased, which was what we expected, and it's pleasing to see this panning out. We expect costs to further reduce as our reliance on diesel generated power reduces over the coming quarters. Kiaka produced just over 95,000 ounces of gold for the year after commencing operations in Q2 and having a shortened operational phase in Q3. Open pit mining continues to ramp up as more equipment is commissioned for use. At Sanbrado, our steady production continued, and we produced just under 50,000 ounces of gold for the quarter, bringing our total for the year to 205,228 ounces. Sanbrado performed well against production guidance, achieving the upper end of our 190,000 to 210,000 ounces production range. Open pit recommenced in the quarter under our new owner mining operating model. Open pit mill feed in Q4 was sourced from both the M5 North pit and previously mined ore stockpiles. Mined ounces for the quarter from M1 South underground was 37,955 ounces, which was 16% below the previous quarter. This was due to a 14% drop in mined grade as well as slightly lower ore tonnes mined. With that overview of our production, I'll hand over to Padraig to discuss our financial details for the quarter. Padraig O'Donoghue: Thank you, Richard. WAF, as Richard mentioned, WAF has benefited tremendously from being unhedged and generated AUD 662 million of gold sales revenue in the quarter at an average realized price of USD 4,058 per ounce. For the full year 2025, WAF generated more than AUD 1.5 billion of revenue. As Richard mentioned already also, we generated AUD 389 million of operating cash flow in Q4 and ended the year with a very strong cash balance of AUD 584 million. Our capital investing activities in Q4 used AUD 113 million of cash, which included AUD 89 million for Kiaka and AUD 23 million for Toega. Financing activities used AUD 23 million of cash in Q4 with payments for loan interest, principal and financing expenses offsetting cash received from the drawdown of equipment finance facilities. I now hand back to Richard. Richard Hyde: Thanks, Padraig. So on the exploration front this quarter, diamond drilling beneath the M5 open pit ore reserve has confirmed potential for us to extend open pit mining at Sanbrado. Gold mineralization was confirmed more than 300 meters below the current ore reserve and mineralization remains open at depth. And this is really the first substantial drilling we've done at M5 North since about 2017. So it's no surprise that we can see that this mineralization being extended and then we're considering our options there, but most likely, updated ore reserve would consider cutting back the northern part of the M5 open pit. So some of the drilling results included 16 meters at 11.2 grams per tonne as well as more typical broad intersections such as 45 meters at 1.9 grams per tonne gold. Diamond drilling at M5 North will continue through 2026 and we look forward to further results from the program to help us better plan for the future mining at Sanbrado. But the future looks very good. Our last ore reserve estimate was completed at a much more conservative gold price of USD 1,400 an ounce. So recalculating today we would expect to use a higher gold price and obviously deliver more ounces into reserve. We also have drilling underway at underground for Toega. We continue to develop a satellite operation for Sanbrado, which we continue to develop as a satellite operation for Sanbrado. We're currently completing a 13,500 meter infill drilling program, which is infilling the underground resource and we'll have more results over the coming quarters. Grade control drilling also confirmed during the quarter with -- commenced during the quarter with 6,600 meters completed. This program is expected to be completed in early Q1 2026 with results to follow. In other developments at Toega, earthworks for the mine services area were completed and the construction of mobile maintenance workshop office and ancillary infrastructure has commenced. The haul road construction is well advanced and remains on schedule to enable order delivery to the Sanbrado process plant in early Q3 2026. Toega open pit mining operations will be owned and operated by WAF, similar to Sanbrado. Mining equipment continued to arrive on site during the quarter with commissioning activities underway. All mining equipment is expected to be fully operational by the end of this quarter. Pre-stripping of open pit mining of the open pit commenced during the quarter with a total of 250,000 BCMs moved to date. Material movement is expected to ramp up to steady-state production by the end of Q1 2026. Across other aspects of our business, we continue to invest heavily in social programs, including education, health, economic development, including providing scholarships to high school students from the area, upgrading our community health centers and constructing a new primary school and refurbishing an existing school near Kiaka, which will also be used for community events outside school hours. In relation to discussions with the Burkina Faso government regarding Kiaka, we continue to engage constructively with the government on these matters. But at this stage, there are no material updates on that matter. Overall, I'm really happy with our performance and progress throughout Q4, particularly with our ramp-up at Kiaka. We're looking forward to releasing our 2026 annual production guidance and outlining our capital management strategy later in Q1 2026. I'll now hand back to Nathan for the Q&A. Operator: [Operator Instructions] Your first question comes from Mike Millikan at Euroz Hartleys. Mike Millikan: Just a couple from me. Firstly, talking about obviously, very strong cash generation at the moment. Debt service, are you going to accelerate some of those payments? Richard Hyde: Yes. So that will be a focus throughout this year and get debt down to a management -- a manageable level. That's our first focus. And then we're having active discussions in the office now and amongst our Board about capital management, which will take us past 2026 whether that's buying back shares or paying dividends, that's the discussion that we're having at the moment. Mike Millikan: Yes. Is that the plan, certainly a buyback probably makes a lot of sense. Richard Hyde: Yes. Look, they both make sense. We just really need to gauge the market and really from -- I'm a follower of Berkshire Hathaway, and they've always bought shares back and they've never paid a dividend though. So -- but it's either/or, I think it's going to be a good outcome for shareholders if we do either. But that's certainly our focus at the moment is to pay down debt and then either buy back shares or pay a dividend. Mike Millikan: Yes. Awesome. Just looking at, obviously, the royalty rates currently in country, obviously pretty high. Is there any sort of changes expected there? I mean just it's obviously on a slowing scale and obviously, gold price is very high. Has some of your discussions also been centered around royalties? Richard Hyde: No, not at this stage. I mean the gold price has risen so quickly. I think we're an average sale price of about USD 3,500 in Q3, and we've sold an average over USD 4,000 an ounce in U.S. Q4. So -- and already, we're well over USD 5,000 an ounce as we speak now. So really, the action has been pretty recent, and we'll be back in country in a few months' time and definitely raise that with the administration. Mike Millikan: Yes, cool. And finally for me, just on Kiaka grid power, has it all been going? Has it been stable? What's your expectations for calendar '26 in regards to reliability? And what do you factor in some of your forecast? Richard Hyde: So that will be kind of -- I think we can explain more of that later in the quarter when we put our guidance out. We had 2 or 3 weeks of stability or stable grid in December, and that allowed us really to ramp up production. And we consistently hit 30,000 to 35,000 tonnes a day in production at Kiaka, which was really, really good. So clearly, the last piece of the puzzle for Kiaka is stable power. We're also looking at installing a full HFO power station, which would allow us to have full production. So we'll have more information on that in our annual guidance. We've also increased the diesel capacity on site. So there's another 5 gensets arrived overnight on site. So they'll be plugged straight in, and that should give us about 30 megawatts of diesel on site. The last week has been pretty unstable with the grid, but there has been work being done by SONABEL, which is the government's energy provider in country. So we should be back on the grid in the coming days. And then we've also got some other equipment arriving on site, which will help stabilize the grid on our side. So look, it's early days with the grid. Long term, it's definitely the right option. In the short term, we've made provisions for additional diesel power and we're making a plan to have full backup with HFO, which is much cheaper to run in diesel. So that's kind of the summary at the moment, but I think the takeaway is that with full power, Kiaka is capable of producing of processing more than 10 million tonnes per annum without any capital -- without any material infrastructure changes. So does that answer your question, Mike? Mike Millikan: Yes, it did. And congrats on a very good quarter. I will hand it on. Operator: Your next question comes from Richard Knights at Barrenjoey. Richard Knights: Just wanted to see if I could get you to give us a little bit more detail on the discussions with the government regarding the Kiaka stake. Just anything relating to time frames or whether or not you've made any progress on those discussions with potential co-investments in other projects? Just any more detail you can give on that? Richard Hyde: Yes. Thanks, Richard. Look, there isn't a lot of detail to give, unfortunately. We responded late last year to SOPAMIB, and we provided them with a lot of information about Kiaka, our construction costs and economic models. And again, the gold price has moved significantly since then. So I mean the discussions have been quite good and cordial. They've made it quite clear that they believe in paying market price for additional share in Kiaka. And we did counter with a proposal saying that if you have a look at our current quarter, I think we paid indirect taxes and royalties, USD 90 million in one quarter. So clearly, we're a very good partner to the government. And probably in our view, that's the best model is that the government already gets a significant proportion of cash flow from mining operations in Burkina, which is getting close to 60% of cash flow at the current gold price. So -- and with obviously, the escalating royalty as well. So that's a significant proportion of cash flow now. So really, there's not a lot of detail to add. We're currently waiting on a response to our most recent correspondence. And we'll update the market as soon as we've got something back. But we've given them an alternative proposal, which we showed demonstrates much higher returns on investment, given that there are assets the government already owns that aren't generating any cash flow. So clearly, that would grow the government's share of revenue much more quickly than an incremental investment in Kiaka. But it's a discussion that we're having with them, and we're doing that in a transparent and polite way. Operator: Thank you. There are no further questions at this time. So I'll now hand back to Richard for closing remarks. Richard Hyde: Thanks, Nathan. Look, I guess, closing remarks, we've got a number of activities underway at the moment, including our resource reserve update. Our new 10-year plan will be coming out in late March. The 10-year plan will include drilling from M5 North and M5 South as well as extensions at M1 South underground. So I'd expect that to be a positive increase on the 10-year plan that we issued last year, which was very close to 10 years at 500,000 ounces per annum, which has been a target of mine for a long time. So obviously, we'll keep the market updated with our discussions with the government around the ownership of Kiaka and also with the stability of the grid as it improves. So thanks very much for dialing in today, and we look forward to keeping the market updated over the coming weeks regarding our activities.
Operator: Thank you for standing by, and welcome to the Boss Energy Investor Conference Call December quarter 2025. [Operator Instructions] If we run out of time and do not have time for your question, we ask that you please call our office on 086263-4494 or e-mail boss@bossenergy.com and speak to our team. I would now like to hand the conference over to Mr. Matt Dusci, Managing Director and Chief Executive Officer. Please go ahead. Matthew Dusci: Thank you, Ashley. Good morning, everyone. Thank you for dialing into the Boss Energy December quarterly conference call. Joining me on the call this morning is Justin Laird, our CFO We will be both happy to take questions at the end of this call. Turning to Slide 2, there's been another significant quarter for the company, which I'll talk through during the call. Some of the key highlights include: we delivered record quarterly production of 456,000 pounds of uranium drummed, up 18% from the prior quarter. C1 cash costs for the quarter were $30 per pound, down 12% from the prior quarter; with all-in sustaining costs of $49 per pound, down 3%. Average price of $112 per pound or USD 74 per pound was realized with sales of $39.3 million. Alta Mesa produced 143,000 pounds of uranium drummed, of which Boss received 68,000 pounds during the quarter. We continue to build drummed inventory to 1.62 million pounds, up 175,000 pounds or 12% on the prior quarter. The balance sheet remains strong with $208 million of cash and liquid assets, including $53 million of cash. We remain on track to deliver FY '26 production guidance of 1.6 million pounds and are pleased to announce downward revision of guidance of C1 and all-in sustaining cost. On the 18th of December, we announced the conclusion of the Honeymoon Review and outlined a clear pathway forward for Honeymoon asset with a new feasibility study initiated. This fundamental change to our wellfield design will enable an increase in residence time at lixiviant, reduce our cost structure, unlock lower grade mineralization, improve the production profile and extend the life of mine. Now turning to Slide 3. As noted, this was a quarter of record drummed production at Honeymoon with production of 456,000 pounds of uranium drummed. This is up 18% on the prior quarter, reflecting a continued run on quarter-on-quarter growth since Boss commenced production in April 2024. IX production was up 8% from the prior quarter with 406,000 pounds produced with increased flow achieved from 4 wellfields B1 to B4, being online for the whole quarter. Key activities for the upcoming quarter will include the completion of the commissioning of NIMCIX columns 4 and 5. Flushing for wellfields B5 is underway and expected to begin production in the coming few days. We are expecting production in the third quarter to be softer than in the current quarter before lifting gain in quarter 4 to deliver the 1.6 million pounds production guidance for the full financial year. The pullback in the coming quarter is due to phasing of wellfields with an expected decline in average tenor. This quarter, we'll also have a major shut associated with the tie-ins of columns 4 and 5 along with power upgrades. In quarter 4, we expect an increase in production as Wellfield B5 will be running for the full quarter, and we'll also bring in Wellfield B6 coming online at the very back end of the quarter. This Wellfield B6 will be the first of the wellfield to operate for Far East Kalkaroo. Turning to Slide 4. As noted earlier, C1 cash cost for the quarter was $30 per pound. This was lower than both the original guidance of $41 to $45 per pound in the prior quarter of $34 per pound. This was a great achievement as we continue to see positive results from lixiviant optimization programs, reagent optimization in the plant and other cost reduction programs, driving cost savings and productivity improvements. The all-in sustaining cost for the quarter was $49 per pound, below original guidance of $64 to $70 per pound. The main variance relates to lower C1 cash cost and the phasing of new wellfield sustaining capital spend. Where there is an opportunity to delay wellfield capital expenditure under the existing plan, we are taking this decision while we execute the new feasibility study. We do not want to be spending capital on the nonoptimal plan. Project and Supporting Infrastructure capital costs increased in the quarter to $11 million from $9 million in the prior quarter. Of the $11 million spent in the current quarter, $4.5 million of related to ongoing completion of the NIMCIX columns, $6.5 million of the $11 million related to wellfield supporting infrastructure for East Kalkaroo, with $4 million spent on the trunkline, monitoring wells and high-voltage power upgrades and $2 million spent on delineation drilling. In terms of guidance for the remainder of FY '26, we continue to reconcile production guidance of -- to reconfirm production guidance of 1.6 million pounds of drum uranium. We are also pleased to revise downwards our C1 cash costs and all-in sustaining cost guidance. Our new C1 cash cost guidance is $36 to $40 per pound, down from the previous guidance of $41 to $45 per pound. All-in sustaining cost guidance has also been reduced from $64 to $70 per pound to a new revised guidance for FY '26 of $60 to $64 per pound. This is largely driven by the team's efforts to increase productivity and efficiencies while reducing costs for the business. This is an area that we'll continue to focus on. Sustaining costs remains mostly consistent as we balance this potential transition from existing plan to a new wide space wellfield design. Where possible, we do not want to spend capital on executing a suboptimal plan. It is in the shareholder interest that we defer as much of this capital as possible in parallel to the execution of the new feasibility study. Project and Supporting Infrastructure capital has been increased by $3 million from $27 million to $30 million to a new guidance of $30 million to $33 million for the full financial year. This increase is primarily due to the inclusion of the Honeymoon delineation drill program. Turning to Slide 5, the company is in a strong financial position, and I continue to reinforce that we are very well positioned to fund what we need to do as a business to drive value. We closed the quarter with no debt and $208 million of cash and liquid assets. Cash increased from $47.8 million to $52.9 million at the end of the quarter. There's a slight decline in the total cash and liquid assets quarter-on-quarter due to mark-to-market decline in fair value for our strategic equity shareholdings. Drummed uranium inventory increased during the quarter from 1.44 million pounds to 1.62 million pounds. We continue to view this inventory as strategic for the company as we continue to see tightening of the uranium market. Sales during the quarter consisted of 350,000 pounds at an average realized price of USD 74 per pound or AUD 112 per pound. First delivery into a legacy contract will occur in Q3 and will continue in Q4. This contract is linked to the Honeymoon Mining license from when Boss originally acquired the asset. The contract is for a maximum of 1.7 million pounds linked to either 20% of the previous calendar year's production or a maximum quantity of 250,000 pounds per year. This contracted material 250,000 pounds will reflect a realized price of approximately 65% to 70% of the spot price for those pounds. Moving to Slide 6. In terms of our 30% stake in Alta Mesa, a joint venture with enCore, production for the quarter totaled 143,000 pounds on a 100% basis during the quarter. Boss received 68,000 pounds of drummed production during the quarter. The production decline was associated with the timing of bringing new wellfields online. Additional modules are currently being installed at Wellfield 7 and Wellfield 3. Drilling at Alta Mesa East continued to confirm the potential extensions of mineralization from Alta Mesa West. Turning to Slide 7. As noted, on the 18th of December, we released the findings of the Honeymoon Review and have identified a clear pathway forward, a pathway that we are generally excited about. It's a pathway that has the potential to unlock significant value for the company. We have commenced work on the new feasibility study centered around the alternative wellfield design which has the potential to reduce operating cost and sustaining costs, unlock lower-grade mineralization, improve our production profile and extend the life-of-mine plan. Successful delivery of this new wellfield design at Honeymoon would also have a positive impact on our satellite deposits. This significant per work has been initiated as we work toward delivery of the new feasibility study, including continuation of the resource delineation, additional sample collection to improve geology, geometallurgy and hydrological characterization has commenced. Additional reactive transport simulations have also been completed. We've continued to advance the updated mineral resource model, and we have completed planning for trial test work patterns, with drilling also commenced on establishing these trial wide space patterns. Turning to Slide 8, work progressed during the quarter on advancing the technical and baseline studies at Gould's and Jason's satellite deposit. An updated mineral resource statement and timeline of work required to provide the permitting pathway will be provided in this coming quarter. It is worth noting that the wide space wellfield design that is being dot as part of the new feasibility study could potentially significantly improve the recoverable uranium metal and reduced capital intensity in C1 costs, both at Jason's and Gould's Dam. Turning to Slide 9, I'll provide a quick summary of the quarter and our priorities. We delivered record quarter production at Honeymoon, which is a credit to the team. Production was our highest ever quarter with 456,000 uranium produced. This was at a C1 cost of $30 per pound and an all-in sustaining cost of $49 a pound. Given the results of optimization, productivity and cost reductions, we have revised our guidance downwards for both C1 and all-in sustaining cost while maintaining our production guidance of 1.6 million pounds for FY '26. The company's financial position continues to strengthen in the quarter with cash of $53 million and total cash and liquid assets of $208 million as we continue to build inventory, which is now at 1.62 million pounds of uranium. Work has commenced on the new feasibility study, which defines a clear pathway forward to unlock significant value, both to the Honeymoon deposit, but also to Gould's and Jason's. Before moving to Q&A, I'd also note that during the quarter, Wyatt Buck, our Chairman, has informed the Board of his intention to step down as Chair. Upon a pointing out of a new Chair, Wyatt will continue to apply his extensive uranium operational and technical expertise as a Nonexecutive Director on the Board. I'm grateful to Wyatt, who has supported me and stepped into the CEO and MD role, and him wanting to continue to assist the company as a Non-Executive Director. With that, I'll hand back to Ashley, the operator, for questions and answers. Operator: [Operator Instructions] Your first question today comes from Alistair Rankin with RBC Capital Markets. Alistair Rankin: First question just on the contract -- the legacy contract that you've called out. So you mentioned it's 65% to 70% of the spot price, is going to be the realized price for that. Just wondering, is that implying that you're going to have part of that as fixed contract and you're estimating that it will be about 65% to 70% of the prevailing spot price? Or is it still a spot price mechanism and it's just at a lower percentage of the spot price? I'm just looking for a bit more color on how that pricing mechanism works. Justin Laird: Thanks for your question. It's Justin here. So the precise terms of that contract are commercially sensitive. It is a -- it does have a couple of different tranches for that contract and has different pricing mechanisms for those tranches. Given that commercial sensitivity, what we have done is tried to simplify it for you with noting that it would be 65% to 70% of the spot price at the time of delivery. Alistair Rankin: Okay. Justin. I appreciate that. Second question, just about the outlook for quarterly production. So you flagged that it's going to be declining in the third quarter for FY '26. And then lifting again in the fourth quarter with the connection of some additional wellfields. So included in those well fields is the East Kalkaroo, I think, B6. That's your first wellfield coming in from East Kalkaroo. Can you just remind me, are you still anticipating that East Kalkaroo production levels to boost your production at the mine? And sort of what are your expectations for production performance from the East Kalkaroo wellfields? Matthew Dusci: Yes. Okay. Yes. So we -- next quarter will be a little bit softer compared to the current quarter, but reminding ourselves that we'll finish the final actual year at 1.6. B6 from Far East Kalkaroo will come into production at the back end of that quarter. Production, it's not heavily weighted in terms of delivery of the 1.6 of that B6 production profile. B6 will provide production profile into FY '27. One of the things we're also considering is just balancing between delivery of this new feasibility study and continuing to support sustaining capital into that future production profile. What we're wanting to do is make sure that we don't -- if we can, we're deferring capital going into existing plan while we complete the new feasibility study. Operator: Your next question comes from Henry Meyer with Goldman Sachs. Henry Meyer: Just hoping you can share a bit more detail on plans to test the new wellfield design. Any color on what areas are currently being developed with that strategy? How long could you need to test it and get confidence in effectiveness? Matthew Dusci: Yes. Henry, so it's Matt. Yes. So as I noted in the commentary, we've planned those test work patterns associated with wide spacing. They vary. So they actually vary in spacing and location. Initial programs have actually has commenced in terms of establishing some of those test work patterns around the Honeymoon Resource as we currently have defined it, so extension to Honeymoon B1 to B5. Some of that spacing in that area varies. We are going up, one of the patents will be up to 100-meter spacing. We also plan as part of the feasibility study to also test Far East Kalkaroo minor wide spacing. B6 becomes quite an important part to this new feasibility study because it's also B6 is on that original plan of close spacing. So we're wanting to compare B6 production with wide spacing program production at the Far East Kalkaroo. In terms of time frame, that will all fit into that delivery of the new feasibility study due in Q3. Henry Meyer: Perfect. And second one for me. Any other detail you could share on recent drilling performance, I guess, over the last month since we got the update late last year? Grade thickness sort of in line with results being observed before or a bit of an improvement or perhaps not as good as the block model suggested? Matthew Dusci: Yes. Good question. The results can generally confirm what we're expecting. We are seeing some mineralization to the south of Far East Kalkaroo. So we are opening up some exploration areas that will come up, hitting some high-grade mineralization outside of design but holistically continue to confirm what we're seeing -- where we're seeing continuity of lower-grade mineralization with high-grade mineralization, but not necessarily as continuous as we previously thought. Operator: Your next question comes from Daniel Roden with Jefferies. Daniel Roden: Just wanted to ask on the contract that you've disclosed. And I just wanted to get some clarity on maybe some of the other contracts under your book that you've got several that you've signed over the past few years. Are you in a position to be able to provide, I guess, a sensitivity on -- at various price points that those various contracts and mechanisms might influence on your realized pricing? Like how should we think about that? And maybe something you can probably answer right now, but what volume of your production expectations for FY '26 and '27 are contracted? Matthew Dusci: Yes. I'll jump in, and then I'll hand across to Justin. I mean ultimately, as a business, we'll try and provide as much transparency as we can. We -- it's one of the things we are talking about is how do we continue to provide that transparency on those contracts and potentially look at doing that at some point as we work through the business. In terms of this contract, it represents about 15% of production at 1.6 million pounds. We still -- what's important to note as a company, we remain significantly uncontracted. I mean our contract book represents about 3 million pounds out to early 2030. So it hasn't changed -- it doesn't change that position in terms of us being relatively uncontracted. What we try to do in this is just provide a little bit of look through on realized pricing that you'll probably see in -- you'll see in Q3 and Q4 as a result of that legacy contract. So still highly exposed to uranium price as we see uranium price tighten both through our contracting strategy and the inventory that we do hold. Daniel Roden: Yes, sure. So that 15% for FY '26 -- in '26, that's the only contract that is applicable for FY '26. Is that 15% or the 250,000? Justin Laird: There are additional contracts that we will be delivering into in calendar year 2026. Those contracts have a mix of base escalated and market related with floors and ceilings. For Q3 of this financial year, most of those pounds have already been executed in terms of the forward sale or delivery into this legacy contract from Q4 onwards of this financial year. So then coming into Q1 and Q2 of the next financial year to complete calendar year 2026, we are mostly under contracted for that period. If you were to look further ahead in terms of calendar year 2027 onwards, our current contract book would get you a realized price that's probably around mid-80s to low 90% in terms of a correlation to the spot price at the time of delivery. Daniel Roden: Perfect. That's very helpful. And just a last one from me, but you kind of -- as you go through the process of building and designing a white space wellfields patents, obviously, there's some lead time into that. And I noted B6 is going to be under the original, I guess, design and plan. At what point do you start needing to, I guess, allocate some of the capital changes and capital spend? I imagine it's FY '27. But I guess from my perspective, that would seem like it would be, I guess, front running or pre the final study results release. So I guess, how do you think about deferring some of that CapEx? What's the amount of CapEx that, I guess, you would need to commit pre the final results of the study? Matthew Dusci: Yes. So this is where we're working that balance while we're completing the new feasibility study and also having to ensure that we can -- sustaining capital to provide that production profile going forward. Ultimately, from a market perspective, we'll be able to provide all that transparency with the new feasibility study to give an understanding of total capital and sustaining capital over that life with that study. Having said that, we are managing our -- within what we're saying with our guidance, both on a sustaining and total capital for execution of these trial patterns. So what you're seeing is we haven't changed sustaining and/or total capital projects only by that $1 million and $3 million, respectively. That includes the trial patterns that we're doing as part of the new feasibility study. Those patents include uranium pounds, which we haven't yet allocated either to any production profile. Justin Laird: I would just add to that as well. And so it is a balance, but there is a lot of wellfield capital that will still be relevant regardless of the wellfield design. So examples of that would be the wellhouse, the pumps, some of the surface infrastructure pipes, cables. A lot of that would be relevant regardless of the spacing of the wellfield. And so we're continuing to invest in that type of wellfield infrastructure, where we are holding back a little bit is in terms of drilling production wells as that could materially change, depending on the spacing of the wellfield. Daniel Roden: Yes. Got it. And so just a clarification, everyone understanding it correctly, but I suppose the findings of the white space drilling don't -- they won't change the pre-committed capital spend for these studies and projects and you're not going to have to go in and rework some of the infrastructure the study findings, I guess, something different. So there's not really going to be a change in, I guess, capital expenditure expectations from yourselves, depending on the study outcomes? Justin Laird: Yes. No, we don't expect any changes, Daniel, and the updated guidance that we've provided today reflects our latest view, and we don't expect any changes to that view for the financial year. Operator: Your next question comes from Regan Burrows with Bell Potter. Regan Burrows: Just on commissioning of Column 4, it looks like it's a little bit delayed there. I would have thought that you would have wanted to have that up and running as you saw the leach tenors coming off to sort of balance that production. So I guess are we -- is there something that's intentional there? Or is there something else that sort of hiccups that? Matthew Dusci: Yes. It is a little bit delayed in terms of that original schedule, but it's not really the key driver. The key driver actually is the flushing of B5, and that will increase flow. So although you see it as a delay here, one of the drivers to where we are probably is about a month on B5 relatively. Regan Burrows: Okay. So it's driven by the wellfields rather than -- platforms themselves... Matthew Dusci: Correct. So it's all linked together. Regan Burrows: Yes. Okay. And then just on, obviously, the results from the white space patent from, I guess, the original call, you said it would take up to sort of 90 days to get some initial results coming through. Curious, I guess, you're still targeting sort of Q3 feasibility study time frame to release those results from the white space patent. Are we going to get an update before then on whether or not this is successful? Matthew Dusci: Yes. Regan, as we're trying to do, we'll provide as much transparency and inform the market as we get data. What we -- how we've designed the feasibility study is to ensure that happens by breaking up into components. So yes, the answer is yes, we're happy to try and give as much clarity as we work through it. Regan Burrows: Okay. Great. And if I could just squeeze one in. Any sort of driver why Alta Mesa performance dropped so materially quarter-on-quarter? Matthew Dusci: Yes. So you saw that drop in production. Again, timing on wellfields really becomes critical in these ISRs. And that's a reflection at Alta Mesa as well as they look at bringing in new additional wellfields and extending wellfields onto -- and prospectivity onto Alta Mesa East project. Operator: The next question comes from Milan Tomic with JPMorgan. Milan Tomic: Just one from me. How should we be thinking about sales over the second half? Is it going to be broadly consistent with what we've seen in this quarter? Or should we be expecting it to move higher? Justin Laird: I'll take that question. So in terms of sales quantities, as we said, we will continue to see sales quantities roughly in line with production. In terms of realized price for quarter 3 this financial year, we'll obviously have the 125,000 pounds of the legacy contract. And then the remainder of the Q3 sales were largely executed in the prior quarter. So they will be based on a forward sales price from the prior quarter. For Q4 in this financial year, we'll have 125,000 pounds of the legacy contract. Again, we will be in that range of 65% to 70% of the spot price. And then we're still yet to execute the forward sales for Q4 of this financial year. So that remains uncontracted. Milan Tomic: Yes. Just in terms of delivering sales into those legacy contracts, how should we be thinking about that? I mean, are you kind of going to be looking to maximize those sales at 250,000 per quarter or so? Or would you be looking to kind of extend it out a little bit further? Justin Laird: The exact timing of the 250,000 pounds is out of our hands. That's the -- based on the terms of the contract, the utility advises a delivery date which is consistent with other utility contracts. And we would then deliver into that contract at the date advised by the utility. Operator: Your next question comes from Branko Skocic with E&P. Branko Skocic: Just on the topic of royalties, I just want to confirm if Honeymoon is now in a position that they're required to pay royalties moving forward. I guess my understanding was you weren't required to pay royalties across the first 1.25 million pounds. Can you just click over that in terms of sales? Matthew Dusci: Yes. So we are commencing to start to pay royalties, Branko. And we'll see that in this half. Branko Skocic: And the other question I had was just on the topic of fixed costs. I know you're not disclosing anymore in your quarterly, but it incurred about AUD 7 million per quarter in the second half of FY '25. I just was wondering if that was kind of a sensible run rate to be assuming over the next 12 or so months. Justin Laird: Branko, yes, we haven't disclosed the fixed cost. It's largely consistent. The fixed cost proportion is largely consistent with what we've previously disclosed. Operator: The next question comes from James Bullen with CGF. James Bullen: Congrats on the results in the core area. Just a question around that legacy contract. So you're saying the counterpart is a utility there. But is there any chance that you could buy your way out of that contract at all? Matthew Dusci: I think it's something that we'll probably look at whether we want to or not. Probably the ideal position would have been to do that earlier than we were at. But ultimately, it becomes a small part of the production profile as we go forward, too. James Bullen: Great. And I guess -- apologies if I've missed it, but this is the first time that this has been disclosed. Have you now gone through and checked pretty much everything? And is there any other artifacts here which could come back and bite you? Matthew Dusci: I feel comfortable that from a sales and contracting perspective, it's all there. Like I said previously, we'll try and provide a little bit more transparency. We can try and provide a little bit more transparency on some of that. We talked about that and when's the right catalyst and the time going forward is. But I mean it's a contracting position 3 million pounds out through 2030, again, relatively deleveraged from contracting. James Bullen: Understood. And just around the PLS, the tenor, there you're telling us not to extrapolate that because it is performing better than the previous feasibility study. Do you have any guidance around the profile it's going to have from the core area? How will it trend downwards? Matthew Dusci: Yes. So we do. We haven't disclosed that, but PLS head grade will come down as we see some of the life of those wellfields continuing to drop. And then with B5 coming back online, PLS tenor will jump again. And it's just -- it's all got to do with that sequencing of wellfields with the tenor. Having B5 come in line enables us to continue to increase flow, and that's with Column 4 also coming back coming into production profile. Operator: Your next question comes from Glyn Lawcock with Barrenjoey. Glyn Lawcock: Sorry, I just wanted to clarify the legacy contract again. So it's the maximum of 250,000 pounds each delivery year. Is that a calendar year? I mean, obviously, you said it's at the discretion of the utility. So does that mean there's nothing in the first half of fiscal '27? Matthew Dusci: It's calendar year, correct? So it's calendar year 250,000 pounds per year, up to a maximum of 1.7 million pounds capped, discretion to the utility on where in that calendar year. Glyn Lawcock: Yes. So there will be no deliveries in the first half of fiscal '27 then as a result? Matthew Dusci: Correct. Glyn Lawcock: And then just the second one, another way, just to think about the dollar spend because I know looking at your waterfall quarter-on-quarter, Honeymoon costs are up 30% from sort of $12.4 million spend in Q1 to just over $16 million. You've got more well fields coming on, more columns coming online to obviously lift production as well. Like where do you feel that dollar spend caps out? I mean I know you've got wellfield design coming as well, which didn't change it. But is that -- are we still going to see increasing dollar spend quarter-on-quarter, you think, into the second half? Matthew Dusci: You're seeing that increase because ultimately, production profile is also increasing quarter-on-quarter from a total dollar perspective, once production profiles level, then that dollar spend would also level approximately. The only variance then would be head grade. Glyn Lawcock: Alright. So if you take the first half total dollar spend in first-half production, you're sort of sitting at the top end of your guidance range, I guess. So -- but you look for more production in the back half? Justin Laird: Yes. I mean, Glyn, for the operating costs in there are some working capital movements. So probably the primary driver or difference between that. And the C1 cost we purchased some resin during the quarter, that will be amortized over quite a few years. We do have some capital accruals that you will have seen in the difference between our CapEx spend for the half compared to the cash flow waterfall. And we expect that CapEx accrual to unwind from a cash perspective over the next 2 quarters. And then other than that, kind of those kind of working capital overhangs from the current quarter, we've given you the cash costs and CapEx for the remainder of the half. So that's the best indication in terms of CapEx or cash spend for the remainder of the half as well. Glyn Lawcock: Okay. So the cost of production will sort of start to match the cash, you think, as opposed to the sort of the inventory movements, accruals, et cetera? Justin Laird: Yes, that's right. Operator: There are no further questions at this time. I'll now hand back to Mr. Dusci for closing remarks. Matthew Dusci: Thank you, everyone, for joining the call this morning. As noted on the call, it's been a record quarter, record production and below guidance cost. And as a result, we've downward -- decreased our cost guidance for C1 and all-in sustaining costs. We're also very clear about the pathway forward on how we drive value for both honeymoon and satellite deposits, which is the delivery of this new feasibility study. So with that, I thank everyone for joining the call. Thank you, Ashley. Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Welcome to the Seagate Technology Fiscal Second Quarter 2026 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President, Investor Relations. Please go ahead. Shanye Hudson: Thank you, and hello, everyone. Welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our December quarter results on the Investors section of our website. During today's call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included on our Form 8-K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as are subject to risks and uncertainties associated with our business. To learn more about these risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking 1 primary question and then reentering the queue. With that, I'll turn the call over to you, Dave. William Mosley: Thanks, Shanye, and hello, everyone. Seagate closed out calendar 2025, with a record-breaking quarter, driven by sequential revenue growth across nearly all end markets. December quarter financial results exceeded both top and bottom line expectations and set new company records for exabyte shipments, gross margin, operating margin and non-GAAP earnings per share. We expanded non-GAAP gross margin above 42%, supported by the execution of our pricing strategy, along with an improving mix of our high capacity drives as HAMR shipments ramp. Looking at the entire calendar year, 2025 marked a transformational period for Seagate, both financially and operationally. Over the calendar year, we increased revenue by over 25%, improved gross margins by nearly 740 basis points and expanded operating margins by an even greater amount, demonstrating the profitability leverage in our financial model. 2025 also solidified HAMR technology as a long-term enabler of mass capacity storage. We ended the year shipping 3 terabyte per disk Mozaic-based HAMR products to our first CSP customer. And by year's end, quarterly HAMR shipments exceeded 1.5 million units and have continued to ramp. Mozaic 3 HAMR drives are now qualified with all of the major U.S. CSP customers and qualifications for our second-generation Mozaic 4 terabyte per disk products are tracking well to plan. These developments align with our long-term areal density road map that extends to 10 terabytes per disk, which we expect to deliver early in the next decade. I want to thank our Seagate teams around the world for exceeding our performance expectations and delivering outstanding value to our global customers. We continue to operate in an exceptionally strong demand environment, particularly within the data center end markets. In the December quarter, we saw sustained demand growth for our high capacity nearline drives across global cloud data centers as well as continued improvement from the enterprise edge. Based on our build-to-order pipeline, we anticipate these positive demand trends will continue for some time. Our nearline capacity is fully allocated through calendar year 2026, and we expect to begin accepting orders for the first half of calendar year 2027 in the coming months. Further out, demand visibility is strengthening based on the long-term agreements in place with major cloud customers through calendar '27. Additionally, multiple cloud customers are discussing their demand growth projections for calendar '28, underscoring that supply assurance remains their highest priority. We will continue to meet strengthening demand through our strategy to maintain supply discipline and satisfy exabyte growth through areal density advancements and without increasing unit production volume. In the December quarter, our average nearline drive capacities rose by 22% year-over-year, approaching 23 terabytes per drive, with those sold to cloud customers averaging significantly higher. This trend underscores the strong adoption of our higher capacity drives to support demand growth. At the same time, revenue per terabyte sold has remained relatively stable, reflecting the effectiveness of our pricing strategy. Seagate is well positioned to continue benefiting from the combination of powerful secular tailwinds and supply discipline. Video applications continue to drive significant demand for hard drives with platforms like YouTube witnessing 20 million video uploads daily, up from just 2 million 3 years ago. This staggering pace of growth extends to other cloud video platforms and doesn't yet include the full surge in content generation expected from emerging AI-driven video applications. These applications are not only fueling social media uploads, they are also transforming how organizations turn their data into tangible value, enabling personalized marketing, interactive education and advanced simulations, capable of training manufacturing, engineering, health care and other professionals. The strategic value of data is further underscored as new applications and use cases emerge across cloud and edge workloads. Among the most promising of these is agentic AI, which relies on persistent access to large volumes of historic data to enable effective planning, reasoning and independent decision-making. Adoption is already gaining momentum with one recent survey conducted by a leading cloud service provider reporting more than half of participating customers were actively using AI agents. Early adopters are already realizing measurable returns with benefits ranging from lower cost to increase revenue opportunities. With the deployment of AI agents at the edge, where untapped data often resides, we believe the stage is set for a sustained and meaningful increase in data generated and stored that will support inferencing, continuous training and also maintain model integrity. Modern data centers have evolved to address the complexity and scale that massive workloads bring through sophisticated data tiering architectures, ensuring that the right data is available at the right time and place. Hard drives are essential to these architectures, anchoring the mass capacity data tier that stores the vast majority of exabytes from storing the checkpoint data sets used to train and maintain model integrity to supporting vector databases that provide the context necessary for accurate inference results and agentic AI performance. By leveraging hard drives, data center operators, whether in the cloud or on-prem, can achieve the optimal balance of performance, capacity and cost efficiency at scale. Against this transformational backdrop, Seagate's HAMR technology road map positions us to meet growing demand and deliver ongoing TCO improvement for our customers. HAMR is a proven technology with large volumes of drives running in cloud production environments for more than 3 quarters now, and performing well across a broad spectrum of use cases. We are systematically ramping our Mozaic 3 HAMR products to qualified customers while maintaining focus on optimizing the profitability of our available supply. As noted earlier, Mozaic 3 is now qualified with all major U.S. CSP customers and remains on track to have all global CSPs qualified within the first half of calendar 2026. Additionally, qualifications of our second-generation Mozaic 4 products are progressing well. We expect to begin the ramp of Mozaic 4 later this quarter and have multiple CSPs qualified in the coming months in line with our plans. We continue to set the pace for the industry, recently demonstrating 7 terabytes per disk capability in our labs. As one of our largest CSP customers recently aptly described, hard drives are engineering marvels, a sentiment that we obviously share. Our deep expertise across mechanical engineering, material science, nanoscale fabrication and now advanced photonics, not only enable Seagate to deliver on the HAMR road map, but also creates a durable competitive moat for hard drive technology well into the future. Wrapping up, 2025 was a milestone year for Seagate in every respect. Financial performance, operational execution and technology leadership. We are carrying this momentum into calendar 2026 supported by a powerful demand backdrop as new AI applications start to complement traditional workloads. We will remain highly disciplined and focused on expanding profitability through our higher capacity product mix, underpinned by the strong economics of HAMR. Our areal density road map positions Seagate to sustain the core TCO and efficiency advantages of hard drives as data creation and storage requirements accelerate in the AI era. We believe this foundation creates a compelling long-term value proposition for the company, our customers and our shareholders. I'll now turn the call over to Gianluca to cover our results in greater detail. Gianluca Romano: Thank you, Dave. Seagate delivered another quarter of strong year-over-year revenue growth and set new record profitability metrics in the December quarter, underscoring the durability of data center demand trends. Additionally, we strengthened our financial position by retiring $500 million in gross debt and generating over $600 million in free cash flow, marking the highest level in 8 years. December quarter revenue came in at $2.83 billion, up 7% sequentially and up 22% year-over-year. We achieved non-GAAP gross margin of 42.2%, up 210 basis points sequentially, and we expanded non-GAAP operating margin by 290 basis points sequentially to 31.9%. Our resulting non-GAAP EPS was $3.11, up 19% quarter-over-quarter. These strong financial results demonstrate our ability to execute our strategic objectives, including leveraging our technology road map to support demand growth. To that end, we shipped 190 exabytes in the December quarter, up 26% year-over-year, while keeping overall unit capacity relatively flat. The data center market accounted for 87% of our shipment volume, supported by ongoing demand momentum from global cloud customers and sequential growth across the enterprise OEM markets. We shipped 165 exabytes in the data center market, up 4% sequentially and 31% year-on-year. Data center revenue grew at roughly the same pace totaling $2.2 billion for the quarter, up 5% sequentially and 28% year-on-year. Against this strong demand backdrop, both cloud and enterprise customers are transitioning to higher capacity drives. Average cloud nearline capacity increased to nearly 26 terabytes in the December quarter and will continue to grow with the ramp of HAMR-based Mozaic products. As Dave highlighted, Mozaic drives are running very well in production environment and meeting all performance, reliability and integration expectations. In the enterprise OEM market, we are benefiting from slight improvement in traditional server units, along with increasing demand for storage servers, driven in large part by the adoption of AI applications and need to store data at an enterprise edge. The edge IoT market made up the remaining 21% of revenue at $601 million, supported by anticipated seasonal improvement for consumer products in the VIA client market. We project the broader VIA market to grow over time with the largest growth contribution coming from VIA nearline products that are captured as part of our data center end market. Moving on to the rest of the income statement. Non-GAAP gross profit increased to $1.2 billion, [ up 14% ] quarter-over-quarter and 44% compared with the prior year period, significantly outpacing revenue growth. Non-GAAP gross margin expanded to 42.2% in the December quarter up from 40.1% in the prior period. This improvement reflects the ongoing execution of our pricing strategy and the growing adoption of our latest generation high capacity products, which collectively drove a modest sequential increase in revenue per terabyte, a trend we expect to continue into the March quarter. Non-GAAP operating expenses were $290 million, relatively flat quarter-over-quarter and in line with our expectations. Operating expense as a percent of revenue declined to 10.3%, rapidly trending towards our long-term target of 10%. The combination of strong top line growth and significant financial leverage drove an 18% sequential improvement in non-GAAP operating profit to $901 million, almost 32% of revenue. Other income and expenses were $70 million, reflecting slightly lower interest expenses on the reduced outstanding debt balance. We currently project other income and expenses to remain relatively flat in the March quarter. We grew non-GAAP net income to $702 million with corresponding non-GAAP EPS of $3.11 per share based on tax expenses of $129 million and a diluted share count of approximately 226 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet. We invested $116 million in capital expenditures for the December quarter or roughly 4% of revenue. We are maintaining capital discipline while we continue to transition and ramp HAMR technology. To support these objectives, we anticipate capital expenditures for fiscal year 2026 to be inside our target range of 4% to 6% of revenue. Free cash flow generation was strong at $607 million, up 42% from the prior quarter. Looking ahead, we expect free cash flow generation to further expand in the March quarter, supported by sustained demand trends, operational efficiency and capital discipline. These factors position us well for durable long-term cash flow generation. Cash and cash equivalents totaled just over $1 billion at the end of December quarter, with ample liquidity of $2.3 billion, including our undrawn revolving credit facility. During the December quarter, we returned $154 million to shareholders through dividends. We retired approximately $500 million of exchangeable senior notes due 2028, which serves to limit further dilutive impact from business and optimized cash deployed for future share repurchases. Our resulting gross debt balance was approximately $4.5 billion exiting the quarter. Net leverage ratio improved to 1.1x based on adjusted EBITDA of $962 million for the December quarter, up 16% quarter-over-quarter and up 63% year-on-year. We expect the net leverage ratio will trend lower as profitability and cash generation increase while we continue to evaluate opportunities to further reduce debt. Turning now to the March quarter outlook. The demand environment remains strong, particularly among global cloud customers. As a result, we expect data center demand will more than offset typical March quarter seasonality in the edge IoT markets. We expect March quarter revenue to be in the range of $2.9 billion, plus or minus $100 million, which represent a 34% year-over-year improvement as a midpoint. Non-GAAP operating expenses are expected to be approximately $290 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to approach the [ mid-30% range ]. Non-GAAP EPS is expected to be $3.40 plus or minus $0.20, based on a tax rate of about 16% and non-GAAP diluted share count of 230 million shares, including estimated dilution from our 2028 convertible notes of approximately 7.6 million shares. Seagate's strong December quarter performance and March quarter guidance underscore our continued focus on driving growth, enhancing profitability and optimizing cash generation. Based on our current outlook, we expect to deliver sequential improvement to both the top and bottom line throughout calendar 2026 and remain in a strong position to enhance value for both customers and shareholders over the long term. Operator, let's open the call up for questions. Operator: [Operator Instructions] And the first question comes from C.J. Muse with Cantor Fitzgerald. Christopher Muse: Given the supply-demand dynamics, you're obviously in the catbird seat. I wanted to really try to get some more detail on gross margins going forward. Your philosophy historically has been to share gains, both your customers and yourselves. But at the same time, given this tight environment, you are raising like-for-like pricing. So curious, is there a framework to think about in terms of the incremental gross margins that we should model from here? And then, I guess, maybe bigger picture, as you think about overall average pricing per exabyte, we've gone from kind of down double digits to high single digits. And I think we just exited the quarter down 4% year-on-year. Do you see a world where pricing could flat or even move positive year-over-year? William Mosley: Yes. Thanks, C.J. I'll let Gianluca chime in here as well, but the pricing will be dictated by the demand. Right now, the demand is really strong. So I think as we roll through into '27 and '28, we look at how much capacity we're having. We're bringing online by virtue of the fact that we're making all these aggressive product transitions. We'll bring more exabytes to bear and then people go out there and renegotiate for those. I think flat to slightly up is certainly possible. And that's the way we're really managing it as we talk to our customers. The value proposition of the new drives as they go up 5, 10 terabytes at a time is pretty strong. Gianluca Romano: C.J. So on the gross margin, we are executing very well, but executing a little bit better than what we discussed at our Investor Day, where we presented a model with a 50% incremental margin above $2.6 billion of revenue. We have done better every quarter, of course, is our objective to continue to optimize what we produce, what we sell and finance the profitability that we can get from the product. So the models cover over a longer period of time, now 2, 3 years, not 2 or 3 quarters, but I'm positive we are continuing to progress in the right direction. Operator: The next question will come from Wamsi Mohan with Bank of America. Wamsi Mohan: I have a similar type of question. I guess the gross margins in the guide and the incremental quarter-on-quarter gross margins on the guide are very strong. Can you maybe help bridge the drivers between mix and price? Obviously, you've got a better mix of data center revenue next quarter. But just wondering if you can dimensionalize that. And the opportunity for pricing, David, you just said sort of flat to up as possible. But as we think about the pricing that might be getting embedded within these LTAs and sort of beyond '26. Why can't that be a lot higher just given the tightness in the supply-demand environment? William Mosley: Yes. I think this gets into how persistent is the demand going to be, Wamsi, we talked about 2 or 3 years from now. The one behavior change that I really like in the last year is that people are starting to say, if I can't get it now, I'll plan next year better and the following year better. So we're having great dialogues on that front. Of course, supply has risen quite a bit in the last year's supply of exabytes from the industry. The industry has reacted pretty well, but I think demand is still pretty strong. And my perspective on this is I think demand will stay strong for quite some time. So in that kind of world, we're having great discussions with customers further out in time. And the biggest part that helps us in our planning is through these product transitions. They know that's how they get more exabytes. Gianluca Romano: Yes. And Wamsi, we are saying in the script today that for the rest of the calendar year, we expect revenue and profitability to continue to improve sequentially every quarter. So we are not implying in any way that this trend is changing. It's actually now getting better somehow. Operator: The next question will come from Erik Woodring with Morgan Stanley. Erik Woodring: Congrats on these results, incredible. Dave, at your Analyst Day last year, you kind of pointed to a mid-20% exabyte growth CAGR. And I'm just wondering where you think that supply growth can land this calendar year. And as you get closer to that HAMR crossover point later this year, like does that pace of exabyte growth accelerate? And I'm just asking this because demand is clearly outpacing supply. So can you maybe just help us try to better understand the shape of your exabyte supply growth because obviously, it will dictate kind of exabyte shipments for the year. William Mosley: Yes. Thanks, Erik. So we are planning to transition to 4 terabytes of platter. And fairly aggressively, but I think what people have to keep in mind is that we were fairly tight all throughout manufacturing. So we have products that are in the pipeline already that are committed to customers and so on. We don't just move very quickly to 3 or 4 terabytes of platter as things come. And it's a good problem to have, actually. We're running manufacturing quite, quite tight right now. So I think it will be a fairly prescriptive ramp, to your point. It won't be as fast as maybe we've done some ramps in the past, but it will be very profitable, and that's the way we look at it. As we go further out in time, I'm very optimistic that the 4 terabytes per platter is a very strong product. It will start to replace some of the other legacy products, I'll say, that way and because it has so much better value proposition in a lot of those markets. And then when that happens, then we see more opportunity. Operator: The next question will come from Asiya Merchant with Citi. Asiya Merchant: Great results here. Just a couple that are related to the prior question. You guys gave some projections on HAMR, not just for fiscal year '26, but even into fiscal '27. So if you could talk about upside to achieving those targets for the HAMR rollout. And related to that, how we should think about the blended cost reductions, pretty impressive, again, margins here and guiding for improved profitability. So if you could talk to us a little bit about the cost reductions going forward, especially as you ramp HAMR here with the Mozaic 4, that would be great. Gianluca Romano: Yes, Asiya. So I would say, first of all, we are very happy with the transition to HAMR. We qualified the last big cloud service provider in the U.S. and we have qualified 6 out of 8 of the top cloud service providers. So the transition from PMR technology to HAMR technology, is progressing very well. And we are now qualifying the new product, the 4 terabyte per disk to 40 terabytes per drive. Of course, this will help with the increase in exabyte in terms of mix. We gave a good indication, I think, at our Investor Day, and we want to be aligned to that. And the cost will be favorably impacted, especially when we start ramping high volume of the 40 terabyte drive. Of course, that will drive a fairly important reduction in cost per terabyte compared to the current HAMR, and of course will be a good contributor to further increase our gross margin. Operator: The next question will come from Karl Ackerman with BNP Paribas. Karl Ackerman: I was hoping you could clarify what portion of your LTAs for overall nearline HDD capacity has fixed or multi-quarter pricing agreements. I ask because as these LTAs roll off throughout 2026, any new agreements will be locked in at higher values reflective of not only the demand use case also widening price per terabyte gap between enterprise hardware drive HDDs. Shanye Hudson: And Karl, your -- the second part of your question was a little fuzzy. So we captured the first part, but I might ask you for clarity on that second. Karl Ackerman: Sure. Yes, I'll just repeat, if I could. As these LTAs roll off throughout 2026, I would imagine those new LTAs will be priced at perhaps a higher value or higher order value, particularly given the widening gap between hard drives and SSDs. So if you can comment on the mix of LTAs and how you think that progresses throughout '26 would be great. William Mosley: Yes. Thanks, Karl. So as we roll off, say, for example, somebody might have been qualified on a 2.4 terabyte per platter product or something, and then they might be qualifying a 3.2 or even a 4-terabyte per platter as we roll forward. So we changed based on the demand that we see, we changed -- and our available supply, we changed the pricing dynamic there. I think that's one of the biggest things you're pointing out. I'll say that '26 is fairly booked. We talked about that in the call a bit to the extent that we can out-execute our plan, it will be marginal like you saw last quarter, we get the qualifications done a little faster. We ship a few more drives. That's how we can do better than planned. But other than that, it's fairly predictable in '26, and we're looking to start '27 the same way. Operator: Next question will come from Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe address -- given everything you just said about demand and about the mix effect from HAMR this year, maybe can you give us any kind of directional guidance about where you might expect exabyte shipments to end up on a calendar '26 versus calendar '25 basis relative to the sort of long-term targets you've laid out previously. It seems like you could do materially better than that, but I just wanted to confirm what your expectations were if you could give us a numerical range. Gianluca Romano: Jim, no, we are not guiding calendar '26. But we said in our financial model, we said that we expect exabyte -- nearline exabytes to grow in the mid-20%. We have done a little bit better if you look at the last few quarters, and we always -- as Dave said before, we always try to extract as many exabyte as we can from our manufacturing. So we are continuing this trend, but we don't guide for calendar '26. William Mosley: But moving from 2.4 per platter to 3 per platter to 4 per platter, you can see that we're on a trajectory like you described. It's -- when it gets down to the individual customer level, obviously, we have to be very predictable because they need what they need and what they -- what we've committed to in order to build out that data center. So we'll continue to execute that plan and maybe we can do a little bit better as we transition to 4 terabyte per platter. Operator: The next question will come from Amit Daryanani with Evercore. Amit Daryanani: Gianluca, I'm hoping you can talk a little bit about the March quarter guide because it seems to be a really sizable uptick in gross margins. I think it's up like 250 basis points or 100% plus incrementals. Could you just -- is there any you would call out in March quarter that's unique that's helping drive that kind of margin expansion? And is this really all coming from the core HDD business? Or is there a potential benefit from the old systems business helping you as well? Gianluca Romano: Amit, well, I would say, we expect it to be a very good quarter. I don't think it's different than what we have done before. It's always based on the pricing strategy and the mix, as you know. We qualified another customer on HAMR, so we will ramp a little bit more volume on HAMR. This is helping us to get better margin. But fundamentally, is not really different in how we think we are going to execute the quarter and is good. I think the incremental margin was very good. William Mosley: Yes. And it's not the systems business. The systems business is doing well, but it's fairly small scale in comparison. Operator: The next question will come from Mark Newman with Bernstein. Mark Newman: Congrats on great numbers today. Just want to touch again on this, the LTAs and pricing arrangements you have. Just curious, do you think there's an opportunity here for more significant price increases in NAND flash. We're hearing things like 40% to 100% up Q-on-Q for some contracts. I appreciate hard disk drives -- you have very long-term agreements. But I think there's a lot of questions I'd like to just touch on this as well. And a lot of -- as the LTAs roll off, is there an opportunity for some of those to be repriced at a more significantly higher price to change the trajectory, certainly numbers are great, you're printing. We're just trying to figure out, could you start to see more significant price increases rather than at the moment, you're seeing kind of flattish down a little bit, up a little bit. But overall, your average prices are flat, which I understand is a mixture of like-for-like slightly up, offset by new products coming in at lower price. Just wondered if that may change. And then just a quick update on HAMR mix, if there's any update on the trajectory of the HAMR mix that you've outlined before. William Mosley: Thanks, Mark. A couple of points. On the HAMR mix, we necessarily constrained ourselves on the 3 terabyte per platter because the factories were fairly full, and we knew we would be going to the 4 terabyte per platter product. So we've been leaning harder on that and making sure it gets through the development and qualification phases. As time goes on, then we'll move off and on to the 4 terabyte per platter very aggressively. So that helps you on the mix side. And the other thing about HAMR mix is it will be necessarily mixed up. I think the demand for those products will be at the high capacity points, not necessarily the lower capacity points just yet. And then relative to pricing, I think I said before, as we -- as one long-term agreement rolls into the next year or the next year, we've satisfied our existing supply commitments, people are looking at the new products, we have constrained supply of those new products, then we look at what the demand is, and we dictate where our pricing is. And one of the very first questions I said it could be flat to up a little bit. That's the way I think about it right now, but it all depends on what the demand is. Demand continues very strong. That's great. And again, what we're seeing is people who can't get what they need today, they're saying, okay, I need to be able to plan my data center procurement out in the future, let's get more predictable in the future, has given us better visibility, helps us run our factories for better cost and so on. So that's great. Operator: The next question will come from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: I had a question, I just want to put it in 2 parts. One is how much was your HAMR as a percentage of your exabyte shipment last year? How much do you expect it to be this year? The genesis of the question is I'm just trying to figure out, obviously, a lot of questions on the very strong gross margins. If there's a way to put it in 3 buckets, like how much of the gross margin upside is driven by pricing? How much is driven by product mix? How much is driven by cost reduction by offshoring manufacturing? William Mosley: Yes, there's really no offshoring manufacturing or anything like that involved. Our manufacturing operations around the world are doing quite well and quite full. So that's helping from a cost perspective. But really no change in any manufacturing strategy to speak of. Relative -- I would say a lot of what -- the benefits we're seeing is mix and mix not just because we're actually transitioning into higher and more -- better products over time, but also because the demand for those products is quite high. You think about it, if you're building a data center with a 3 terabyte per platter versus the 4-terabyte per platter, you're going to be running that data center for a long time, you want the higher capacity point. And to the extent that we can do that as predictably as possible, that mix is what's driving the stability out in the market for us and helping us plan. Gianluca Romano: Yes, Krish, we don't give specific details on the impact of pricing, mix and cost. But they are somehow interrelated. I would say the change in mix is helping with the cost reduction and the supply-demand situation is, of course, supporting our pricing strategy. So they are all very good contributor to the increase in gross margin. And as we said before, this is going to continue through the calendar year. Sreekrishnan Sankarnarayanan: How much of HAMR as a percentage of the mix? Gianluca Romano: Well, Dave gave an indication of the unit that we shipped in the last quarter. So I think you can fairly easily calculate that. Operator: The next question will come from Steven Fox with Fox Advisors, LLC. Steven Fox: I guess I was just wondering on this -- on your mix question, looking at your average capacity per drive being up 22%. Like how much of that -- like obviously, the supply demand environment has tightened over the last year. And in reaction to that, are you taking steps to accelerate that mix up as the customers pushed you that way? Like I'm just curious how much you can control going forward now that we're here on even tighter supply to sort of help your customers in terms of absolute petabytes you're delivering. William Mosley: Thanks, Steve. So yes, we are -- the lead time out of the wafer fab is quite long. So we have to be predictable for our customers, say, 6 months, 9 months later and so on and so forth. That's one of the reasons why we talk kind of a year at a time inside of these LTAs. So we start wafers based on what we know we're going to be able to deliver, so that we're as predictable as we can be for our customers. As were -- if we're deploying manufacturing engineered resources we're trying to get through these product transitions. That's what gets us the most exabytes after that. And so going, mixing up is kind of our goal. So if that helps clarify what our strategy is. Steven Fox: It does, Dave. I'm just wondering like when you had your analyst meeting, you said that sort of a pretty well-defined time line for node transitions. Maybe just can you give yourself a report card on how you're doing on some of those time lines if we look out now versus the next year or longer term? William Mosley: Yes. I think that's good. We're on the plan or slightly ahead. And again, most of that's under our control. We execute well. We've been executing well. Some of it's under our customers' control as well. And the behavioral changes we've seen in the customer I made reference to earlier, they're really pulling hard because they need more exabytes. And so that helps get the calls done quickly. It helps a road map alignment and then supply -- specific supply alignment, which helps our factories. Operator: So next question will come from Aaron Rakers with Wells Fargo. Aaron Rakers: Congrats on the results. I want to go back to gross margin. I know you talked a lot about the pricing dynamics and the visibility you have. But the thing that stands out to me is you've been executing on like a cost per terabyte of like a mid-teens year-on-year decline in these last several quarters. As we roll out the 4 terabyte per platter Mozaic drive, how do I think about that cost down curve? Is it mid-single digits? Is it -- can you sustain at double digit and would not -- wouldn't we expect the 4 terabyte per platter HAMR drive to actually maybe accelerate the cost down, given the ability to bring that into lower end other outside of the nearline platforms. So I'm just curious how you think about that cost down curve. Gianluca Romano: Yes, we are very positive on the 4 terabyte per disk in terms of impact on the cost, as we discussed before. The unit costs tend to be fairly similar. But of course, we are adding a lot of content per unit. So that will be a good help to reducing the cost and improving profitability. So as you know, we are qualifying 2 major customers on these new products. So the time to finalize the call and their ramp probably through the end of the calendar year and for sure, well into -- the impact will be strong, I think, in the next calendar year, too. William Mosley: And we plan on making a big transition to 4 terabytes per platter over the coming few years and then getting to the 5 terabytes per platter as well. We do add complexity as we make those transitions. But I'd say the first order, the things that dictate the speed of the ramp are our ability to go work scrap and yield, all through our supply chain and so on, and we're working very hard on that. I like the product. So I think it provides for a bright and stable future for us. We just need to stay focused on it. Operator: The next question will come from Timothy Arcuri with UBS. Timothy Arcuri: I want to ask about LTSAs. I think you said nearline capacity is allocated through 2026. So it sounds like both pricing and exabytes are locked in this year. But for '27, I think you said something that I took that exabyte and pricing is not locked in, but you have some sort of agreement. So I guess I had 2 questions. First of all, is it right to assume that pricing is also locked in for all of '26? And what sort of agreement are you referring to for 2027 if volume and pricing is not locked in next year? Gianluca Romano: Yes. For this calendar year, we said basically, we have PO in place for all the quarters, so volume and pricing is well defined. As Dave said before, if in a quarter, we can produce a little bit more, of course, we will sell those exabytes in the open market at a good profitability. But I would say we have -- the vast, vast majority of the volume is already allocated. Calendar '27, we will start working on that fairly soon. Of course, we have very good indication and agreement on volumes, but we have not -- we have not fixed the price yet. William Mosley: Yes. And Tim, if this helps, so we haven't really started the longest lead time parts, but we will very soon for the start of '27. And we need to start having those discussions with our customers which calls are we going to get through together with -- what exactly is the plan, because a lot of them need predictability as well. So we'll have to build in our factories what -- based upon how hard they want to pull on those new products. Operator: The next question will come from Mehdi Hosseini with Susquehanna Financial Group. Mehdi Hosseini: Just a quick housekeeping item. Gianluca your CapEx has been increasing on a Q-over-Q basis. How should I think about depreciation, especially since it did dip in the December quarter? Any color here would be great looking forward. Gianluca Romano: Yes. No, our CapEx is aligned to our target of 4% to 6% of revenue. We are actually at the bottom of that range. So is not increasing in terms of what we want to achieve and what we said, of course, comparing to a period where we were more into the down cycle in terms of dollars, of course, is higher. We are supporting our HAMR transition and HAMR ramp. So I would say there is nothing different than what we said. William Mosley: Yes, the way I think about it as well, Mehdi is that if you go back 2 years ago, and you use that as a baseline, we were still significantly lower revenue, but also we were challenged on the supply and demand balance. Right now we're in a totally different environment, of course. So we'll probably stay well within the 4% to 6% range. But as the revenue goes up, we'll spend a little bit more and probably the first priority is maintenance tools and the things that we weren't doing a couple of years ago. Mehdi Hosseini: I apologize, I may have confused. I was focusing more on depreciation given these several quarters of increase in CapEx, should I expect a step-up in depreciation looking forward? Gianluca Romano: Depreciation will follow the CapEx. So you have your -- I guess you have your model on the revenue, so you can calculate the 4% to 6% of CapEx. And then depreciation for us is on a 10 years useful life. So you can probably model it that way. William Mosley: It's not like -- some other fabs, it's not necessarily the huge part of the cost drivers. There's a lot of other pieces of the cost that we can go manage them. Operator: The next question will come from Ananda Baruah with Loop Capital. Ananda Baruah: Dave, while we have you, a little bit of a technical one, are you -- what kind of activity are you seeing at sort of the so-called warm tier of storage. It's a question that comes up a bunch in our conversations. We've heard that it's obviously growing, it's growing both hard drive and flash storage is participating nicely, but would love to get your input on it. Because I think there's still -- first of all, we love to know if what we're hearing is accurate. But secondarily, I think there's a lot of people that are assuming that that's really like it's becoming a NAND tier. Largely a NAND tier in the GenAI world. And anyway, just love to get any context there that you have? William Mosley: Yes. I think you have to be a little bit careful, Ananda. So there are applications that are very memory dependent that are attached to compute and some of these applications are neat, I like them. When you get -- when you start talking about big data storage, if you will, in data centers, the tiering architecture is fairly well set and probably won't change based on economics and also architectures that are well known. People know how to play. So if the concept is that drives aren't working hard, they're in the background, just storing data. That's not the way -- a good way to think about it. That's not the way hard drives are being used right now. They're working 24/7. A lot of times, they're optimized for performance themselves, largely streaming performance not random small block workloads. That's more of a memory thing. And so if you had an application that's random small block, it's probably memory. If you have big data, it's probably a little bit of memory on the front end and a lot of hard drive on the back end. And we think that there are applications across the entire spectrum, of course, but we think that in the future, when we start to talk about the concepts in their enormity about checkpoints and physical AI and video and things like that. It's large, large data so that the architectural tier that stores the data will probably remain constant for the next decade. Ananda Baruah: That's super helpful. I'll keep it there. Operator: Next question will come from Vijay Rakesh with Mizuho. Vijay Rakesh: Just a quick question on HAMR. I know you're ramping it faster in the March quarter. Should that drive a much better gross margin profile, I guess? And any thoughts on how we should see the margins improve, I guess, as HAMR starts to ramp? And I have a follow-up. Gianluca Romano: Vijay, if you are referring to the March quarter, of course, ramp of HAMR is included in our guidance. And our guidance is indicating a fairly good improvement in gross margin again. And then I said for the rest of the calendar year, we expect both revenue and profitability to improve sequentially. And of course, part of that is coming from additional HAMR products. William Mosley: We think demand will be strong for the 4-terabyte per platter, of course. And so that's one of the reasons why we're making that a priority in the transition that we go through this calendar year and into next. Vijay Rakesh: Got it. Very helpful. And just a quick question also on the OpEx side. Very nice, obviously OpEx same time last year, somewhere in the 14% range, now is down to 10%. I know Gianluca, you said probably that's a long-term target, but it looks like as Dave mentioned, with the top line ramping up with all the design wins, it looks like OpEx could go down again. Is that fair as a percent of mix? Gianluca Romano: Well, I would say we are getting closer and closer to our fourth target of 10% of revenue for OpEx. We are almost there. We should be there actually in the March quarter. And then, of course, now that we relax our cost control, we will continue to keep our cost control and revenue is supposed to increase so we can probably do it a bit better. William Mosley: Yes. I'm glad you asked that, Vijay, because obviously, a few years ago, the tough times that we went through, we weren't investing in ourselves to the rate that I'd like. And of course, it's with the HAMR transition in front of us, that was a lot of work. Now that we've kind of cleared that HAMR transition, we can see the future fairly well. It's the -- clouds are parting, if you will. And we can see aerial density opportunities in front of us, and we will take that the money such as it is, even staying within our same model, and we'll take that money and reinvest in ourselves so that we can continue to drive the areal density. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. William Mosley: Thank you, Nick, and thanks to everyone for joining us on the call. The Seagate team is executing very well, delivering on our financial targets and advancing areal density road maps and successfully qualifying customers on our HAMR-based Mozaic products to address the sustained and growing demand for data storage. As data creation accelerates, driven by both traditional workloads and these emerging AI applications, Seagate's transformational technology positions us well to capture the significant demand opportunities ahead. I'd like to thank our employees for their dedication and innovation and our customers and suppliers for their trust and collaboration, and our shareholders as well for their continued support. Together, we're driving Seagate's ongoing success. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to the Alexandria Real Estate Equities Fourth Quarter and Year-end 2025 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I would like to turn the floor over to Paula Schwartz with Investor Relations. Ma'am, please go ahead. Paula Schwartz: Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel. Joel Marcus: Thank you, Paula, and welcome, everybody, to our Fourth Quarter and Year-end 2025 Conference Call. With me today are Peter, Marc and Hallie. And I want to wish everybody a happy New Year. And remember, most importantly, health is wealth. I want to thank our family team for their exceptional efforts during 2025 and particularly a very busy fourth quarter. In 2025, we witnessed the fifth year of a life science bear market. Our 2025 time line clearly evidences that no one could have predicted with the February 2025 nomination of HHS Secretary, the intense cascade of events from February 2025 on to the numerous key departures toward year-end at the FDA. And in fact, sadly, measles and polio may be back to some extent. We have been navigating a fast-changing life science industry landscape throughout 2025, which has been front and center for our team. Our Investor Day path forward is our North Star for 2026. As the industry begins to adapt to the fast-changing landscape, 2026 is all about timely execution of our plan, heavily focused on dispositions and maintaining a strong and flexible balance sheet, driving occupancy with intense leasing focus on vacant space, rollover space and redevelopment and development space and meeting the marketplace. We also plan to continue to significantly reduce CapEx. And with that, let me turn it over to Marc to highlight 4Q and 2025 briefly, and then we'll turn it over to everybody for questions. Since we had Investor Day less than 60 days ago and we just reported yesterday, we'll try to make our comments brief. So Marc? Marc Binda: Thank you, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon, everyone. First, a congratulations to the entire Alexandria team for the outstanding operational execution during the fourth quarter, including the completion of $1.5 billion of dispositions spread across 26 transactions and 1.2 million square feet of total leasing volume for the fourth quarter, which was the highest quarter in the last year. We are focused on taking all the 7 steps to our path forward that we outlined at our recent Investor Day and are also included on Page 4 of the press release. Our team continues to navigate a challenging macro industry and regulatory environment. Please refer to our earnings release for our EPS results. FFO per share diluted as adjusted was $2.16 for 4Q '25 and $9.01 for the year, which represents the midpoint of our prior guidance provided on our last quarterly call. Leasing volume for the quarter of 1.2 million square feet was up 14% over the prior 4 quarter average and up 10% over the prior 8-quarter average. An important takeaway for the quarter is that the leasing of vacant space completed during the fourth quarter of 393,000 rentable square feet was almost double the quarterly average over the last 5 quarters. Free rent and rental rate changes on renewed and released space were under pressure this quarter, which reflects the market realities and included 2 large deals, 1 in Canada and 1 in our Sorrento Mesa submarket. Lease terms for the quarter of just over 7.5 years were consistent with the prior 3-year average of right around 8 years. Occupancy at the end of 2025 was 90.9%, which was up 30 basis points from the prior quarter and was up 10 basis points over the midpoint of our prior guidance. In addition, we've signed leases of almost 900,000 rentable square feet or about 2.5% of the portfolio that are expected to commence in the third quarter of 2026 on average upon completion of construction and will generate incremental annual rental revenue of $52 million. It's important to emphasize that our asset quality, location, best-in-class operations, sponsorship and brand trust continue to be a major distinguishing factor for tenants, as our Megacampuses, which represent about 78% of our annual rental revenue, outperformed the total market occupancy in our largest 3 markets by 19% for occupancy. We reiterated our year-end 2026 occupancy range of 87.7% to 89.3% that was provided at our Investor Day this past December. A key takeaway on our outlook for 2026 is that we expect occupancy to dip in the first quarter of 2026, and we expect occupancy growth in the second half of 2026. The projected decline in occupancy for the first quarter is primarily driven by the 1.2 million square feet of key lease expirations with expected downtime that we highlighted on Page 22 of our supplemental package, consistent with our outlook from Investor Day. We're making good progress across these spaces with 13% that's either lease negotiating, and we've identified prospects or in early negotiations on another approximately 40% of these spaces. Same-property net operating income was down 6% and 1.7% on a cash basis for the fourth quarter and down 3.5% and up 0.9% on a cash basis for 2025. The results for the year were at or better than the guidance midpoint we provided on our last earnings call. The full year 2025 results were primarily driven by a decline in occupancy which occurred in early 2025, and the cash results had a boost from the burn off of free rent in the first half of 2025. We reiterated our outlook for same-property performance for 2026, up/down 8.5% at the midpoint of our guidance range, which is expected to be driven by lower occupancy. And despite the anticipated decline in occupancy in 1Q '26 I previously mentioned, we continue to benefit from a very high-quality tenant base, with 53% of our annual rental revenue coming from investment-grade or publicly traded large cap tenants, long remaining lease terms of 7.5 years, average rent steps approaching 3% on 97% of our leases and strong adjusted EBITDA margins of 70% for the fourth quarter. We expect same-property NOI performance to be weaker in the first half 2026, driven by lower occupancy and stronger performance in the back half of 2026. Our guidance assumes the delivery of the nearly 900,000 square feet of signed leases commencing in the third quarter of 2026 on average, as well as about a 2% to 3% assumed benefit from a range of assets that could be sold or designated as held for sale in the second half of 2026. We highlighted several considerations for the first quarter of 2026 on Page 5 of our supplemental package, including the following 3 items that we expect to impact same property performance. First, the 1.2 million square feet of key lease expirations with expected downtime, of which around 60% expired in mid-January on average. Second, we terminated 1 lease for nearly 171,000 rentable square feet in South San Francisco in 4Q '25 that had annual rental revenue of $11.4 million. And we are announcing that we re-leased 100% of the space to a new tenant, but the new lease isn't expected to commence until beginning in the second half of 2026. So there will be some additional temporary vacancy in the first half of 2026. And third, our guidance assumes a reduction of rent of approximately $6 million per quarter, starting in the first quarter of 2026 related to potential tenant wind-downs. During 2025, we achieved tremendous general and administrative cost savings of $51.3 million or 30% compared to the prior year. And our G&A cost as a percentage of NOI was about half the average for other S&P 500 REITs at 5.6% for 2025. As we've guided in the past, we expect those annual savings in 2026, relative to 2024, to be cut roughly in half, given the temporary nature of some of the 2025 savings. We reiterated our guidance for capitalized interest for 2026 of $250 million, down 24% from 2025. With projects under construction and expected to generate significant NOI over the next few years and other earlier-stage projects undergoing important entitlement design and site work necessary to be ready for future ground-up development, we are required to capitalize a portion of our gross interest costs. Part of our strategic path forward includes goals to reduce the size of our pipeline and construction spending needs and to substantially complete our large-scale noncore disposition plan in 2026. During December 2025, we sold or designated for held-for-sale projects with more than $1 billion of basis that had previously been subject to interest capitalization. As a result, we expect a decline in capitalized interest headed into the first quarter of 2026, and we have a number of projects under construction where we are evaluating the business strategy and a number of future pipeline projects undergoing preconstruction activities with milestones in May 2026 on average. To the extent that we decide in the future to either pause or sell any of those projects, capitalization of interest and other costs would cease. While those ultimate decisions have not yet been made, we would like our disposition program for 2026 to include a significant component of land, which will also help us achieve 1 of our strategic objectives to significantly reduce the size of our land bank. During the fourth quarter, realized gains from our venture investments was $21 million, down from the approximate $32 million quarterly average for the preceding 3 quarters. For 2026, we reiterated our guidance range for realized investment gains of $60 million to $90 million or approximately $19 million per quarter at the midpoint. We continue to have 1 of the strongest balance sheets amongst all publicly traded U.S. REITs. Our corporate credit ratings continue to rank in the top 15% of all publicly traded U.S. REITs. We have tremendous liquidity of $5.3 billion, the longest average remaining debt maturity among all S&P 500 REITs at just over 12 years and modest leverage of 5.7x for net debt to adjusted EBITDA for the fourth quarter annualized. We reiterated our guidance range for 4Q '26 net debt to annualized adjusted EBITDA of 5.6x to 6.2x. While we remain on track to achieve our leverage goals for year-end 2026 leverage, we expect leverage in the first quarter of 2026 measured on a quarterly annualized basis to temporarily increase by 1 to 1.5x higher, driven by a reduction in quarterly adjusted EBITDA. Please refer to Page 5 of our supplemental package for detailed assumptions specific to the first quarter. We expect 1Q '26 leverage to significantly improve over the balance of 2026 as we make progress on our dispositions and sales of partial interest. As we announced at our Investor Day, we sold 1 of our campuses in South San Francisco. We expect to sell 2 redevelopment projects in 2026, and we pivoted to office on 1 project in the Fenway. And these changes reduced our future funding needs by more than $300 million. In addition, we are evaluating the go-forward business strategy for 4 additional projects that are currently under construction and have significant remaining capital needs. Again, a huge congratulations to the Alexandria team for the tremendous execution during the fourth quarter with $1.5 billion of dispositions that completed across 26 different transactions, which allowed us to achieve our leverage target of 5.7x for the fourth quarter. Over the course of 2025, we also made significant progress in reducing our investment in nonincome-producing assets as a percentage of gross assets from 20% at the end of 2024 to 17% at the end of 2025, and we expect that ratio to continue to decline by the end of 2026. In connection with our disposition program, we recognized our share of impairments of $1.45 billion in the fourth quarter. Five important items to highlight here. First, approximately 90% of that number was previously announced with our 8-K on December 3, and the remaining 10% was primarily related to 1 land parcel located in Greater Boston, which was designated as held for sale later in December. Second, 50% to 60% of our share of the real estate impairments recognized in the fourth quarter was related to land, which is notable given the oversupply in numerous submarkets. Third, the 2 largest impairments comprised 37% of the total and included our future development project at 88 Bluxome Street in SoMa located in San Francisco and our Gateway campus in South San Francisco, which was owned through a consolidated joint venture. Fourth, we sold our interest in the Gateway campus in South San Francisco in December. Ultimately, we decided to exit this investment given the challenging supply and demand dynamics in South San Francisco and the very significant capital required over time to redevelop the campus. And fifth, we expect to complete the sale of the 88 Bluxome Street, our only asset located in SoMa over the next few quarters. We originally acquired this site in 2017 with the intent to expand the Mission Bay cluster. However, Pinterest terminated their lease with us in 2020 and paid us an $89.5 million fee. And we ultimately decided the sale proceeds from this project would be better recycled into our Megacampus platform and to address our current funding needs We continue to focus on our disciplined strategy to recycle capital from dispositions and partial interest sales to support our funding needs with a focus on the substantial completion of the large-scale non-core asset program in 2026. And we expect non-core assets and land to comprise around 65% to 75% of the $2.9 billion midpoint of our guidance for 2026 dispositions and sales of partial interest. We expect most of our dispositions and partial interest sales to close in the second, third and fourth quarters with a weighted-average closing date in the third quarter. In early December, our Board also authorized a reload and extension of the common stock repurchase program of up to $500 million. And our guidance does not assume any common stock repurchase in 2026 based upon current market conditions. And lastly, we reaffirmed our guidance for 2026 FFO per share diluted as adjusted, as well as the key components of guidance. Now I'll turn it back to Joel. Joel Marcus: So can we go to questions, operator, please? Operator: [Operator Instructions] Our first question today comes from Farrell Granath from Bank of America. Farrell Granath: This is Farrell Granath. I want to start off, I know that we spoke about a month ago, but just given the sustained and slightly up quarter-over-quarter leasing that you've seen and recent commentary around better VC funding that we've seen in the broader biotech market, has that changed your outlook at all and expectations into '26? Or are you at least receiving greater inbounds in terms of sentiment as people are potentially making more decisions? Joel Marcus: Okay. So Farrell, is your question aimed broadly at leasing? Or is it aimed at venture-backed private? So I'm not sure how broad or narrow your question is. Farrell Granath: I want to just connect the dots between what we've seen as positive headlines for broader VC funding and how that may be connecting to leasing and sentiment towards leasing. Joel Marcus: Okay, because that's one segment of a very broadened market. So Hallie, maybe take her through a little bit of venture and the private side, but then maybe overall. Hallie Kuhn: Yes. Farrell, this is Hallie. As Joel mentioned, when we think about VC dollars going into this industry, it's very much tied to a specific segment, our private biotechnology segment. And we have seen, over the course of this year, sustained funding and numbers are similar, if not slightly higher to the last couple of years. This is money that is going into new companies. On the other hand, venture funds have raised the lowest amount of dollars in the last decade. So this is LPs investing in these funds. And so we have no kind of interesting dynamic going on here where it's certainly not back to a healthy robust environment that we would fully like to see. And what we see that manifesting in is that VCs and these companies continue to be very conservative. So we certainly are seeing demand. We have -- Peter can talk to tours increasing. There are some great companies out there. I do think by and large, decision-making is still taking longer and companies are very cautious in terms of how they think about taking on new space or expanding. So while we're cautiously optimistic, we are monitoring it closely because we don't necessarily think that we're back to a fully robust environment that we may have been in the past. More broadly speaking on headlines, the other big one is the XBI has certainly performed incredibly well over the past year, outperformed broader indices. As mentioned in the Investor Day, the majority of those companies are commercial or near commercial companies, which don't typically drive lab space needs. So we're not seeing the immediate translation of that activity to leasing. So altogether, while we do feel that we're moving in the right direction in terms of positive sentiment, we still have a lot more work to do. There's still a lot of volatility on the regulatory and pricing side of things. And so we just continue to monitor. And for the demand that is out in the market, meet the market and really capture our outsized share of leasing. Joel Marcus: Yes. Let me put 1 footnote on that, Farrell. If you look at the pie chart of our leasing for the year and the fourth quarter, you'll see in the fourth quarter, a notable, a very small amount of leasing for public biotech. That's something that we're hoping turns around in 2026 because that's a critical mainstay of this industry. And much of that has to do with the lack of availability of secondary offerings except on data or the lack of a real, robust open IPO market. Okay? Farrell Granath: And I also wanted to ask about your strategy of retaining the Fenway office property and looking to lease as an office. Is -- was that a one-off transaction that you're looking to maintain? Or is that something that you could see doing across other properties as well? Joel Marcus: Well, I'll have Peter comment on that. But you have to remember that the Fenway is made up of multiple buildings. The one we're speaking about is, in fact, an office building and in fact, has multiple long-term leases with some of the best institutions in LMA and the Fenway. And so we sometimes you think about would you create lab space or other things out of vacant space or stick with what makes sense and the demand there we think is -- will, on a go-forward basis, be pretty good office-wise. But Peter, do you want to comment on that, I think, 401? Peter M. Moglia: Yes. I mean, I would agree exactly with what you just said, we have seen an increase in demand for office space. And given the availability we have elsewhere in the Fenway for lab, it made more sense to just go ahead and follow a business plan to lease it as office and not create any more lab space in the near future. Joel Marcus: Yes. So that's more building and submarket specific as opposed to something much broader. Operator: And our next question comes from Ronald Kamdem from Morgan Stanley. Ronald Kamdem: Two quick ones. Just on -- starting with the dispositions. I saw some of the cap rates on the stabilized assets in the supplemental, which was helpful. But as you're sort of thinking about that $2.9 billion, I appreciate a lot of it is going to be land, but any sort of commentary on cap rate trends, sort of the interest, price discovery, how that's been going relative to your expectations? Joel Marcus: Yes. Peter? Peter M. Moglia: Yes. I mean there's still going to be a considerable amount of non-core assets that we're selling, and you've seen cap rates for those in the mid 6s, all the way up to the mid-9s. A lot has to do with what markets they're in, how much leasing or what the WALT is, the lower the WALT, the higher the cap rate. We do plan on a couple of executions during the year that would involve more core assets. So you should be able to get more discovery on what our NAV could be for what we're holding on to. But I'm not going to speculate on those cap rates yet. We have talked in the past and mentioned at Investor Day, and we do think our top end properties should have a 5 handle. And 1 or 2 of those types of properties could be involved in this execution, and we'll report on that when it happens. Ronald Kamdem: Great. Just my follow-up, I had sort of a similar question on the leasing chart, but maybe asking it a different way. Can you just comment on the leasing pipeline in terms of how it's rebuild after the quarter? And if any sort of notable groups are in the pipeline or not in the pipeline? That would be helpful. Joel Marcus: Yes. That's kind of a secret sauce. I'm not sure I want to say much. But Peter, do you have any overall comments? Peter M. Moglia: Yes. Look -- in practically all of our markets, the smaller space is under 50,000 square feet are still what is moving most of the tours or in that range. There is, as Joel mentioned and Hallie mentioned, there is a bit of a dearth of biotech, public biotech type of companies, which are usually the middle of the barbell, 50,000 to 150,000 square feet. We're not seeing a lot of that, but we do have, in certain markets, some good activity in the 100,000 square foot plus range. So we're pleased to see that. But as Joel mentioned, we really need to see the public biotech sector contribute to the leasing pipeline in order for it to really start to turn around. There is some good green shoots, we're very cautiously optimistic. But 1 example is that the Greater Boston region did see an 11% increase in tenants in the market, and that was really the first time we've seen an increase in a number of quarters. So we're happy to see that. And we'll keep you informed as we go. Operator: Our next question comes from John Kim from BMO Capital Markets. John Kim: I was wondering if you still felt comfortable with the previous guidance you gave for the fourth quarter '26 FFO of $1.40 to $1.60 stated at your Investor Day? And whether or not you believe this would represent trough earnings? I think in the presentation, you mentioned that earnings will be flattening out in the second half of the year. But there are some dispositions that looks like that's falling into the fourth quarter. Joel Marcus: Yes. So Marc? Marc Binda: Yes. John, yes, we're still tracking within that range that we gave for the fourth quarter of '26, which I think was $1.40 to $1.60. And that does represent kind of the trough for the year, at least for 2026. But as far as '27, I know you don't want to give guidance for that, but... Joel Marcus: Yes, we haven't and can't give guidance at this point for '27. But that was the point of saying that's a good run rate to think about as a base. John Kim: And then can you comment on dispositions you've completed year-to-date and what you planned for the year in terms of the type of buyers you're talking to as far as owner/users, other REITs, developers looking to convert some of that space potentially or other buyers? Joel Marcus: Yes. So maybe, Marc, do you want to just talk about the percentages of dispositions through the year? And then maybe ask Peter to comment on the buyer pool. Marc Binda: Yes, sure. Yes, the mix of dispositions was pretty consistent with what we kind of set out at Investor Day. So about 20% stabilized, 21% land and then 59% non-stabilized. So I mean, the biggest -- obviously, the biggest pot or portion was the non-stabilized properties, which is going to attract a certain type of buyer. Maybe I'll hand it over to Peter to go over it [indiscernible]. Joel Marcus: Yes. Before you do, talk about timing, quarter-by-quarter because I think that's... Peter M. Moglia: Oh, sure. So as we look forward to 2026, we've got just under $200 million of stuff that were under contract or under PSA negotiations. We've got about $580 million of assets on balance sheet today that have been designated as held for sale. And so I think that the first quarter closings will be pretty small. We expect the bulk of the closings to occur over 2Q, 3Q, 4Q. And again, I think if you -- on a weighted-average basis is probably closer to third quarter as a kind of a blended average for the closings for 2026. Joel Marcus: Yes, Peter. Buyer? Peter M. Moglia: Yes. So on our guidance page, we did indicate that we've got about $180 million under contract or in negotiations that we expect to close in the near term. That's essentially 3 assets. One is a portfolio that is being purchased by what we would classify as an investment fund. Investment fund buyers have been our fourth largest over the last couple of years, taking down about 12% to 15% of our inventory. That's the -- an investment fund as someone is buying it to hold long term and is usually private capital. The other 2 assets are residential conversions. They're land or assets that are at the end of their useful life that will be demolished and turned into a residential type of use. And that was another one of our largest segments of buyers last year and we anticipate that will continue this year. More than 55% of our available land is either zoned or could have an allowable residential use and is in urban environments that could use the housing. So we expect that out of the $2.9 billion midpoint this year, although as Marc said, there'll be a considerable amount of land, 25% to 35%, and we do expect the majority of that to go to residential developers. But there has not been a problem getting assets sold. There's a number of buyers. The biggest issue is just the yields that these buyers are looking for and that has created some impairments, and -- but the good news is when we need to get things sold, we do. And we fully are confident we'll do the same thing this year, even though it's a larger amount that we have to execute on. Operator: And our next question comes from Vikram Malhotra from Mizuho. Vikram Malhotra: I just wanted to clarify kind of the earnings, I guess, trajectory through the year. With the vacancy or the move-outs you mentioned, some of the fees, et cetera, onetime items in 4Q '25, I'm just wondering sort of the cadence that you showed at Investor Day trending down to that $1.40 to $1.60, is that cadence still intact? Marc Binda: Yes, Vikram. Yes, we still expect the fourth quarter to kind of be the low point in earnings for the year, for 2026. We did -- I think there was some question around where the first quarter goes and how steep of a decline that is coming off the fourth quarter. And so we tried to give a lot of color about the components that go in there, but the general trajectory that fourth quarter, things will even out in the back half of the year. And the fourth quarter being in that $1.40 to $1.60 range still holds. Vikram Malhotra: Okay. Great. And then I guess maybe Joel or Hallie. If -- from a broader perspective, I understand like it takes a while for all the changes on the macro front to translate to leasing. But I don't know if you've had any like recent conversations with FDA officials or any larger VCs in terms of the shifts that you may be hearing as a precursor to new company formation and hopefully then leaving down the pike. So maybe if you can update us on any thoughts around the FDA and like early-stage Series A, B type funding? Joel Marcus: Yes. So maybe let me make a couple of comments and ask Hallie to fill in the blanks. So I think it's fair to say that the FDA Commissioner has been active. He's out a lot. He's certainly trying to hit in the right direction and do the right things, given speed of approvals, looking at trying to get products into the clinic much quicker than otherwise. Remember, we talked about it at Investor Day, the things that the market really wants to see is a substantial compression of the 10- to 12-year billion-plus cycle of bringing up a compound from discovery to the market. And he's, I think, very much focused on that. Now have defections, DOGE firings, resignations and all that stuff at the FDA, how much does that practically impede the ability of the agency to do what they want to do, which I think they've got their mindset in the right place I think is a big question for this year. Last year, they did end up approvals at 46, which was a very, very respectable number, but a lot of that was in the pipeline. This year is going to be a much more telling result. But Hallie, other thoughts, comments? Hallie Kuhn: Sure. So maybe Vikram to take a step back on this question as it continues to come up. On Page 21 of the sup, we break out our leasing volume by business type, both for the fourth quarter and for the full year '25. And if you look at private biotechnology, in the last quarter, it made up about 1/5 of all leasing volume. So to be clear, we still continue to see demand from this segment. Whether that's going to pick up and how long that takes, I wish we could give you a specific time frame. These things take a while, right? And I think generally, we need a lot more confidence in terms of the broader landscape, being able to return capital to LPs, the IPO window opening up, which is a really important source of capital for private companies. But where we've really seen the drop off, as Joel mentioned, is in that public biotechnology cohort. So in terms of overall impact to our leasing going forward, we think that segment in particular is critical. And we are seeing some demand out there from some really good companies. They still are tending to be more capital conservative, more commercial, near commercial. And without that next bolus of new companies that are IPO-ing that tend to be earlier stage, they still seem to be on the back burner right now. At JPMorgan, there was a lot of, I would say, positive sentiment around the potential for some really strong companies to go public and raise capital. We haven't seen that yet. But that is really top of mind as we think about the next, I would say, 12 to 18 months. Vikram Malhotra: Okay. Great. And then can I just clarify? Like, the new leasing was really good this quarter and hopefully, the pipeline supports sort of that continuation. But where are we today in terms of like incentive packages, TIs, free rents to achieve that leasing? And I asked just because there have been a couple of leases in South San Francisco where we've heard like very big TI numbers. So I'm just wondering if you can give us a bit more granular color on the TI and free rents? Joel Marcus: Yes, Peter? Peter M. Moglia: Yes. I mean, tenant improvements haven't changed. They're still elevated for anything that's from shell. It's got to really be -- it's either you get an allowance to build the whole thing out or you have to spec build it. So on renewals and re-leasing, the TIs are also stable. The fact that the space is already built out and the fact that people tend not to change much in the generic labs that we build, that's an advantage to us. So really, where we continue to see weakening in fundamentals is in the free rent category, and it's continued to elevate. We did have a couple of leases this quarter that really had significant amount of free rent in order to win the deal. And Joel mentioned in the very -- in his comments that we're meeting the market. It's in our best interest to meet the market, but keep rental rates as stable as possible, because as free rent burns off, then you get the income that you can build upon and hopefully, the next generation of leasing, you can increase it from there. When you start taking rents down, then you're starting to destruct value. So Alexandria and others that are competing in the market, free rent is the tool that we're using. Tenants really appreciate it because obviously, it's good for their cash flow. And as long as we continue to have availability in the mid-20s to low 30s in the major markets, free rent is going to be the tool that people need to use in order to execute on deals. But outside of that, we are pretty happy to see that rental rates are stable, in certain cases, growing. And we just got to get the net effect is to improve, but that will take a decrease in supply over time in order to start seeing that. Operator: Our next question comes from Jim Kammert from Evercore. James Kammert: Just trying to triangulate on Peter and Hallie's comments regarding the public biotech. Is there any concern? I mean, you said they're both critical to sort of kick starting demand again. But is it possible that some of these public biotechs, if they raise more capital, already have sufficient space? Or do you really think there's expansion space need there? Joel Marcus: Well, yes, let me maybe give you an overarching comment, Jim. I think number one, historically, public biotech has been the mainstay of -- I mean, the broader industry is obviously institutional pharma product tools, services, all that. But when you get to biotech itself, the public market has been the mainstay of this industry, going back 50 years this year to Genentech. And one would assume that it would continue to be the mainstay and it's made up of really, 3 things. One, you get a good start at the venture level. You can get public through an IPO window that's reasonable, and you can continue to finance the company even if you don't have immediately actionable data. That's how it's worked over the last several decades, and that's what we're hoping to see a return to. Now in any given case, it's hard to say. Some will need more space, some will need less space. Some will be able to keep the same. But I don't know, Hallie, thoughts there? Hallie Kuhn: Yes, Jim, I think that is in a way what we have been seeing. If you look at the XBI this past year and follow-on financings, which on an absolute numbers basis have been pretty strong, most of those have been for particularly commercial stage companies, which is great in terms of sentiment for the industry, but these are by and large, not companies that are driving a lot of R&D expansion. So to Joel's point, we need to see that earlier funnel fill up. We need to see the venture stage companies go public, gain more liquidity, expand their investor base. Those are more likely at that stage to drive additional R&D needs, which is what we've seen historically. I think Peter did mention we have seen some requirements hit the market. Things take a while, but not to say that it's a complete desert, but it is further and fewer between than it has been in years past. James Kammert: That's very great color. And then 1 quick clarification. Peter, you also, I think, said that it's possible you might see a 5 handle on some of the core asset capital recycling in ' 26. Would that be potentially -- I mean, if it happens, on a JV? Or would that also be for an outright sale? I'm just trying to think about NAV implication sale versus JV. Peter M. Moglia: Yes, very likely a JV that would happen. We are not planning on selling any core assets outright unless there's a special situation. Operator: Our next question comes from [ Ray Zhang ] from JPMorgan. Unknown Analyst: My first 1 is on the capital allocation side, it seems like you guys did above midpoint of the guidance on dispo this year. And you guys -- I think Marc mentioned, buyback is still not on the table at this point. But with the excess cash, is the thinking that the priority is on the debt side? Or how should we think about that? And when would buyback be on the table with the excess cash? Joel Marcus: Yes. So Marc? Marc Binda: Yes. Ray, I think in terms of the buyback, we'd like to get farther along on the disposition program, which is going to involve paying down debt to keep the balance sheet in check before we consider buybacks. Now I say that given the current market conditions and -- will remain flexible. But as we sit here today, that's kind of our current thinking. Unknown Analyst: Got it. And a follow-up question on uses of funding then. You guys disclosed how much you historically spend on the non-real estate investments in the [ K ]. If I'm looking at it correctly, I think between $200 million to $250 million a year. How should we think about that moving forward? Anything -- any help on that front would be appreciated. Marc Binda: Yes, sure. So we really look at the fund kind of net of the inflows and outflows. So I think if you -- if you look at the cash that came in, it was maybe a net outflow of somewhere between $60 million to $70 million for the year. And that's been -- I mean, I think it was a similar number in the prior year. So I think we'd like to see that the fund be as close to neutral as possible so that we're not putting a ton of capital in there, but still continue to be very active in the space. Unknown Analyst: Got it. So the net will -- the expectation is hopefully get to net neutral on that front? Marc Binda: That's right. Or at least a small number. Like I said, it's been $60 million to $70 million in the last couple of years. Operator: And our next question comes from Rich Anderson from Cantor Fitzgerald. Richard Anderson: The elephant in the room is, I guess, stock is up 20% this year. It's great, or 19%. And yet, it still feels like pricing power is quite a ways off still with everything that's going on. Do you have any sense on the people that you're talking to, a different type of investor that's showing interest in the stock? Do you think it's just pure rotation, people sort of profit taking, looking for a bottom in life science? Do you have any sense of what's driving stock performance so far this year? Joel Marcus: Well, I think it's all of the above. And I think it's pretty clear that the slide that we showed at Investor Day, when you looked at stock price versus consensus NAV certainly tells the story in many respects. I think if one believes in this industry, 50 years after Genentech was founded this year back in 1976. Again, we've only addressed 10% of diseases, 90% are left. And if the public is willing to pay for therapies and addressable cures to the extent we can have that, that's -- one has to believe the industry has a promising future. We are making some, we're slipping back. As I said, when you look at some of the vaccine policy stuff, which is a little distressing to a lot of people. But I think if you set that kind of mentality aside and you look at what the FDA is trying to do, I think they're trying to do exactly the right thing to compress the time to go from discovery into the clinic, through the clinic and out of the clinic into the commercial side and assuming the policymakers and executive and legislative branches don't get too crazy to pay a fair return on these innovative therapies. I mean, just look at anybody who's been the beneficiary of any real therapy that saves somebody's life and made that more an ongoing chronic condition as opposed to life threatening, if you will. I think that's where the great promise is here, Rich. And -- so I think that when you look at our locations, quality of assets, quality of sponsorship, I mean it's not surprising that the sell-off after the third quarter was, I think, pretty radical. Richard Anderson: And -- but those are all good color, but do you think you're attracting a different investor? I think you're attracting a non-REIT investor, a biotech investor, a generalist investor to the name? Joel Marcus: I think the nature of investors change over time. I mean, think about when we went public, there are a lot of long-term investors today. There's very few long-term investors, a lot of ETF investors. But there's a large cohort of value-driven investors that don't look at quarterly day-to-day, monthly, year-to-year earnings, they look at quality of assets generating quality of cash flows. Obviously, people interested in the industry. So I think it's a whole bunch of sets of different interests that have come to bear because the sell-off just was, I think, foolishness. Richard Anderson: Thought Hallie was going to jump in there, but maybe I misheard that. So okay. Hallie Kuhn: No problem. Keep going. Joel covered it really well. Richard Anderson: Okay. Perfect. Okay. Second question for me is, let's say, your development exposure as a percentage just to use a simple way of looking at as a percentage of total assets goes from 20%-ish to 15% this year. I'm assuming that sort of a step in the process. And I'm curious, Joel, Peter, whoever, what do you think the appropriate run rate is for development exposure, financing risk, need to access capital, all those things? Like what is new Alexandria going to look like from a development exposure point of view, call it, 2, 3 years from now in your mind? Joel Marcus: Yes. I think we kind of articulated that at Investor Day, and there's a slide there that talked about. We think -- we don't know precisely because we're still in a -- I think, a -- how shall I say, a phase of trying to get used to a new reality with the industry. But I think we've hypothesized that we think 10%, somewhere 10-plus percent as a percentage of nonproductive or non-income-producing land as a percentage of overall gross assets is probably where we want to be very different than GFC, where there were no supply issues. The prospects were kind of unlimited because there was no supply constraint issue -- oversupply issue, if you will. So I think this is just a new reality. But yes, we've got great opportunities on many or most of our Megacampuses. And so those will be the instruments of future development and external growth, and we're excited about that. And there isn't just biotech. There is a whole host of other interested parties, both in our current pie charts and pie charts beyond that view those locations as top of mind. Operator: Our next question comes from Seth Bergey from Citi. Nicholas Joseph: It's Nick Joseph here with Seth. I guess, last month at the Investor Day, you talked about a 4- to 5-year recovery for life science broadly. And I recognize it's only been about 2 months, but you've been busy over those 2 months. So has anything changed that time line, either moving it up or delaying it from what you see? Joel Marcus: Yes. So that's actually -- I'm glad you teed this up because Peter, I think, addressed this, but a lot of people came away reporting it a little bit unclear. And he basically said that he thought that the time frame for recovery in our markets where we were very active would be in the 2- to 3-year range and that it may be as much as 4 to 5 in submarkets where we were not particularly involved or active. But Peter, do you want to comment on that? Peter M. Moglia: Yes. Thanks for clarifying that exactly. Like if you look at Greater Boston, for example, there's a significant amount of inventory in an area like Somerville and other tertiary areas and Alewife that -- where we're not at, which -- that's where we think that it's going to take 4 to 5 years for that to resolve. But Cambridge and Watertown, Seaport, where we're heavily invested, those -- that's probably more like 2 to 3 years and maybe even less depending on the trend of -- a lot of people are starting to realize that they should probably go a different path in life science, and we're hoping to continue to see that. So if we -- obviously, demand is going to be needed to take a lot of the lab space, but as a lot of it decides to change -- use that -- even that 4 to 5 estimate would be reduced. But Joel is exactly on point. 4 to 5 years for the areas that are the new markets that really didn't ever need to be lab markets, those will need a long time to resolve because it's not going to get resolved through lab demand, it's going to get resolved by changing use. But the lab markets that we're in that have been functional lab markets for decades, there has been some oversupply, and it will take 2 to 3 years for that to resolve. Operator: Our next question comes from Tayo Okusanya from Deutsche Bank. Omotayo Okusanya: Yes. In terms of the guidance, you talked a little bit about $6 million a quarter revenue headwinds from tenant wind down. Could you talk a little bit just about what's happening with that pool of tenants? Is it just they're not -- they didn't -- the drug trail failed or they ran out of cash? So just kind of thematically, what's happening with that group to just kind of understand what that headwind is? Joel Marcus: Yes. So I'll ask Marc to comment there, but I would say in this environment over the last handful of years, again, we're in the fifth year of a bear market, hopefully turning that around. And when you find that happening, obviously, more companies at the earlier stage or less companies are formed and more companies may be wound down. Some companies merged in the public markets. The bankers, certainly during the heyday of the last decade, led too many companies go public. So there has been a shake out there over the last handful of years of companies that probably shouldn't have gone public. So this is a natural outgrowth of that given where we are today. But Marc, you could comment more specifically. Marc Binda: Yes. The thing I would add is it's -- public and private biotech comprises the majority of it for the reasons that Joel and Hallie have mentioned. And some of it is kind of failure, which in their clinical milestones, which is normal in any market that will happen, but a lot of it is also ability to attract capital and just the kind of shorter runway that investors have given these companies that has caused part of the issue. Omotayo Okusanya: That's helpful. And if I may ask 1 more, the 4 development assets that is still under strategic evaluation. Could you -- does it all basically boil down to just leasing around these assets to determine whether you kind of proceed or you go through strategic alternatives? Joel Marcus: No. I think it's much more granular than that. It's what is the prospect broadly in the submarket, the nature of the asset, any competitive product that we may have with that asset. I mean there's a whole set of variability or analysis that you go through. Leasing is clearly important, but it's not the sole determinant. Operator: Our next question comes from Michael Carroll from RBC Capital Markets. Michael Carroll: Joel or Peter, can you guys provide some color on the 400,000 square feet of leases that were signed at previously vacant space? I mean, I would imagine a good chunk of that relates to the backfill at 259 East Grand Avenue? I guess if that's true, where were the other leases signed within that bucket? Joel Marcus: Yes. Peter, I don't know if you want to give any color there? Peter M. Moglia: I don't have the specific leases, but you are right that a significant amount of leasing was done at East Grand. I will say that one thing that we were asked about and did some investigation on is that a significant amount of that leasing was absolute new tenancy, not tenants relocating from one place to another, but new tenants actually coming in into our portfolio, which we really love to see. Hallie Kuhn: This is Hallie. I do have that list in front of me. And so just to say it was a pretty diverse from a regional perspective, leasing in Cambridge. We have RT, Seattle, some in San Francisco. So in terms of just generally seeing positive momentum backfilling the vacant space across the board. We think that diversity across the region is healthy. Joel Marcus: Yes, and broader base than you might otherwise guess. Michael Carroll: And that's -- is there any common themes on why those tenants were willing to lease space, I guess, in the fourth quarter? Joel Marcus: Yes, because we're great sponsors. Michael Carroll: Do they have like funding agreements where they just got funding? Or is there... Joel Marcus: It is so -- Yes, Mike, it's so episodical in a sense because if a company has a clinical milestone, a data milestone and they need to do something, I mean that's -- I mean, we've seen that with a couple of companies where they've doubled their space just on that 1 event. So it is very episodically-driven. And I'm not sure I'd read anything into -- was the fourth quarter substantially different than the second quarter vis-a-vis leasing trends because it tends to be very case specific. Michael Carroll: Okay. Great. That's helpful. And then just 1 last 1 for me. On 401 Park -- and I think I caught this earlier in the call. I just wanted to confirm to make sure I'm right. It's not necessarily that you have office tenants ready to lease that space. I don't know what type of interest. It's just that you had lab space available in that marketplace that you didn't need, you decide, okay, we have this building that could be lab or could be office, let's kind of diversify our approach and kind of go office with this specific property. Is that the right way to think about it? Or is there like a vibrant office market ready for that asset? Joel Marcus: Yes. I think that is the answer. It's an iconic office building that's been known for a long time. The mainstay is primarily anchor Boston institutions, brand names that you would know that have very, very specific uses there. Some are pure office, some are more clinical like or whatever. But in fundamental, this is part of and kind of adjacent to the LMA along with medical center. So this is a big, big market for those institutions and their office and other adjacent or other kinds of uses other than, say, traditional wet lab space. So it's not so much that it's a hard call. It's -- the call was, given the NIH's move on the 15% limitation on indirect costs in a variety of ways, we saw a big decline of demand and immediate decision-making by a lot of medical institutions, and we've seen that across the country. We did put in the [indiscernible]. There is a court decision that is -- has overruled that. That may start to move institutions in a different direction. But at some point, institutions still need to get space, and both Fenway and the LMA are the best locations for that. So it actually is a pretty easy decision. Operator: And our final question today comes from Mason Guell from Baird. Mason P. Guell: You had previously talked about San Carlos, San Bruno, Seattle and Campus Point as Megacampuses with large shadow pipeline and that you may look to reevaluate some of these in the future. I guess, do you have any updates? Or do you expect to have any updates any of these over the next few quarters? Joel Marcus: Are -- you're talking about the expansion? Mason P. Guell: Yes, [ large ] future shadow pipeline for [indiscernible]. Joel Marcus: Yes. I think those are all under pretty deep study in each market. And probably, at this point, don't want to get into that. But we clearly are looking to reduce our non-income producing assets, as we've said, as a percentage of the gross assets and where we can carve off land that we have for other uses or move into a monetization path at a much faster rate. We're trying to do that. And so I would stay -- say, stay tuned there. Certainly, for the Bay Area ones and Seattle. Operator: And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Joel Marcus for closing remarks. Joel Marcus: Okay. Well, thank you, everybody. We appreciate it and look forward to talking to everybody next quarter. Thank you, and stay safe. Operator: And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Oleg Vornik: Good morning, and welcome to the DroneShield December Quarterly Investor Presentation. I'm Oleg Vornik, the Chief Executive Officer of DroneShield, and with me is Carla Balanco, our Chief Financial Officer; and Angus Bean, our Chief Product Officer. I will aim to speak for about 20 to 30 minutes, and then we'll turn to Q&A, which will be the majority of this session. I encourage everybody on this call to submit your questions as you go as opposed to wait until the end of my presentation, so we can commence the responses to Q&A as soon as we're done. I'm going to skip the basics of DroneShield as I assume most who have dialed into this call [Audio Gap] in revenues as well as about $202 million in cash receipts. This is a truly outstanding result and approximately just under 4x the increase from the top line of last year. But importantly also, we have started really strongly on the 2026. And a reminder that we are going in calendar year-end. So roughly this time last year, we would have begun the year with maybe $5 million or $10 million in locked in cash receipts and revenues while today, we're essentially $100 million that we have carried over from the end of last year, and that will be reflected in the next 1 or 2 quarters, plus any additional business that we're currently working on. The SaaS revenue similarly has continued to climb. So we have gone from just under $3 million in '24 to just under $12 million in '25, and we have already locked in over $18 million for 2026. And again, this we anticipate to continue to climb as we secure more sales with SaaS attached to it, but more on that as we speak about our SaaS strategy. In terms of the profit before or after tax, we're going to be releasing this in about a month from now as part of our annual results, and that is what our finance team are busily working on. The next slide gives roughly a quarter-on-quarter and a year-on-year comparison. So across all top line metrics, the revenues, the customer cash receipts, the SaaS revenue and the operating cash flows, we are seeing significant increases. The revenue from customers and the secured revenues is not the only metric. The pipeline remains strong at about $2.1 billion, and that is a small reduction from the $2.4 billion roughly that we had about 3 months ago. And a lot of it is driven by a -- us essentially being slightly more conservative when it comes to the civilian revenues in the U.S. We're seeing still a lot of momentum in those non-military opportunities in the U.S., and I'll talk more about it. But essentially as part of us being more strict in how we apply those metrics and also remembering that U.S. civilian sector is a very nascent industry and much like what military used to be several years ago when you had the early stages, you are not always seeing that progression. And if you go -- just give me one second. I have received and know that I need to reshare the slide deck, so I will do so now. [Technical Difficulty] Okay. Now you should be able to start seeing the screen again. Apologies for the IT issue. So $2.1 billion pipeline, which is an exceptionally strong pipeline that I will talk more to in the next couple of slides. But ballpark, we're talking 300 deals diversified across products, geographies, stages of maturity and so on. Underpinning all this is about 350 world-class hardware and software engineers here in Sydney that has taken a decade for us to build. There is no team of this sophistication and quantum in the market that we're aware of. And this is what's leading to the highly differentiated nature of our products, both the current products, which I believe, are the best out there, but also the next generation of products that we'll be commencing release of in the second half of the year, which we think will completely transform how our customers think about counter-drone solutions. The $70 million plus R&D spend and we expect that to continue, slightly increase, but not a lot. So we expect to go from about 500 to 600 people, assuming our recruitment program goes on track by end of '26. Most of those would be engineers as well as ops and salespeople. And this will continue building on our highly -- basically high gross margin products, so 65% gross margin as well as a healthy cash balance. So let's talk about the individual geographies. U.S. has, for a long time, been the engine of growth of the business, so 70% revenues. Last year, Europe has taken that title and Europe will continue driving a lot of our momentum as we're seeing a number of countries really ramp up their defense, realizing they cannot just rely on the U.S., they need to be self-reliant, and increasing their defense expenditures significantly. And within that, we're really well positioned, including setting up manufacturing in Europe. We have a number of well-credentialed distributors that we trained and are deeply ingrained with our military but also critical infrastructure and customers through Europe and set up our office in Amsterdam led by Louis Gamarra, our Global Chief Commercial Officer, who is then managing those distributors around Europe. In the U.S., after a relatively quiet '25, we expect to have a very strong '26 once the current U.S. congressional '26 budgetary discussions are concluding. And hopefully, that will be all in the next month or so. And that is across several verticals. The defense budget, which is already at the record of USD 1 trillion in '26 is proposed to be USD 1.5 trillion in '27 and we believe we're well positioned as JIATF 401, which is the centralized procurement office for counter drone in the U.S. will start kicking in. Outside of the defense, the Department of Homeland Security has set up a dedicated team, the Program Executive Office with USD 1.5 billion contract vehicle. And that's also linked into the FIFA World Cup in June, July where you need significant security, including counter drone. And Safer Skies Act in a nutshell enables police and majority of police in the U.S., state and local, not federal, enables states and local police to be able to jam on our product, if you think DroneGuns, RfPatrols, DroneSentry-X, on-car sensors and effectors are perfectly suited for police deployment. And also, we have been included in the Golden Dome, the $151 billion SHIELD IDIQ. Now those are primarily missile protection sites, but all of them will need counter drone protection. So that's where we intend to play. In the U.K., those of you following me on social media would have seen that I shared a picture in Hereford about a day ago where there was a U.K. Minister of Defense visiting the SAS HQ facility, and that was our RfPatrol basically being demonstrated as part of the visit, and that is not a stage marketing opportunity. This was a genuine visit unrelated to DroneShield and this shows how deeply embedded DroneShield is within the various arms of the Ministry of Defense. And we believe that the actual opportunity is much more than just $17 million or 5 projects. This is what we are actively tracking. But I think the U.K. will be spending significantly on counter drone, and I believe we are, by far, the best positioned business there. In Australia, we've recently been included into a Line of Effort 3 panel for LAND 156, which is saying to be the managing contractor on specific sites. And we expect that work to commence as in the participants on those panel will start getting those roles sometime this year as well as us being part of Line of Effort 2, which is purchases of portables like DroneGun and RfPatrol and where we received initial small couple of orders totaling $6 million last year, and we expect to get more off the back of that. In Asia, a lot of our efforts are driven off Japan and the rest of Chinese neighbors, and we expect that to continue ramping up significantly. Outside of all these geographies, South America is probably the key driver where we're very active in both Colombia and Mexico, and Colombia has announced USD 1.7 billion counter drone budget. And the key focus for South America tend to be fixed site systems, our drone DroneSentrys, which provide protection for the whole facility. I'll likely skip through the Safer Skies Act except to say that this is significantly increasing our U.S. law enforcement demand. On the products, again, I will skim and maybe refer back to it during the Q&A session, but a reminder that we do a complete range of dismounted and on-the-move and fixed-site products. So we are a radio frequency AI-enabled drone detector and defeat maker, but we are also an integrator. So integrator of third-party detectors and third-party effectors. And this is quite important, especially when it comes to fixed sites. I want to spend a little bit of time talking about the software strategy. So today, software is a small, about 5% part of the total revenue. We plan to have it as close to 30% over the next several years as possible. And this will be achieved by every new product that will be released going forward, having one or multiple SaaS streams on top of that product. DroneSentry-X is a good example. So today, when you buy DroneSentry-X, you have RFAI, which is our AI-enabled engine that runs as a SaaS product on that. But then you're also probably going to have it deployed as part of your site. And within that, our C2 is also the other SaaS product that will be applicable to you. If now you happen to run multiple sites, our enterprise SaaS, so DroneSentry-C2 Enterprise kicks in, which gives you a region or a country-wide awareness and that is an additional product again. Now if you're having a multisensor solution, chances are, you have cameras, so our DroneOptID SaaS, you probably have radars where there's SaaS attached to it as well. And we'll continue releasing new SaaS families, optimizing for more and more of the SaaS offerings on top of the hardware that we sell. I think selling as hardware and software positions us really well competitively. I would not want to be a pure software business in the world of ChatGPTs, et cetera, today, where you're worried that the big AI is going to eat your lunch. And I think hardware, which is highly customized, high IP sort of product, we have a lot of effort that we've been putting in, in terms of designing that circuitry, designing those antennas, how it all sits together. And having AI that works on that hardware, not in the cloud, it's not large server farms, but on the device, AI on the device, is making us a truly unique proposition that is very difficult for somebody to replicate. And I don't believe we have any competitors that are doing anything quite like we are in terms of our deployment of AI to sense and take down drones. And so this is our strategy to then grow our SaaS to 30%. But then importantly, selling to militaries and government agencies is recurring by nature. So in the world of counter drone where you really need new hardware every 3 or 4 years, whatever the customers are buying today in terms of hardware, they'll be fully replacing in about 3 or 4 years. In fact, some of our customers are already seeing the trend and they're asking us, and I think this is potentially where the industry is moving, towards Counter-Drone-as-a-Service. So instead of paying us x dollars for hardware and then continuing to pay SaaS, it's basically becoming one giant SaaS and the hardware refreshes are baked into that. Now this is not going to be done by everybody. And this will enable us to continue receiving those bigger one-offs in the short term from the hardware purchases as well. But I think in the long term, so over the next 5 to 10 years, I think a lot of the industry will move towards Counter-Drone-as-a-Service, which will further smooth out our cash flows. Number of differentiators, so technical and commercial, I've talked to many of you about this before. On the technical front, the AI. So our enormous database of drone signals, the largest proprietary database of its kind in the world, we believe, which is collecting drone signal data from 70-odd countries in which we operate. And this is one of our also key advantages compared to, say, North American or European competitors, a lot of whom focus on their regions because the markets are big enough. Coming out of Australia, we always had to be a global export business because the market here doesn't support a business of our size, and that enabled us the global reach as well as building those enormous databases. And then we have data engineers in Australia, cleaning, tagging the data and enabling them the dedicated hardware with an AI engine to perform against drones. Now we're super excited and we can talk more about it in the Q&A if people are interested on this call about the next generation of AI engine that we are planning to release later this year, which we really think will be the game changer in the performance of the drone detection as well as the defeat. So as a result, our gear can detect, further defeat, further be lighter, smaller and be in various form factors. So on-the-move, fixed-site or both. On the commercial front, we are one of the most global counter drone businesses. Now we don't supply to the likes of Russia, China and North Korea, Iran and so on, but within the Western and Western allied countries, I don't believe there is a counter drone company with a wider deployment than DroneShield is. And over the last 10-plus years, and we've truly been a pioneer in this business, and there are a lot of people in this company with very significant longevity. We've seen the whole cycle, both from the commercial and technology experience. We have this think tank capability of understanding where the threat is moving, what the drones are likely to do, how to direct our road map, what makes sense, and this is also our competitive advantage. In the world where you have to have understanding, not just with military technology, drone technology, but also the acquisition cycles and how various customers like. On the competitive positioning, we have 1 or 2 competitors usually across most of our product lines, but we are aiming and I believe we are today the leader in every product segment in which we operate. Traditional defense primes, we see more as our customers rather than competitors just due to the requirement to rapidly evolve like 3 to 4 years hardware cycles, quarterly software updates and also be cost competitive. Live defense primes are not positioned for that kind of performance. Theirs are more like, if you want to build a tank or a missile with very different sort of competitive moat. And I believe that we remain the only publicly listed pure counter drone company in the world. There are other publicly listed companies that do lots of things as well as counter drone being a relatively small part of what they do. But we are the only pure-play counter drone listed company in the world. And on the manufacturing capacity expansion and maybe in the interest of time, I'll stop on this slide, we are on track to expand to $2.4 billion by end of the year. We are -- we're just in the process of completing the move now to our 8x. Beside the facility expansion in Sydney, we are setting up manufacturing in Europe and in the U.S. So the idea is for smallish orders up to maybe $5 million, we can usually deliver really rapidly. So for example, the order that we announced on the 30th of December last year, about a month ago, we delivered the following day, and this was in Europe. And for larger orders like the $62 million order we received in the middle of last year, we delivered that within 2 months. And the idea is that if we receive an order in hundreds of millions of dollars, we can still deliver that within, say, 2 quarters. So that's the goal of manufacturing capacity and how we look at the inventory. I'll stop there and see if there are any questions in the function. Just give me one moment. Oleg Vornik: So the first question is why did the pipeline move from $2.5 billion to $2.1 billion? So this was what I was alluding to earlier about in the U.S. when it comes to the civilian sector, we had more bullish assumptions that we have today in terms of follow-on projects. So some of those non-military, non-law enforcement, more nascent industry type situations, where I still think there's going to be an enormous business to be done in data centers and airports and energy infrastructure. But a bit like what we've been seeing with the military sector, say, 5 years ago, those customers are still struggling, given it's their very first time buying counter drone equipment. They need to figure out how much they want to spend, how they want to lay it out. So we have significantly trimmed and made more conservative our near-term forecast for the U.S. non-law enforcement, non-military sector in terms of what we presented in the pipeline. So in the very near term, I still expect defense to be the majority driver of business in this company, except in the U.S. where I think law enforcement will be a very significant contributor. And I think over the next 3 years or so, the civilian sector would really start picking up to the point where if you think about the total addressable market, the USD 30 billion for the military and USD 30 billion for the civilian sector, I'd see in the long term, this business being 50-50 military and non-military. Any guidance or TAM for SentryCiv? So SentryCiv is our commercially focused more affordable product that we released several months ago. We already started having early sales to customers. And this is focused on civilian customers who are budget conscious and they want to be spending hundreds of thousands of dollars or in the low millions for their deployment, but rather they want to be spending tens of thousands of dollars a year. And it's a little bit too early to tell. And I think a lot of that adoption will drive as the civilian market starts to take on. So we're talking potentially farms concerned about activists, and we've already been seeing purchases on that front, some energy infrastructure, stadiums and so on. The next question is when or how would we consider a U.S. listing to increase exposure to U.S. investors? I think there will be a time when that makes sense. However, my view is that you need to be significantly larger. So today, we're about AUD 4 billion market cap or US, call it, USD 2.5 billion. But while that is significant. So we are probably halfway on the ASX200. That is truly a micro cap by the U.S. standards, and I believe that it's going to be a disservice for our shareholders if we list on the U.S. market now. But say if we are 2x or 3x the size, which given the growth we achieved, we more than tripled just last year alone in terms of the share price and the size, that could start making sense. So I think this is a regular thought that we're having. But right now, my personal opinion, a bit too early in terms of diluting from our primary listing in Australia. The next question is, when are we expecting to start manufacturing products in European Union and in the U.S.? This half year. So in Europe, this quarter, and in the U.S., the following quarter. Are we finding any challenges to slow this down? No, I mean, there's obviously the usual process, nothing simple in terms of the supply chains and whatnot, but we're not seeing an issue. The next question is how do we counter fiber optic drones? So there's actually a slide in the appendix of the investor presentation that I will draw those of you who are interested in this question, but I'll give you a short summary. So radio frequency and drones are very closely linked. I see this a bit like wheels and cars because there's been so much invested in road infrastructure, whatever cars will look like in 50 years, they'll probably have wheels on, whatever they'll look like. So similarly, radio frequency is so core to the drone technology that the reason why fiber optic and attempts at AI exist is to try to circumvent what we do, but we are still dealing with the vast ramp of what drones are. And fiber optics have very severe limitations like you think practically, right, flying a drone with 10 kilometers of a fishing line attached to it and snagging at other things or snagging the line itself, very, very difficult. You can't fly quickly. And a lot of the images by the way, coming from Ukraine, I wouldn't necessarily trust what you see. Information warfare is prevalent. They say in war the first casualty is off on the truth. So -- but if you are really looking to make sure you can counter them, remember we're an integrator as well. So we build in radars and cameras that can track fiber optics, and we can integrate, and we already have, in fact, integrated things that can effectively count current electronic systems inside of our DroneSentry that can deal with that as well. But frankly, our customers are not seeing a lot of concern based on everything I'm observing on fiber optics, and it's more of a media thing. The next question I may pass to Angus about RFAI and our next generation and what it means. I'm personally really excited by that. So Angus, over to you. Angus Bean: Thanks, Oleg. Good morning, everyone. Thank you again for attending this morning and your continued support and interest in DroneShield. Yes, very keen to talk about our next-generation AI technologies. As many of you know, we have been a pioneer in the counter drone space. We're also a pioneer in utilizing what we call micro AIs. So these AIs are run on the edge. As Oleg mentioned, these are not cloud-based, big server farm, big GPU-based systems. These are very low power, very high throughput AI systems that run essentially on the edge. And that strategy that we developed over 8 years ago has proved to be incredibly accurate as our detection performance often, as you can see in the results of '25, has been really good, and there's been a large adoption of these systems. And the other thing that it allows us to do is attach a software and service license arrangement to the products as well to get those recurring revenues. The AI, the next generation is coming through, and we're really excited about the developments. So we -- our current models, RFAI-ATK and RFAI V2 are doing really well in the market. We are working on both RFAI-3 and RFAI-ATK-2 that will be reduced -- sorry, will be released onto the existing products but also, as Oleg alluded to, our next-generation platforms later this year. And there will be a slow rollout through the different products that are appropriate over time. One last point I'd make on here is the key thing you need to understand about building an AI business is the algorithms that you develop are important and they're difficult. But once you get through that, it really becomes a race for information or a race for data. DroneShield has more data available on drones than almost any company in the world and we're utilizing that as the core foundation to both sustain our current generation AI models. But more importantly, that's also the bedrock of our next-generation AI models, which will be much more open and much more applicable to the new varieties of drone technology that we're seeing in the future. So a bit of color on that one on to you. Oleg? Oleg Vornik: Thanks, Angus. The next question is, do our products -- I'm paraphrasing the question slightly. Do our products have any familiarity to systems developed by Palantir? So Palantir develops more broader software only based battle space awareness systems. This is quite a bit different to us. We are focusing specifically on counter drone, we're doing a fusion of hardware and software. And in fact, I believe that going forward that fusion, that working together of software, the C2 and the hardware will become increasingly more important. So no, I don't quite see us competing with Palantir, which I think is a great company. The next question is, do we think that any of our customers are delaying purchasing our current generation of products for the next generation? Look, I doubt it. So the next generation of products will come in batches through to and probably from the end of the year onwards. I mean it's probably a bit of an analogy. Would you not buy an iPhone and wait for another year for another iPhone. Look, you probably would wait except if your life depended on it, you'll probably buy the current iPhone as it stands and then you'll buy the next one when that is released. So I don't believe there's any way. There's expectation, in fact, that military see working with DroneShield as a long-term partnership, which is also how the 65% gross margins are justified, in that we're doing significant ongoing investment in R&D, which means we will be releasing new hardware every several years, software every quarter. And they will be having to upgrade and also that's where counter-UAS, the service idea comes in. Next question is, can we talk to the new product road map and any changes in the mix of potential uplift? So there's not everything that I can speak about. But the general comment I would make is that the average sales price would be higher. So we're pricing our product to the gross margin, which we -- on the hardware front in -- are planning to keep at 65%. But the extra product cost is likely to be close to triple just due to the more advanced chips, circuitry and so on. But essentially, it would mean that the revenue should continue to rise, I believe, as low market situation and customers are looking to still have counter drone products where they often have very little by way of the civilian sector hasn't been started, for example. And so larger dollar numbers, but similar margins. And hopefully, as SaaS continues to increase as a percentage, that will, in time, increase the gross margins across the business. The next question -- sorry, it's a bit of a long one. I'm trying to read it as I go. So maybe I'll turn this one to Angus as well. So the person is asking about the -- us previously talking about the ongoing cat and mouse dynamic in the technology. Can we give an update on how the landscape is evolving? So what are the drone makers doing to make our life difficult essentially? And how are we responding? And then a follow-up, what are the fundamental shifts in the underlying technology that we're seeing and how we're positioned with those changes? So Angus, over to you. Angus Bean: Thanks, Oleg. Great question. So yes, we are definitely in counter drone 2.0, and we talk about that a lot on DroneShield where we really are in the second era of counter drone warfare, whereby the big shift here is that the drone manufacturers are actively building systems and technologies to mitigate previously deployed counter drone solutions. And so we are seeing a really large uptick in that. And we've spoken about this before. This is the reason why we invest so much of our time and energy and financial resources into R&D. We have, as Oleg mentioned, the largest R&D team specifically to meet the needs of this emerging market. So to give you some examples of what we're seeing and drone manufacturers use, we are seeing really wideband RF communications. We're seeing mesh networking in drones. We're seeing obviously the fiber optic, which we still feel is a very niche use case, technology becoming into play, and we are responding accordingly. But we're responding with solutions that our customers can actually purchase and field. There's a lot of solutions out there, particularly once you get into kinetic and high energy and laser systems that either financially or operationally are not really something that a lot of our customers can deploy easily to the level that we basically expect from DroneShield. So we're responding with solutions that are going to work for our customers, most importantly. The thing -- and going back to the point forward, we've been looking at this for 10 years now. But the thing that we really understand is the core principles of the drone technology. We've watched this technology evolve over time. We have some pretty good understanding of where the evolution is going and it really is going back to first principles. There are physical limitations on what you can do with the radio system, there are physical limitations on the airframes and once you understand those first principles, then you can build technology to meet those changing needs. And as Oleg mentioned, what are we doing about it? We are looking at integrations of a number of different technologies that we don't plan to build ourselves. I think a good example of that is the interceptor drone category, but we are currently doing test evaluation, and we are in very close communication with a number of interceptor drone companies around the world that market itself very competitive, no clear owner and winner. So we plan to take a strategic view and just partner with best-in-breed. We are doing that work now to work out who those partners are and pushing those integrations. Oleg, did you want to talk to anything on the M&A front on that side? Oleg Vornik: On the M&A front, our goal is to ensure that we continue being best of breed in anything that we buy. So you'd notice we have $200 million in the bank. Obviously, we have ability to use our stock as well, but we do not want to buy one of many. And I think there have been cases in the counter-drone industry where people went out and purchased companies that were not best of breed basically just for the sake of making transaction. We are very disciplined, which is why in our 10-plus year history, we haven't done an opportunity yet, but that's not to say that we're not actively looking. And in fact, we have hired [ Josh Bollo ] to start with us this week and one of his explicit focus areas is assisting us to identify M&A targets for us. And so we -- this is something that we're actively thinking about, but it has to be a success for the company. I often find that, and as you guys may well know, I come from M&A background myself. In a transaction situation, the target benefits much more than an acquirer. And obviously, here as being an acquirer, I want to make sure that it is value add to the shareholders. So we're being very careful. But I believe the opportunity is there in terms of acquiring best-of-breed capability, otherwise, we'll just keep developing things organically. The next question is around the Golden Dome. So the SHIELD IDIQ, the USD 151 billion program that we are now a part of. And the question is, has the U.S. given any context to the time lines and when we're going to see pipeline from SHIELD IQ (sic) [ SHIELD IDIQ ]. So there is no pipeline from SHIELD IDIQ in our sales pipeline right now because it's a little bit too early. On the timing, it's really difficult to tell. There have been, as you probably know, a large number of companies included in that IDIQ, but it's also a very large program. So I'm hoping to get some news over the next 6 to 12 months on this. And I'm glad we're included. And like I said, all of these missile protection sites will need to have a counter drone program attached to it. And so I believe we're well positioned. So the next question is -- I'm trying to summarize it, is that basically, I think, the asker is wanting to get some more background around me selling the stock of the performance options in the business back in November last year. So look, the background is as follows: myself as well as a number of senior executives in the business get rewarded when we hit revenue thresholds. Those are exceptionally ambitious thresholds. When we had no revenue to speak of, it was $10 million. When we hit $10 million, the next threshold was $50 million. When we had $50 million, the next threshold was $200 million, which is the one that was achieved in November last year. And now the next threshold we communicated, which is more of an industry best standard, is a number of those thresholds rather than what you call cliff vesting, which is what we've been operating in a more elegant way up to now, where you have $300 million, $400 million and $500 million in revenue as your threshold and for each one of these numbers being reached, you have some vesting of the options immediately and some the other half 12 months later. So it's a very, very staggered fashion. So once those performance options have vested and I've chosen to exercise them, that essentially crystallized immediately half of that as a tax bill, regardless whether I would have sold them or not and regardless where the share price would have gone. So essentially for me to immediately crystallize $25 million in tax liability regardless where the DroneShield share price is, which is a huge burden. So clearly, anybody looking at this now would have said, okay, well, Oleg is looking to sell at least $25 million worth of stock to pay the bill to the ATO. And then the rest, look, I grew up in a fairly poor condition as some of you who followed me would know in social housing and so on. So this was an opportunity for me to secure my financial future. I had a mortgage, a fairly significant renovation bill, unfortunately, that went out of control, but more generally secured the financial future. Look, unlike what some of the articles reported, I did not sell everything. I still have a multimillion dollar equity position through the stock options and obviously continue to care about the business. And I would also say that while the price has reduced a bit before, like from about $6 plus to about $4, it was completely unrelated to selling. It was before the selling. And this was in line with the general listed market slide down after a hard run up a couple of months before. And in terms of impact from misselling, well, the price now is higher than what it was before I started selling. So those that would have held on. I'll be seeing the money. And I would say that we are #1 performing stock in terms of 3x plus growth out of the ASX200 in 2025. And I hope as we continue to keep goals, the share price will continue to perform. And maybe the last thing I would say is that while obviously I was in the news as a director and my filings are public, there are a number of employees in the company that also benefited from this, and I'm really glad for them because life at DroneShield is not simple. In order to achieve those revenue targets, the amount of effort and the sacrifice on people's family life and so on is very, very significant. We're not just posting these results because we're lucky. So I'm glad that all of these employees, they've been around for many years and have prioritized the company over anything else in their lives, have been rewarded and continue to be rewarded as part of the stock structure and this is aligning with obviously investor interest. And then ultimately, as we'll continue to keep goals in terms of our financial performance, the stock price follows that as we've seen through '25. I think the next question I might pass to Angus in terms of the other current supply shortages across semiconductor industry expected to impact 2026 revenue. And maybe more generally, Angus, if we talk about our supply chain and how we deal with that. Angus Bean: Sure. So one thing we're really proud of at DroneShield is we've never missed a delivery. So in all of our history, when we have been working with our customers, many of those had been urgent requests for equipment, we've been able to supply generally into the time line in which the customer needed that equipment. That's something we're really proud of, and that's the sort of thing that gives many of our end users and our customers the confidence to go with DroneShield and -- so that they can place significantly larger orders with DroneShield and know that we'll meet their demands. I mean the great example we had last year was the very large European order, over AUD 60 million, which we essentially was able to turn around in just over 2 months which is an incredible feat of our operations team, working very closely with our various supply chain partners. In terms of the supply chain, we are investing a lot of capital into ensuring that we can meet those long lead time items, we can build confidence in our supply chain partners, and we can secure the stock that we need. And obviously, the much larger facilities that we already have in Sydney at the moment are supporting that as well, having additional warehousing and just logistics support to do much larger orders and turn them around very rapidly. So we're not experiencing any delays that are material to us in delivering on orders at this time. And so we're in a relatively good position there. Oleg Vornik: Thanks, Angus. The next question is around whether DroneShield is being affected by the Trump tariffs. So we have revised our pricing and fully passed on the tariffs when they were introduced last year. So no, we are not affected. The next question is slightly long, so I'm trying to summarize it. It's around how do we continue to innovate in response to new drone technologies such as fiber optics. So to kind of reiterate what me and Angus said before, DroneShield at the heart is an engineering organization. We have 350 engineers, but not just slabbed together over the last month, but a lot of these people have been in the organization, especially in the senior roles in the last 5, 7 years, right? I've been in this company now for more than 10 years. Angus has been here for a very similar amount of time. Even outside of the engineering functions, Carla, our CFO, has been here for about 8 years. So there's a lot of longevity in the business and understanding of the trends and where things might go, right? And the drone makers are a clever bunch, but physics is physics and there are natural limitations of what those guys can do. And I guess, further up the curve you go, the more difficult it gets and where they are waiting for them as they're making their technologies more sophisticated. So to me, innovation in drones is a very positive thing. If the drone makers stopped innovating, the counter drone industry would commoditize and our gross margins would collapse. So that rapid engineering mindset and deep experience in anything to do with counter drone is our key competitive advantage, and we actually want the drone makers to keep innovating. Our customers do not want us to be -- what -- they're not expecting us to be 100%, nobody is, but they want us to be materially better than competition, which I believe we are, and to continue to innovate. The next question is whether we can give an update on the Homeland Security World Cup. So this is the June, July event and how we're positioned. So there was a grant from FEMA, a U.S. government agency for about $0.5 billion. And there are a number of U.S. law enforcement agencies that have been applying for these grants at various degrees of that process. There's only so much I can share. And obviously, under the Safer Skies Act, a lot of these guys once they go through their Huntsville, Alabama FBI range training school are able to use jammers as well. So we are well positioned. Obviously, the urgency is there. So I'm pretty optimistic, but I can't give solid update in terms of the dollar numbers that we're currently associating with the program in part because I think there's just going to be so much movement over the next several months. There are next couple of questions, which are essentially asking us for revenue forecast for '26. Look, I'd love to have a crystal ball. So we don't give guidance. The reason why we don't is because you're in a nascent industry and it will just be irresponsible for us to give a number. We're not a toll road, we're not an airport. I can tell you that my internal direction to the sales team is to have a very meaningful increase like we're talking multiple increase over '25 sales. And obviously, we'll update the market as we continue to push towards the target. And I would notice that we already started the year with essentially $100 million in the bank in terms of the revenues, which is by far the strongest where we had in any of the years in the past. The next one, I'll pass to Angus. Does DroneShield have concerns with the emergence of microwave-based drone defense technology? How we differentiate ourselves from the company's focus on that technology, specifically combating drone swarm defense? Angus? Angus Bean: Thanks, Oleg. So yes, high-powered microwave solutions are emerging as a counter drone technology. We -- many of you would remember, we do have a strategic relationship with a company out of the U.S. called Epirus, who are, in our opinion, the leader globally in that space. The technology is incredibly impressive. However, it has very large limitations around cost. We are talking multiple tens of millions of dollars per panel, which is a price point significantly higher, many pages higher above where many of our solutions are priced. So it's a very different price point. So often we don't compete directly with these types of companies, and we see them more as a strategic partner for those customers, and those customers have a very limited subset of the core defense customers that we have who are interested in that technology. We have ways to partner with various companies to provide that should we be requested. So a very different price point, very different technology and very complex to deploy, very complex to sustain. So incredible technology, and we think we've got some great partnerships there, but it's a very different strategy than the much more broader, larger piece of the pie that DroneShield is going after. Oleg Vornik: Thanks, Angus. And to reinforce what Angus just said, I firmly believe that for counter drone solution to work, it has to be cost effective. So drones are costing a few thousand dollars a piece. You can't have a $10 million, $20 million piece of equipment unless you're protecting only what will be effectively, a couple of sites in a nation where you basically throw anything at that in a counter drone solution. So if you want to be selling more than 5 or 10 of something, you can't be costing $10 million or $20 million in the counter drone land, which is also why we don't really see defense primes in this situation. The next question is about dividends. Also a topic we get periodically. When will the dividends be payable given -- well, the question was also saying, given performance options are taking priority? So firstly, I wouldn't see dividends and performance options as a trade-off. They're related to entirely different things. Performance options related to basically motivating the staff to achieve the results that shareholders are looking for. And the dividends are about capital allocation in saying, are we wanting to invest the capital for rapid growth? Or do we want to return the excess capital that we don't have deployment for to achieve the growth to shareholders. And right now, we're seeing an immense amount of opportunity as we continue to post these record results. And so dividends are not a priority at this time, but this is something that the Board regularly reconsiders. But I would see this, frankly, more of a consideration when we finish the growth rate at the incredible levels that we are doing now. The next one is thoughts of being part of ASX100? So we got into ASX300 in September '24, into ASX200 in September '25, if my memory serves me right, or I could be slightly off. And we are, today, I believe, sitting somewhere around a number, depending on how you count 120 or 130 but in order to get into the ASX100 , you can't be #99 and you need to be more like further up. So there's a significant jump from where we are to get to ASX100. But hey, if we tripled in the share price last year, depending on where we get to this year, this is all in the realm of possible and obviously, that opens additional angles in terms of further funds investing into the company. The next question is, can we give some context into the $800 million opportunity that we're working on? What stage of the sales cycle are we in this deal? So it's a European countrywide deployment where this is a part of a much bigger deployment, but our share of it is about $800 million. It's the same customer that we had the $62 million order with in the middle of last year. I hope to see the project awarded in the second half of the year. But as you'd expect of mega projects of this size, there's a lot of political angles to it, budgetary locations at the national level. So there are a lot of moving parts. But I'm hopeful to have the order in the second half of the year. And then the question is, how soon do they want it fielded? So whether it's ASAP or whether it will be staged over a period, over a year or a couple of years, perhaps, and also what are the payment terms? So obviously, we'll be seeking payment terms to ensure that we either have no or absolutely minimal cash drag. And remember, 65% gross margin means that you don't need to have enormously favorable payment terms not to have cash drag or on an order of that size. So the next question, I think this is the last question that we currently see in the line. So if you have more, please feel free to ask now. Can we talk -- can we speak -- sorry, I'm just trying to summarize this. So -- can we talk to market-sensitive contracts, which are now under $20 million threshold. For example, would LAND 156 or other Australian government contracts always be market sensitive? So I think the question is, for contracts, which are not quite $20 million. So $20 million is a dollar threshold over which we will always announce. If it's under $20 million, but it has some kind of a deep strategic element, would we announce it? And the answer is, if there is a deep strategic element, meaning it has a clear pathway towards larger sales, the fact that we got a particular contract, then we would be looking to consider announcing, but there needs to be that strategic element for us to do so. So you wouldn't be expecting a lot less cadence in the amount of sales announcements we do, but obviously each one is going to be a lot more material than what people have seen in the past. The next question is about the expense. So do we expect to increase our fixed expenditure line? So maybe I'll pass this one to Carla, our CFO. Carla Balanco: Thank you, Oleg. So on the question, it asked specifically if the $800 million would increase our fixed expenses? And the answer to that is no. So it would not significantly increase it because we are currently putting structures in place so that we can increase our manufacturing to way above that level. So therefore, everything that we are currently doing in terms of uplifting all the internal structures, focusing on our manufacturing capability, we will not need to significantly increase our fixed cash costs. Oleg Vornik: Thanks, Carla. And in terms of our base costs, so as we said in the investor presentation, there is about $150 million in run rate cash cost. This is not what the question was asking, but I'm just expanding on that. As of December, and this is based on about 500 people head count plus the on cost, like the spaces we lease and so on. So that will increase a bit as we get from 500 to 600, but at the revenue growth that we're expecting, our aim is to continue being operating cash flow positive as, in fact, we have been in the December quarter, as you can see from the 4C quarterly. Then the next one is, do we have any update on Mission Syracuse? No, we do not. And if there is an update, chances are you will hear it from the Commonwealth before you hear it from us. That's usually how the nature of the Australian defense announcement works, you have to let the customer make the announcement first. The partnerships question. So maybe I'll pass it to Angus. So, is DroneShield considering partnerships with specialist connectivity providers such as Elsight to enhance resilience and stability of RF communications, avoid signal loss, tight integration, it sounds like an outside shareholder asking this question, and enabling tighter integration across different platforms, assets and operating environments. Angus, over to you. Angus Bean: Thanks, Oleg. Look, we have a number of partnerships, some of which we do talk about it, a lot of them we don't. And that is for supply chain resiliency, but also just for commercial reasons, we don't always announce our partners. Look, we are open to partner where it make sense. But also, I think one of the hard lessons we've learned over the last 10 years is your core capabilities, core technologies, if you don't have them in-house, you don't control the destiny of those technologies, it's very hard to keep pace with where the market is going. And so we do have a strong tenancy for core technologies, particularly those 2 right now -- or sorry, those 3 are the RF detection, and RF defeat and the C2 layer. These are our core technologies, we remain in-house. And then we look to partner with the integrators and different technology providers to layer on top of those 3 and equip the units. And the story behind that strategy is those are the 3 elements that most of our customers need first. So DroneShield is generally the first partner that -- or first supplier that most of our customers come to. They're the first 3 layers that they look to put in place, then we can work with those end customers to layer additional partners and technology. So we want to control that relationship. We want to supply the intelligence and our understanding of the industry to those customers, and that's why we focus again on those 3 layers. And then we had those additional ways where it makes sense. Oleg Vornik: Thanks. A question that just came through, have any major European and North American institutional investors already discovered DroneShield? If so, which ones? In terms of public information, you would see that Fidelity has been a substantial shareholder, so over 5%. I think they're currently sitting at about 7% according to their substantial shareholder notices. So that's obviously a sort of a pan, call it, Boston, London, huge investment giant, and now they've been with us for quite some time. I want to say probably over a year, if I remember correctly. And then we can't really comment on the registered composition, but we see a $4 billion market cap and quite deep liquidity and inclusion in a bunch of indices. We're now getting to the press piece of being on the screen for a lot of the funds. And we are starting to do an active outreach using opportunities like quarterly release and annual report that we're releasing in a month to market to those institutions. We still remain a majority retail-held stock, and I think it just reflects our heritage, having grown very quickly from a tiny company to a fairly big one. But I think in the long term, this would be a majority institutionally held company as you'd expect. I believe that concludes all of the questions. So we'll stop there. Thank you for your time. And if you think of anything else, please feel free to email us with your question at investors@droneshield.com. Thanks for your time.
Operator: Welcome to the Crane Company Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Allison Poliniak, Vice President of Investor Relations. Allison Ann Poliniak-Cusic: Thank you, Madison, and good day, everyone. Welcome to our Fourth Quarter 2025 Earnings Release Conference Call. I'm Allison Poliniak, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our Chairman, President and Chief Executive Officer; Alex Alcala, Executive Vice President and Chief Operating Officer and incoming CEO; and Rich Maue, our Executive Vice President and Chief Financial Officer; along with Jason Feldman, Senior Vice President, Treasury, Tax and Investor Relations, who is on for Q&A. We will start off our call with a few prepared remarks from Max, Alex and Rich, after which we will respond to your questions. Just a reminder, the comments we make on this call will include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section. Now let me turn the call over to Max. Max Mitchell: Thank you, Allison. Thanks, everyone, for joining the call today. While we've got many exciting things to discuss today as we exit the fourth quarter, and we're already off to a fantastic start for 2026. Our performance last year and our initial guidance for 2026 show that we are consistently and reliably delivering on our commitments and our long-term value creation thesis. 4% to 6% core sales growth, and we were just at the high end of that last year, 35% to 40% core operating leverage and upside from capital deployment. And that's just the baseline. We're always working to over-deliver. All aspects of this thesis have continued to play out as expected and will continue. For the quarter, once again, we exceeded even our high expectations, underscoring the strength of our team's strategy, excellence in execution and a relentless commitment to delivering shareholder value. Adjusted EPS of $1.53 was up 21% over the prior year, driven by an impressive 5.4% core sales growth, reflecting broad-based strength at Aerospace & Advanced Technologies, and continued strong execution of process flow technologies. For the full year, adjusted EPS increased by 24%, driven by our outstanding teams delivering on customer expectations enabled by our sustained investments in advanced technologies and innovative solutions. In 2025 we also continued building on our strong track record of enhancing and shaping our portfolio by adding technologies and capabilities inorganically that will drive growth and support both existing and new customers. Having previously announced the signing with Baker Hughes on June 9th last year, we are excited to formally welcome the Druck, Panametrics and Reuter-Stokes brands to the Crane portfolio. Having closed on the acquisition of these brands on January 1st. As a reminder, Reuter-Stokes doubles the size of our nuclear business, adding industry-leading radiation sensing and detecting technologies for nuclear plant operations as well as for Homeland Security applications. Nuclear is an exciting market space today, and we see additional applications for the core Reuter-Stokes technology and a number of other high-growth adjacent markets. This business is being integrated into our Crane Nuclear business, which Chris Mitchell has successfully run for us over the last 6 years. Panametrics will operate as a stand-alone business unit in our Process Flow Technology segment reporting directly to SVP [indiscernible]. This business adds advanced ultrasonic flow meters and precision moisture analyzers, a really incredible portfolio of solutions that enables accurate measurement of liquids and gases across applications such as cryogenic gas storage, LNG transportation, wastewater treatment, chemical and petrochemical production. And lastly, Druck will be maintained as a stand-alone business unit reporting to SVP J. Higgs under the newly renamed Aerospace & Advanced Technologies segment. This new name better captures who we are today and our future strategic direction for this segment than the prior Aerospace & Electronics name. Still the same focus on proprietary, highly differentiated technologies with primarily sole-sourced positions, but continuing to expand our range of technologies and offerings and looking at adjacent end markets where our capabilities are similarly valued. We expect to selectively and carefully widen our aperture in this segment without losing focus on what differentiates us. Specifically the addition of Druck's complementary product line meaningfully strengthens our critical applications, including aircraft engine monitoring and hydraulics with strong positions in both single-aisle and widebody aircraft platforms as well as environmental control. Also expands our presence into ground-based test and calibration equipment for aerospace and certain other end markets, leveraging the same best-in-class pressure sensing technology. Another exciting news in addition to Druck, Panametrics and Reuter-Stokes business is closing January 1st. At the start of the year, we also closed on the acquisition of optek-Danulat, headquartered in Essen, Germany. Optek is the leader in in-line process control, optical sensing measurement solutions for biopharma, pharma and other demanding markets with annual sales of approximately $40 million. Optek is a perfect complement to our growing instrumentation business, my personal thanks to Jurgen Danulat for his trust in Crane as stewards of his legacy moving forward and to the outstanding team at optek. Just really a fantastic addition. The teams have hit the ground running across all businesses. The integration process is well underway, and the machine is fully in motion. Further, M&A activity is robust, and we continue to execute and cultivate accelerated opportunities. We see many opportunities progressing through 2026, but at this time, nothing additional is imminent in Q1. Alex will provide more detail on our core businesses as well as the recent acquisition shortly, but let me touch on the planned succession time line that we announced last night. I want to congratulate Alex for being appointed as Crane's next CEO, and effective April 27th, 2026, at our next Annual Shareholder Meeting. And at that time, at the request of the Board, I will move to serve as Executive Chairman for a transitionary period expected to be no more than 2 years. Having partnered with Alex for more than a decade, I can confidently say he is the right leader to accelerate Crane's strong momentum. His deep operational expertise, proven ability to develop and execute complex strategic initiatives and unwavering commitment to our high-performance culture have been critical in shaping Crane into the market leader it is today and our proven performance across PFT and AAT. In my new role as Executive Chairman, I look forward to supporting Alex and the leadership team. As we continue driving strategic growth and long-term value creation. Coming off the incredibly strong performance in 2005 and turning to 2026, I remain highly confident in the strength and resilience of Crane's team and portfolio. Moving to 2026 guidance. I'd like to highlight that our guidance for '26 includes a change to our non-GAAP presentation of adjusted EPS, which now excludes noncash tax-effected acquisition-related intangible amortization. Rich will provide more on this during his remarks. By using this new convention for both '25 and '26, I'm pleased to announce our initial 2026 adjusted EPS guidance, $6.55 to $6.75. A solid 10% adjusted EPS growth at the midpoint. When excluding the $0.16 benefit of onetime hurricane-related insurance recoveries that we received in 2025. As well as after-tax acquisition-related intangible amortization in both years. Importantly, I'm excited to share that we estimate that the acquisitions will be slightly accretive to 2026 earnings results. As I started with, many exciting developments across the company and our investment thesis is stronger than ever. Now let me pass it over to our Chief Operating Officer and incoming Chief Executive Officer; Mr. Alex Alcala to provide some color on the current environment, segment performance and recent acquisitions. Alex? Alejandro Alcala: Thank you, Max. I'm truly honored to have been appointed the next Chief Executive Officer of Crane. I'm enormously grateful for the Board and in particular, to Max for his trust and support over the years. I'm also thrilled that Max will continue as Executive Chairman, allowing me to keep benefiting from his tremendous experience and leadership. But this is not about me. It's about our leadership team and the 8,500 associates who execute every day, leaving the Crane culture of incredible intensity, focus and accountability. I've been fortunate to be part of the Crane journey for the past 13 years. We've transformed our portfolio, substantially improved our margins and our growth profile, and delivered significant shareholder value under Max's leadership. But I can tell you, I've never been more excited about our future and the progress we will continue to make for our customers, our associates our communities and our shareholders. Looking ahead, we will stay true to our journey, driving the Crane business system to deliver strong organic growth while also pursuing our strategy of accelerated inorganic growth. Over the years, I have literally traveled more than 1 million miles as part of this incredible journey with Crane, and I'm ready for the next million with this extraordinary team. Now some thoughts on the segments in the quarter as we look to 2026. Let me start with Aerospace & Advanced Technologies. These markets remained very strong. The backlog we built, along with the new programs and opportunities, our Aerospace & Electronics teams have secured continues to provide us with great visibility into 2026 and beyond. On the commercial side, Things continue to look healthy. Boeing and Airbus continue to ramp up production and aftermarket demand is still running at elevated levels, although the year-over-year comparisons have become increasingly challenging. On the defense side, a lot of activity and interesting industry announcements over the past few weeks. Procurement spending remained solid, and there's a continued focus on strengthening the product defense industrial base given the heightened global uncertainty we continue to see. Given the level of activity we are seeing for 2026, we expect core sales growth for the year to be up at the high end of our [indiscernible]. assumption. And importantly, that growth should leverage at about 35% to 40% for the full year despite the less favorable mix, which is moving back to normal levels. Our guidance assumes OE sales will grow double digits year-over-year, partially offset by decelerating growth rate in commercial aftermarket. We are excited for Druck to join the AAT segment and expect over the next few years that it will be incremental to both the segment's growth and margin profile. However, while it will be incremental to growth in 2026, we expect Druck to be diluted to overall segment margin in the near term. Overall, we are on track for another outstanding year. And beyond this, we continue to develop new technologies, win new business and pursue additional opportunities across the segment. That gives us confidence we'll deliver above-market growth for the rest of the decade. A few highlights for the quarter in AAT. First, in our Defense Power business, we remain actively engaged and solidly positioned with defense vehicle OEMs collaborate on the common technical truck and new combat vehicle programs. Second, Crane also continues to win funded next-generation military demonstrator programs for our brake control systems. We will also begin production for the F-16 brake control project in 2026 and received two more follow-on orders, one from the United States Air Force and the other from a foreign military customer. And last, with elevated interest around air defense systems, we are actively tracking and pursuing new high-power AESA radar opportunities. Overall, our Aerospace & Advanced Technology segment is positioned to significantly outperform its markets over the next decade. We're extremely proud of what this team has accomplished and the momentum they've built. At Process Flow Technologies, we remain well positioned to outgrow the cycle. Over the past decade, we have deliberately repositioned our portfolio towards technologies and end markets that are higher growth and where we maintain leading competitive advantages and clear differentiation, positioning enough to deliver consistent, sustainable growth ahead of the market. And the latest acquisition enable us to continue that journey. Similar to Q3, we continue to see strength in segments such as pharmaceuticals, cryogenic power generation and water while chemical markets remain subdued at trough levels. Our disciplined approach and sharp focus enabled us to maintain leadership in this segment, as evidenced by our Q4 performance even given today's macro backdrop. A few highlights from PFT in the quarter. Our cryogenic business had another strong Q4, securing orders for a number of space launch customers. We continue to win and expand our share in this important vertical due to our excellence in engineering solutions, along with our ability to rapidly execute orders. Additionally, we continue to drive solid wins in pharma, securing another large order supporting capacity expansion to manufacture GLP-1 drugs. Our ability to deliver high-performance solutions for our critical pharmaceutical applications continues to set us apart in a competitive market and positions us for sustained growth in this segment. And lastly, despite the sluggish chemical industry, our teams continue to secure targeted opportunities within chemicals, securing key new project wins in the Middle East. Looking ahead to 2026 for PFT, given our fourth quarter orders remain sluggish, we are adopting a cautious view of 2026 demand levels to start the year and expect that core growth to be flat to low single digit for 2026. However, we do expect core leverage to still be within our targeted range of 30% to 35%, with the additions of Panametrics, Reuter-Stokes and optek-Danulat joining the PFT family, we fully expect over the next couple of years that they will be incremental to both segment growth and margins. In 2026, while there will be incremental to growth near term, we expect them to be [ dilutive ] margin. Overall, both businesses are strongly positioned for sustained success with the resilience and strategic foundation needed to deliver outstanding results in 2026 and beyond. Before I wrap up, I want to provide additional color on the acquisitions of Panametrics, Druck and Reuter-Stokes. The integration process is off to a strong start, and our outlook for these businesses is already exceeding our initial expectations. As Max mentioned, we now anticipate these businesses to be slightly accretive to earnings in 2026. Compared to our original expectation of no accretion in year 1. We have been preparing for the last 6 months, and I personally spent a significant portion of this month visiting all these teams. And the CBS machine is already being deployed. I'm extremely confident that these businesses will become some of our best performing and most profitable businesses within Crane in the years ahead. As I think about the levers of focused improvement, the cost synergies will come from 3 major areas, all driven by CBS. Organizational simplification and focus. By operating these businesses as three independent entities, we're eliminating the top management cost layer. Product Line Simplification or 80/20, reducing complexity and eliminating work with limited return on investment; and traditional productivity improvements, driving efficiency through supply chain and lean tools and processes. In addition, all growth synergies are fully incremental upside to our financial model. We have dedicated teams in place and are off to a great start. I'm very confident we will meet or exceed our targets. Now let me turn the call over to our CFO, Mr. Rich Maue for more specifics on the quarter. Richard Maue: Thank you, Alex. I really look forward to having as much fun with you as I've had with Max over the last decade. And Alex, I gave Max this same advice when he became CEO, borrowed from Michael Caine as Charlie Croker in the timeless movie classic, The Italian Job. It's a difficult job and the only way to get through it is if we all work together as a team. And that means you do everything I say. I'm kidding, of course. I don't -- not really. And to Max, borrowing Humphrey's Bogart ever famous line as Rick Blaine, in the Academy Award-winning drama Casablanca, We'll always have Paris. Max Mitchell: I'm going to get choked up. Richard Maue: Good morning, everyone. Let me start off with total company results. We drove 5.4% Core Sales growth in the quarter, reflecting the ongoing strength within the Aerospace & Advanced Technologies segment. Adjusted operating profit increased 16%, reflecting the impact of higher productivity and favorable pricing net of inflation. In the quarter, core FX-neutral backlog was up 14% compared to last year, again, continued strength at Aerospace & Advanced Technologies and core FX control orders were up 2%, from a balance sheet perspective, with the close of the acquisition of Druck, Panametrics and Reuter-Stokes, we ended the year with net leverage of 1.1x, which reflected 102% adjusted free cash conversion in 2025 and outstanding performance by our teams globally. And as Max noted earlier in January, we also closed on the acquisition of optek-Danulat, that brought our net leverage to 1.4x, leaving us well positioned for further M&A. A few more details on the segments in the quarter. Starting with Aerospace & Advanced Technologies. Sales of $272 million increased 15% in the quarter, nearly all of that growth organic. And even with the continued high level of core sales growth, our record backlog of just over $1 billion was up 25% year-over-year and was up slightly sequentially. Core orders were up 8%. Again, no surprises and continued strong demand broadly. Total aftermarket sales increased 1% with commercial aftermarket sales up 3% and military aftermarket down 3%. And OEM sales increased 23% in the quarter with commercial sales up 27% and military sales up 18%, all in line with our expectations. Adjusted segment margin of 23.6% expanding 50 basis points from 23.1% last year, primarily due to strong productivity, higher volumes and higher price net of inflation. At Process Flow Technologies. In Q4, we delivered sales of $309 million, flat relative to a year ago with core sales down 1.5% as we anticipated, offset by a slight benefit from the Technifab acquisition and 1.6 points of favorable FX. Compared to the prior year, core FX-neutral backlog at PFT decreased 7% and core FX-neutral orders remained soft, down 3% driven by the weaker chemical end markets as expected. However, adjusted operating margin of 22% expanded again and in the quarter was 170 basis points higher. Despite the headwinds on the top line, productivity is reading through as well as price. Moving to the nonoperational items below the segments, along with some additional 2026 guidance matters. The start, as Max mentioned, beginning in 2026, we are excluding intangible amortization from our non-GAAP presentation of adjusted EPS. Following the significant increase in intangible amortization related to this month's acquisition activity, we believe that excluding it from adjusted EPS gives investors a better picture of Crane's free cash flow and also enables better comparison to the majority of our peer companies that use the same convention. Reconciliations recasting last year are in the slide presentation accompanying this call. Now moving on to a few nonoperational items. Corporate expense for the full year of 2025 was $87 million, modestly up above our prior view of $85 million due primarily to M&A activity. For 2026, we anticipate corporate expense to be in the range of $80 million to $85 million. In Q4, we received $5.2 million of insurance recoveries from the Hurricane Helene flood. We had at one of our PFT sites or a $0.07 benefit to results in the quarter. With this final payment, the matter is now fully resolved with our insurers. Remember that our full year 2025 guidance included $9 million of insurance recovery related to Hurricane Helene with $6.7 million received through Q3. So $2.3 million or about $0.03 of the fourth quarter's insurance recovery was in our latest October guidance. So the actual amount received was $2.9 million or $0.04 per share better than we had expected. Also keep in mind that for the full year, total insurance recoveries benefited adjusted results by $0.16, a benefit that will not repeat in 2026. Given the funding for the acquisitions of Panametrics, Druck, Reuter-Stokes, and optek-Danulat, we now anticipate full year 2026 interest expense of approximately $58 million. And lastly, we estimate our tax rate for 2026 to approximate 23%, slightly higher than [indiscernible]. Looking at the cadence of quarterly results for the year, we expect Q1 2026 to be seasonally softest quarter coming in roughly flat with the first quarter of 2025, lower than historical patterns given acquisition integration and increased interest expense. For the full year earnings split, we expect the first half of 2026 to represent about 45% of full year earnings with 55% weighted towards the second half. Overall another outstanding year at Crane planned for 2026. And with that, operator, we are now ready to take our first question. Operator: [Operator Instructions]. Our first question is coming from Scott Deuschle with Deutsche Bank. Scott Deuschle: Max, what are you going to do about your free time here? Max Mitchell: I'm going to remain busy, Scott, very, very busy. In addition to Executive Chair, I think you know, I've become a very popular Gen X influencer. I have my podcast that started and my only fan page is going well. It's going to be... Scott Deuschle: I'm looking to hire someone from my team if you're understood [indiscernible] I'll let you buy the Crane nuts. In all seriousness, Alex, I was wondering if you could speak to the pricing opportunity at drop in 2026 and 2027. And specifically, I was curious if there are any meaningful LTAs coming up for renewal this year or next? And what type of price increase might be possible there? Alejandro Alcala: Yes. Thanks, Scott. So I was just pulling back on all 3 businesses, right? Druck, Panametrics, Reuter-Stokes in our financial model, we assume significant opportunity. I've been working with this team for 6 months, spent most of the months with them. So definitely validate our hypothesis on opportunities potentially more than we even thought. So feeling very bullish about these acquisitions. All three businesses have a significant opportunity to drive the Crane Business System. I talked about the areas on product line simplification, restructuring, how the business model and just traditional operational excellence. As far as value pricing, as you know, in Crane, we do a good job standing for setting up for a value our differentiated technology. There's opportunity to do better in all 3 businesses and Druck, we would expect to see improvements starting this year, reading more into next year as it takes some time. Just like any aerospace visits, there are contracts some expire naturally that need to be renewed, renegotiated. So everything -- no real obstacles to achieve our goals in that area, Scott. Scott Deuschle: Okay. Rich, can you clarify what guidance contemplates as it relates to cost takeout at PSI. I think you've spoken about high single-digit million corporate cost takeout. And I wanted to clarify if that was in the guide or still on the comp. Richard Maue: Yes, I think no change to what we've previously discussed. There's a few buckets. I think they're the same buckets that Alex mentioned. So the cost element is going to -- is -- or productivity element, however you want to categorize it is clearly going to be one of them. On the commercial side being another and then leveraging the growth at rates that we would expect to leveraging our operating cadence. So across all 3, and I would say no difference versus what we previously had communicated. Operator: And our next question is coming from Myles Walton with Wolfe Research. Unknown Analyst: This is Greg Dahlberg on for Myles. First of all, I would like to say congrats to Max and Alex. So first one, I guess with the renaming of A&E to A&T, I think [ aperture ] of what you would look at there. Can you go into more details, I guess, in terms of what adjacent tech and strategic direction this is actually referring to? Alejandro Alcala: Yes, Greg, this is Alex. So just a reminder, our business unit, Aerospace & Electronics was both business unit name and segment name. So last year, we announced the promotion of J. Higgs, as Senior Vice President of the segment, and it's really positioning us to do more deals like Druck. So Druck would be a perfect example of the technologies that we would expand in, where it has a foot in traditional aerospace, but also gets us into lab-based calibration and even some high-growth industrial applications that are combined with the technology. So I think Druck would be a good reference of what you expect to see in that segment. And the model that we have right now in the structure allows us to keep adding not only bolt-ons, but stand-alone units to keep building out that segment similar to what we've done in PFT. You recall that when we changed the name to -- from fluid handling to process flow technologies, we were thinking about expanding our aperture moving up the technology stack, having more differentiated products, and those have been the acquisitions we've done on that side as well with the sensing applications and now optic as well adding to that. And that's what you would expect to see high technology differentiated, improving our growth and margin profiles on both sides of the segments, growing both segments, doubling the size here in the next coming years is our goal that continues to create shareholder value and also optionality for the future. Unknown Analyst: And then just quickly on PFT. I know backlog declined sequentially for the second quarter in a row, mostly due to the chem side. Can you just talk about what you're seeing? And I guess is there a time frame you'd expect that to start turning more specifically to the chemicals? And, I guess, more broadly your outlook for end markets in 2026 in PFT? Alejandro Alcala: Yes, Greg. So let me pull back just on PST because we have -- we service various segments, right? So first commenting on the areas and businesses markets that grew in 2025 strongly, and we expect to continue in 2026. So wastewater, which is primarily a North America-based businesses. We saw high single-digit growth, we expect strong growth also in 2026. Cryogenics as well, double-digit growth in '25. That will continue pharma. There's a global growth that we're seeing also, in particular, in North America, some increased investments and reshoring from pharma customers that we expect power. Again, North America-based power generation, where we've seen momentum in '25, expect that to move on to a lot of our segments and verticals of our businesses continue with strong momentum. You did mention chemical, which has been sluggish. Just to pull back also, we expect to see similar to what we saw in '25, which has been varied by region. You can't lump it all together. So Americas and Middle East, we saw growth year-over-year on orders in '25. We expect the sort of modest growth to continue in that area. Our team is doing an excellent job winning. Again, those 2 regions have this feedstock energy advantage. So customers see good return on investment on taking action on capacity expansions or increases brownfields in particular in the Middle East. So those will continue at a moderate pace on a negative or sluggish, Europe, China, the rest of Asia Pac, that's been down. We don't expect those to change. So on the net, our assumption for 2026 is continue to see working through the trough, not deteriorating, stable, but not planning for a strong uptick in the year, but we're ready for it. If it happens, we'll take advantage of it, but not built into our guidance right now. Operator: And Our next question is coming from Jeff Sprague with Vertical Research. Jeffrey Sprague: Congrats Max and Alex, exciting news for both of you. Just a couple from me. First, just back on the deals. You kind of laid out the cost reduction opportunity and plan I think there's also cost in to get these bedded down and integrated given that they were carve-out entities. Could you just maybe speak to that the interplay between kind of cost to integrate versus cost out? And I would assume those sort of flip as we look into '27, '28. Alejandro Alcala: Yes, Jeff. So I mean there is some cost in and cost out on a net basis, it will be a cost out. The improvements in the margins will increase in '27,'28 as a lot of our actions to materialize and read through to the P&L. I've mentioned before, Baker Hughes operated these businesses as PSI. So it has that high-level PSI headquarter structure, which we're dissolving, shared services and finance, HR and IT. So that goes away, replaced by stand-alone business unit resources that we're adding overall on that basis, we expect once we're done to operate leaner and more profitable with all these ins and outs from a cost standpoint and then driving improvements on top of that. Jeffrey Sprague: And then just thinking about what Rich shared on Q1, it sounds like the expenses could be heavy here in Q1. Maybe you could just give us a little bit of color on kind of the expected organic performance in Q1 versus kind of the deal impact in Q1 to get to kind of that relatively flat number. Richard Maue: So legacy Crane organic, we'll be clearly up in A&E and likely down a bit in PFT in Q1 would be part of that dynamic in addition to the incremental interest expense that we have compared to last year in the first quarter. Sort of the, I would say, the big drivers, Jeff. There's also within Druck, Panametrics, Reuter-Stokes, there is seasonality, and they tend to be stronger in the second half than the first half historically. Jeffrey Sprague: Okay. Great. Understood. And then maybe just kind of stepping back just on the deal activity. So a lot of bandwidth still on the balance sheet. It sounds like you feel pretty comfortable with just the internal bandwidth to kind of execute all this? Maybe kind of address that, the ability for the organization to take on something else of size this year? Or should we expect maybe sort of smaller bolt-ons as the year is progressing here? Alejandro Alcala: Yes, Jeff. So the machine is working, right? At CBS, our funnel. We're integrating these four different businesses very well with resources. We have bandwidth to do more, I expect to do more in '26. I can tell you that we're also building capabilities constantly. We improved our capabilities not only to integrate but also our strategic resources that are evaluating adjacent is proactively increasing the potential targets. So we're only getting stronger on the M&A front and expect to accelerate that going forward. So funnel strong, nothing imminent in Q1, but expect to continue the momentum as we move forward. Plenty of bandwidth on our side. Operator: And our next question is coming from Matt Summerville with D.A. Davidson. Matt Summerville: Thanks. Couple of questions. First, can you talk about 2026 with respect to the Aerospace segment, what you're expecting from an aftermarket volume standpoint for both OEM and military? And can you also sort of discuss whether there's any sort of government shutdown impact on any of the more material military programs for you guys? And then I have a follow-up. Alejandro Alcala: Yes. Thank you, Matt. I'll comment on it. Let me walk you through all the assumptions here on Aero in all the segments. So commercial OEM, as you would expect, will continue to be strong, high teens, Military OEM, mid-single digits then to your question of aftermarket. On the commercial side, we're anticipating mid-single digits and on the military side mid- to high single digits. So continued momentum on all those fronts. As far as the government shutdown the only thing that we've seen no change in orders or programs or funding, but we did see the flight test of the F-16 program get delayed a few months of being completed in January we expect that to be complete more in the early second quarter. So that will delay a few months, the start of the shipments for the F-16, but that's all baked and factored into the guidance we provided. No other real impact right now that we see related to government shutdown. Matt Summerville: So as it pertains to kind of that $30 million sort of per year beginning '26 kind of target you laid out for F '16, is the is that lower than in 2015, meaning is your guidance assuming you don't fully capture that 30%, yet there's an opportunity albeit over a more compressed time frame for you to ultimately deliver that. And then can you just clarify for the PSI group of businesses, what for your 3-year cost synergy target would be, if you can remind us? Alejandro Alcala: Yes. So Matt, on the F-16. Yes. In our guidance, we're thinking more on F-16,though the annual rate is 3% this year, more like in the 20s, low 20s of revenue. There is an opportunity and a more compressed time line. But in our guidance, we've pulled that back a bit due to the few months shifting to the right. Related to the cost synergies, right? So this year, as we're starting off, we're moving fast with the actions. The teams are actually impressed me with their ability to embrace the Crane Business System machine, but it takes some time to read through. So if you're trying to do the math, would expect like mid-single-digit growth and about 200 basis of improvement in the margin profile this year. And then in the coming years, It'll be a little bit higher than the 200 basis points on a CAGR basis that gets us in that 5-year mark to achieve or beat the 10% return on investor capital. So about 200 basis points and then a greater number in the years ahead. Operator: Our next question is coming from Amit Mehrotra with UBS. Amit Mehrotra: I wanted to ask about the power -- come back to the power generation market for a minute. I think you talked about Power Gen being 10% of the portfolio inside of PFT, but you're also adding nuclear exposure with PSI. And obviously, that's a pretty important place right now. So maybe you can just reset kind of the exposure to total power gen, and then I'll also talk about nuclear power gen and how that's changing. Alejandro Alcala: Yes. Thank you, Amit. So like you mentioned, the traditional power combined cycle power plants in our valve segment, that's what I've mentioned in '25, significant, as you know, amount of being built in the United States. So that's driving our growth. As far as nuclear, as you stated, we're basically doubling our exposure in the nuclear with Reuter-Stokes. So we have our core business, Legacy Crane Valve Services and then now Reuter-Stokes and then combined, we call it, Crane Nuclear now. So the growth exposure there is pretty attractive. Think about it 4 buckets you've got the restarts of the various nuclear plants like [ Polek ] or the Crane Clean Energy formally Three Mile. So that will drive upside. You have the new construction with AP1000, Westinghouse where we're very strong, have a very strong position with those reactors in our valve business, and there are some expected starts in Europe. The third area, really, which comes with Reuter-Stokes is we also have very good exposure now to the small module reactors. So -- we have a partnership with one of the leaders that's building the first SMR in Darlington, Canada. That's starting construction already or soon, one of the reactors. And there's three more on the plan depending on how this one goes. This is boiled water reactors that Reuter-Stokes has the neutron sensing technology, which is used to gauge the power that's being generated. And then we're also benefit on this fourth leg with the extension of licenses, right? So 5 years ago, nuclear plants were decreasing or shutting down. And now we're seeing licenses being extended 50 years or so, and that requires upgrades and investments. So pretty good tailwind that will keep getting stronger as the decade progresses. Amit Mehrotra: Okay. And just as a follow-up. I want to revisit that 55% back half, I guess, obviously, 45% first half. And then you've given us the first quarter. It looks like just the way the math works, there's not a lot of growth year-over-year in 2Q implied by those comments as well. I don't know if I'm doing my math wrong or maybe there's the hurricane dynamic in there in terms of the comp. But can you just talk about that. Richard Maue: Yes. Jason and Allison will catch up with you. But I would say that, yes, on the part of the headwind in Q1 and in Q2 clearly will be the insurance recovery. Those were included in our numbers, $0.16 on the year, and it was probably close to 50-50 in terms of first half, second half. Yes. But from a growth perspective, I'd rather hold off on commentary on individual quarters from a core growth perspective, frankly at this point. Amit Mehrotra: Fair. That's fair. Can I just ask 1 quick follow-up, if I don't mind, just on the synergies for PSI because you talked about PFT growth flat to up low single digits and then 35% to 40% incrementals. It doesn't feel in that number, there's a lot of synergies in there, but there's still 7, 8 points of margin gap. And so maybe this is just a timing thing or maybe it's conservatism but it would just be helpful to understand maybe if there's an opportunity for EBIT and PFT to grow disproportionately from revenue in 2016, just given maybe some of that margin gap that you can close? Or is that maybe more of a late '26,'27 thing? Richard Maue: Yes. I would probably err towards what you closed there with on your question. The 30% to 35% is on the legacy. And then as we continue to integrate the Druck, Panametrics Reuter-Stokes, we'll start to see some of that incremental coming in more so in the second half versus the first half. So that would be -- that would absolutely be the case for '26. Operator: Our next question is coming from Nathan Jones with Stifel. Nathan Jones: Everyone. Congratulations to Alex. And unfortunately, Max, I can't see you're on the fan page. Max Mitchell: I'm not taking your request any more. Nathan Jones: I guess, first on the acquisitions. I know you guys didn't include any revenue synergies in the deal model and in that kind of 10% ROIC target by year 5. But I also know that you anticipate getting some. So I'd be interested in getting some color around kind of where the most the most bright areas for you to generate revenue synergies are? If you can put any kind of financial framework around that of like would generate 100 basis points of revenue synergies or 200 or whatever the expectation might be over the next several years? Understanding that those are a little more squishy and maybe a little harder to track. But just any color you can give us on how you'll approach that? And if you can give any financial framework around affects. Alejandro Alcala: Yes, Nathan. So let me try to answer the first part of -- you're right, we expect some growth synergies in these areas, different for each of these businesses. For example, in Druck very strong, very strong position on the commercial side, not as much on the military side. So with our legacy core A&E, as you know, we have an outstanding position there. So there will be some synergies opportunities to grow the businesses there. Traditional CBS commercial excellence and driving key accounts, channel management, project pursuit funnel management, et cetera, that will drive as well within the core business, improved performance similar for Panametrics, Reuter-Stokes incredible position in the power generation. We're looking at these adjacencies where they also play in homeland security, on the other industrial applications where there's a lot of room for growth with the right focus. So none of that is baked into our model, our guidance. I'm not yet ready to provide you with the financial numbers as much as I would like on what those growth opportunities would be. but they'll be there and you'll see them eventually read-through in the P&L need. Richard Maue: Yes. I think the confidence in -- I forget if it was Max's comments or Alex's is on the the 4% to 6% and these businesses taking us towards the higher end of that range, part of that confidence level comes from these adjacencies and other opportunities that we already see. So I think we expect to be at that high end or even slightly above it when you look out a couple of years. Nathan Jones: And this is probably just a housekeeping one. I think it was maybe Jeff earlier on was talking about integration costs and the impact that might have on your reported numbers. Are you eating those in the reported results? Or are they adjusted out of the reported results. Richard Maue: Yes. So I think in our response to Jeff's question, clearly, if they are directly associated with the integration, we will be excluding them and keeping them visible for everybody. But there are other investments that we'll be needing to make just part of bringing the business to where -- in the certain areas where we need to be. So in finance, for example, if I have to hire people or an HR have to hire people in IT, those are continuing costs of the business, and I can't exclude those. So that's really what we were referring to in the response to Jeff's question. Nathan Jones: Yes, I understand. Can you just give us an idea of what the impact to free cash flow will be in 2026 from these expenses, not from the hiring, but from the costs to achieve synergies just to level set that for us. Richard Maue: Yes. I don't have that off the top of my head here, Nathan. So we'll look to provide more color on that at the right time. I would expect our free cash flow, though, overall. Just stepping back, we had an outstanding performance here in 2025 in our business 102% on an adjusted basis. If we didn't adjust for it, for certain items, we were at 98%. So it's not like we pulled the whole heck of a lot out to adjust. Our core business will continue in that 100% range is our view right now. In next year, I would say, including the acquisitions, it will be down a little bit, but we'll be within that 90% to 100% range without a doubt. If that helps. Operator: Our next question is coming from Justin Ages with CJS Securities. Justin Ages: Congrats to Max and Alex on this new chapter. A question on the F-16. You know you noted that some of the win additional in the U.S. and international partners. Is that layered on top? Or is the international -- after the U.S. orders get built to maybe not into '27 where we see the benefit of the F-16 from international orders. Alejandro Alcala: Yes, Justin. So on F-16, the way we think about it is this $30 million annual sales doesn't really change much what -- as we get more of these foreign orders, what it does is it extends the whole program link. So it goes out further that we'll continue to see the benefit. We will ship first to the United States Air Force and then complement that with foreign military sales. At that $30 million or so rate per year. Richard Maue: We have orders that are in excess of that annual rate today. So it's not like we have to wait for the orders. It's -- we have them in backlog today, Justin. So anything incremental to that, just to Alex's point extends. Justin Ages: All right. That's helpful. And then you guys have done a bunch of acquisitions. You talked about your M&A capacity. You're levered now at 1.4. Can you discuss a little more what your target leverage is? What would you would be willing to go to if the right acquisition is out there? Richard Maue: Yes. So with the right acquisition, we don't have a problem going to 3x even strategically, if it made a lot of sense even going beyond as long as there was a path to come back down within a pretty short period of time to be in between, I'll call it, 2x, 2.5x, something like that on a -- from a target perspective. But we have no problem going up as high as 3x or even above that for the right deal. Operator: And our next question is coming from Jordan Lyonnais with Bank of America. Jordan Lyonnais: On Aero and the name change, how are you thinking about adjacencies or opportunities into IGT or Aeroderivatives. And then two, [indiscernible] on the military side, is there any changes to your thinking on CCA's with the new group of on select on Tranche 2. Max Mitchell: You're breaking up just a little bit, Jordan, if you can say that again. Jordan Lyonnais: Apologies. Yes. Sorry, is this better? Max Mitchell: That's much better is better. Jordan Lyonnais: On CCAs, has that opportunity changed at all for how you're thinking about the program with Tranche 2 now coming online with a batch of 9 new contractors? Max Mitchell: And you're opening as well because it was -- repeat it again, that would be great. Jordan Lyonnais: Yes. For Aero & Advanced Tech now with the name change, the adjacencies that you're looking into, are you thinking about opportunities in IGT or Aeroderivatives. Alejandro Alcala: I think on the first piece of the question on the AAT, again, we are exploring many different types of adjacencies. Traditionally, right, our core business has been in improved power control. So expanding beyond that in aerospace, just like we did in sensing, many different avenues, land-based. We're thinking about -- I don't want to call out specific adjacencies at this point, but many, many other adjacencies that complement both military and aerospace technologies and also play in other high-growth markets at the same time. And on the second part of your question, with CCA, do you mean collaborative combat aircraft? So I mean we're definitely playing in that space. We think we're very, very well positioned both with the, I guess, the traditional primes and the new entrants. In fact, in prior quarters, Jordan, you may recall that we have this great position in one of the new program Fury to call it out where we expect significant growth in the future. So in this different cycle, different sales cycle, different type of speed that is required, but all the demonstrators we have won our position there. And also with the new entrants, we have excellent content. So we feel very, very bullish about that segment and our ability to benefit from that. Operator: [Operator Instructions]. This concludes the Q&A portion of today's call. I would now like to turn the floor over to Max Mitchell for closing remarks. Max Mitchell: Fantastic. Alex, congratulations again. Alejandro Alcala: Thank you. Max Mitchell: Thank you all for joining us today. Great call, great team, great performance. There's a great deal of momentum here at Crane. We delivered an exceptional 2025, and I couldn't be proud of our teams. We continue to innovate, win critical projects and execute and deliver exceptional results. We also accelerated and delivered on our M&A efforts, adding differentiated technologies that further strengthen the Crane portfolio, and we're set up for an even stronger 2026 with a leadership transition that will drive a continued focus on transformation, execution and the relentless pursuit of improvement, relentlessly driving towards perfection while accepting the reality we will always fall short that is what pushes us forward driving change as a late great performer, Diane Keaton once said, What is perfection, anyway? It's the death of creativity, that's what I think, while change on the other hand, is the cornerstone of new ideas. As always, change Crane is constant, and it remains the catalyst for fresh ideas, strategic evolution and continued outperformance with our excellent strategy, exceptional talent, strong momentum, our progress speaks for itself, and truly, there's no limit to what we will accomplish in 2026 and beyond. Under Alex's leadership and the team. Thank you all for your interest in Crane and your time and attention this morning. Have a great day. Operator: Thank you. This concludes today's Crane Company Fourth Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.
David Boshoff: Good morning, everyone, and welcome. I'm David Boshoff, and with me is our CFO, Steve Fewster. We're pleased to be joining you today for this December 2025 quarterly update. You'll notice that we're both in our harness today as we'll be traveling to site directly after this call. Before we get underway, I'd like to mention that today's presentation should be read in conjunction with our December quarterly report, which is available on our website. As we move through today's session, please feel free to add your questions to the live Q&A tab on the right side of the screen. I will be responding to these questions at the end of the session. As we step into the new year, it's a good moment to reflect on the December quarter, not just on what we've achieved, but on how we've achieved it. The quarterly -- this quarter delivered solid progress with strong tangible momentum across operations, construction and financial performance. And that progress is underpinned by our values, which guide our decisions, shape our culture and influence the way we work with our partners and contractors. That brings me to our find a way value. I'd like to recognize one individual who truly embodied it. Thomas Huckstadt is an application specialist in our IT team. Tom delivered the first phase of our Mardie operating system on time, on budget and to scope. He successfully managed key contractors to implement the Mardie production reporting system and our laboratory information management system. When traditional delivery models threatened time lines, Tom adopted an agile approach to accelerate implementation. And in fact, the contractor has confirmed that this was likely one of the fastest implementation in their history. I'll speak more about the Mardie operation system shortly, but I want to begin by acknowledging Tom and recognize the values-driven approach of our people. And that values-driven approach is exactly what underpins the business we are building at Mardie. Mardie is already Australia's largest solar salt operation and the third largest globally. Our focus is clear: Delivering salt to our customers later this year and providing -- and proving up SOP as a next major revenue stream. Salt is now in operation and is set to ramp up to 5.35 million tonnes per annum. With its scale, coastal location and integrated port infrastructure, Mardie is exceptionally well positioned to meet rising demand across Asia. Our SOP pilot work is also progressing well and remains on track to support a production pathway targeting around 140,000 tonnes per annum. This represents an opportunity to leverage our investment in the salt business to produce made in WA value-add products. The port provides us connectivity to our customers, along with additional upside through its spare capacity, creating potential for third party revenue and strategic partnerships over time. Now I'd like to walk you through the highlights for this quarter. In safety, we continue to strengthen key fatality prevention controls and maintained our focus on field leadership, completing more than 400 Leadership in the Field safety interactions. We also completed 290 critical control verifications, and our 12-month rolling average total recordable injury frequency rate was 3.9. We continue to actively manage the complexity of concurrent activities and project activities on site for operations and projects. As mentioned earlier, we deployed the mine production reporting system and the laboratory information management system as part of the Mardie operating system. This, along with our digital twin that we call Poseidon enhances operational visibility and control, enabling us to make timely, data-driven decisions. Brine levels across ponds 1 to 9 remained in line with our operational targets. The pond brine density continued to increase as we have forecasted. Construction is also progressing well. With the project now 77% complete, we commence seeding the primary crystallizers, and progress is tracking to plan. Major earthworks for the salt wash plant, stockyard and nonprocess infrastructure were also completed during the quarter, readying us for construction of these 3 assets over the next 3 quarters. Significantly, another reflection on our Find a Way value, we secured all our primary approvals for the offshore placement of material from the dredging program at the Port of Cape Preston West. This is a key milestone for our port infrastructure, which also significantly derisks achieving our construction budget. Finally, we commissioned all the KTMS trial crystallizers as part of our SOP piloting work, achieving steady-state operations and performance in line with our expectations. I'll now hand over to Steve who will walk us through the corporate highlights. Steve Fewster: Yes. Thanks, David. With construction remaining within budget, BCI continues to be in a strong financial position. During the quarter, we drew $99.8 million from the syndicated debt facility. That takes total debt drawn at the end of December to $446.8 million. We also issued over 50 million new shares following the conversion of the Series 1 convertible note held by AustralianSuper Pty Ltd. And consequently, that reduced our borrowings by $29.1 million. We'd like to thank AustralianSuper for their ongoing support. On the corporate front, we formalized the 2-year capacity building program with Wirrawandi Aboriginal Corporation, and Dave will share more about that later on. I shall share more on cash flow shortly, but Dave will provide a more detailed update on our operations. David Boshoff: Thanks, Steve. Operational performance remained strong this quarter with ponds running at 96% utilization across more than 9,300 hours. All pond levels continue towards operational height, and brine density continues to increase in line with forecast. As you can see on the chart, we are -- we've got a marker there for 31st of December, and it's within the range that we predicted 2 quarters ago. Our focus is now on balancing density across the pond network as we progress towards crystallizer readiness. Key technical milestones were also achieved, including calcium carbonate ceiling in pond 6, gypsum formation across the ponds, that is, pond 7, 8 and 9. This process materially improves water retention, remove contaminants and are critical to achieving steady-state brine flow and high-quality salt production. We also welcomed the arrival of brine shrimp in pond 7. Brine shrimp helps to naturally clear nutrients and support salt quality. Looking ahead, Poseidon, our model, indicates that pond 9 is expected to reach target density in February, and this keeps us on track for first salt on ship in the December 2026 quarter. We're continuing to make good progress towards our construction milestones with cumulative expenditure totaling $1.043 billion. As we stated in September quarterly, activity during December was relatively lower, reflecting the completion of several large packages. We expect activity to pick up again this quarter as we now work on the salt wash plant, crystallizer sealing and dredging packages. Seeding of the primary crystallizer has also commenced with liners creating a safer, more predictable harvest environment and eliminating seepage. Brining began in November and remains on track with the first crystallizer cell scheduled for completion in February. 3 crystallizers lift stations were also completed during the December quarter, ready for commissioning of the transfer of high density brine from pond 9. Major earthworks for the salt wash plant, stockyard and nonprocess infrastructure were also completed, enabling concrete works to commence early this year. Engineering and design for the salt wash plant continues with major procurement items in the fabrication phase. The nonprocess infrastructure contract was awarded in December, and design work is now underway. Approval has also been received for the remaining section of the Pilbara Port, and that construction has also commenced. At the Port of Cape Preston West, construction of the marine packages progressed with electrical and mechanical installations advancing, and the overall completion is now 94%. Now that BCI has secured our primary approvals for offshore placement of dredging material in December, dredging of the berth pocket and navigation channel is expected to begin in April 2026. Steve will now take us through the financial highlights. Steve Fewster: Thanks, David. Total construction costs now sit at just over $1 billion, having spent $41 million during this quarter. The largest packages of work remaining include dredging, the balance of the crystallizer lining and the salt wash plant. Other than long lead items that have been ordered for the salt wash plant, these packages will be funded from the $351 million in uncommitted funds that we have. The progress made on these 3 major construction areas supports our confidence of remaining on budget. As mentioned earlier, we drew $99.8 million from our syndicated debt facility during the quarter. At the end of the quarter, BCI had available liquidity totaling $601 million. With construction costs at just over $1 billion and our pre-revenue operating expenditure of around $255 million, BCI has invested almost $1.3 billion in the Mardie salt operation. With approximately $400 million required to complete construction and available funding of $601 million, we remain fully funded to complete construction as well as meeting the working capital needs through ramp-up. To date, we have also successfully completed 8 drawdowns totaling $446.8 million. I'll now provide an overview of what we're seeing in salt market. The market fundamentals remain strong. While some Chinese chlor-alkali producers are seeing softer short-term demand due largely to a slowing in the real estate growth and domestic consumption, the medium-term outlook across Asia remains positive. India is the largest exporter of lower-grade industrial salt to China. And across the last 5 years, we've seen India export volumes expand from 12 million tonnes to a peak of 28 million tonnes in 2024. In 2025, however, Indian export volumes have pulled back to 26 million tonnes. Our expectation is these volumes will further reduce as the Indian chemical industries expand to supply their local market. The reason we remain confident about the outlook for high-grade industrial salt is that between now and the end of 2028, there are 16 new chlor-alkali and soda ash plants under construction in India, China and Indonesia. A proportion of this new Asian production is replacing chemical plants that are closing throughout Europe. These 16 new plants are forecast to increase demand for high-grade industrial salt by 10.2 million tonnes per annum. And this timing coincides nicely with the ramp-up at Mardie. So across the period, there is only 6 million tonnes per annum of new supply coming into the market, and that includes Mardie. The Port of Cape Preston West is a strategically valuable asset for BCI and the region. This is a multiuser port designed to expand and to export around 20 million tonnes per annum of bulk commodities such as salt, SOP and iron ore. At nameplate capacity, Mardie salt-only operational needs of around 5.5 million tonnes per annum, leaving approximately 14.5 million tonnes of surplus capacity. This presents a real opportunity to support other proponents in the West Pilbara who require access to port infrastructure. Pleasingly, BCI has received inquiries from potential third-party users in the region. By the end of 2025, construction of the marine package have progressed well with electrical, mechanic and the mechanical installations advancing. Remaining works now include the final piles and [ cat walk ] which is scheduled for completion in September 2026. During late September, BCI secured all primary approvals from the Commonwealth and state governments enabling offshore placement of material from our dredging program in line with the optimized dredging methodology. Subject to final approvals, including management plans and contracting -- contract finalization, dredging is expected to commence in April 2026. Thank you, and I'll hand you back to Dave to talk about SOP. David Boshoff: Thank you, Steve. SOP, or sulphate of potash, is a key product of our salt operation, an important revenue stream for BCI in the future. SOP is a high-value premium fertilizer. This is different to the more common muriate of potash, or MOP. Unlike MOP, SOP contains sulphur as well as potassium, making it ideal for high-value crops such as fruits, vegetables and nuts. It plays a key role in improving crop quality, yield and food security, particularly in regions with nutrient-depleted soils. During the December quarter, all KTMS trial crystallizers were fully commissioned, achieving steady-state operation and performing in line with expectations. This work is a key part of BCI's piloting approach, enabling us to refine processes, validate operational performance and derisk full-scale SOP production. Batch plant testing completed during the quarter has allowed us to finalize the pilot plant scope, and preparations are now underway to award the design package in this current quarter. This marks a major step towards construction and delivery of that facility, positioning BCI to unlock the value of SOP production alongside our salt operations. While our focus remains on safety -- safely ramping up our operations and completing construction, we continue to prioritize sustainability. This included -- in this quarter, this included monitoring our mangroves, sandfire and algal mats, marine turtle monitoring and migratory shorebird surveys to name just a few. We convened a co-designed workshop with the Wirrawandi Aboriginal Corporation to update our indigenous engagement strategy, ensuring alignment with their strategic priorities. We also formalized a 2-year capacity building program with Wirrawandi, providing $480,000 to strengthen governance, systems, financial management, leadership development and succession planning. On the community front, we established a new partnership with the Karratha Kangaroos Junior Rugby League. As a big rugby fan myself, this is especially exciting opportunity supporting youth sport and well-being in our region. As we close out this quarter, we do so by consistently applying our values and finding a way. We are well positioned to respond to forecast salt supply shortfalls in face of rising global demand, while creating sustainable multigenerational benefits for our shareholders, local communities and the broader Australian economy. This brings us to the end of our presentation, and we'll move to questions now. If you haven't already, please submit your questions in the live Q&A tab on the right side of your screen. Thank you. Unknown Executive: Thank you, David and Steve. Now I'll take the first question and pose this one potentially to you, David. Besides salt and SOP, are there any additional minerals that can be extracted from Mardie? David Boshoff: Yes. Thank you for that question. There are certainly numerous other products that are being extracted by other producers that uses sea brine as their primary source. We visited facilities that produces bromine. Actually numerous facilities use bromine as one of the products. We've also seen magnesium being produced in various areas. There's also a very good data that indicates pharmaceutical salt is a good potential to produce from seawater salt. So certainly, multiple other streams that provides a revenue upside for BCI and where we've already invested significant capital in our infrastructure at our site. Unknown Executive: Thank you, David. And just building on that, you mentioned earlier our progress on SOP. How confident are you in SOP based on the batch testing data received? And are there any learnings you can take away that can feed into the design of the pilot plant? David Boshoff: Yes, certainly. The -- as I mentioned during the presentation, the KTMS testing results so far has been exactly as to expectations. The key thing that we have to manage is on the trial ponds. We, of course, manage the chemistry. The laboratory information management system that I mentioned earlier is a very important ingredient, and we spend a lot of effort in setting up the lab to be able to test for chemistry properly. This is a key input that we've taken from some of the design partners that's helped us to set it up. And I'm very comfortable with where we are with the results. We have now also received test results back from our high temperature tests, both in China as well as here in Perth. And it's pleasing to see that the particular collectors that we are selecting to be able to do so performs well at temperatures well above 50 degrees Celsius. This is a key thing that I wanted to be sure of before we start into design phase for the pilot pond. Unknown Executive: Thank you, David. Now Steve, I've got one here for you about the port. Are you in a position to talk to the level of interest in the surplus port capacity? And if so, can you tell us a bit more about the revenue potential from this asset? Steve Fewster: Yes, thanks. So as I mentioned earlier, we certainly received interest in accessing the port. Those parties are looking at developing iron ore projects in the region. Our port is relatively close to where they're proposing to build their iron ore operations. And certainly, on a distance -- from a distance perspective, we're a lot closer to, say, the Ashburton Port and certainly a lot closer to their -- where they propose to have the operations compared to Port Hedland, if they can even get capacity or access at Port Hedland. So there's a couple of steps that they'll need to go through. They'll need to get their approvals in place, get their funding in place. So the interest is there, but I think that the critical part is without a port solution, they don't have a project. And the ability to get the product from the Pilbara, be able to mine it and then get it out through a port, we will play a critical role in opening up that area of the Pilbara where there's still a lot of high-grade, high-value iron ore deposits that are sitting with some of those junior players. So I think what we'll see is we'll have, probably not in the short term, probably not over the next 1 or 2 years, but as we look a bit further out, as companies are finalizing FID, we'll become much greater part of those conversations. In terms of revenue stream, we still need to work through what our pricing will look like. And in the past, what I've suggested is the Port of Ashburton, their [ considered ] rate is around [ $9, $10 ] for a tonne of bulk commodities to go through their port. That's one data point. We would need to look at the size of the investment we've made and make sure we get a reasonable return on that investment before we sort of set any pricing targets. Unknown Executive: Thank you, Steve. I've got a question here on BCI's longer-term plan. So does BCI have any plans to add additional salt ponds in the tenements held by BCI to the north of the current site? Steve Fewster: Thank you for the question. We have a number of leases that is available that we've already established in the last 12 to 28 months. Most of these leases are to the south, so between us and the Ashburton Port. There's some area to the north, but we are bordering up with an iron ore proponent just north of us. So there are certainly options available very close to as part of the Mardie project. These areas will require additional environmental approvals and will require, therefore, additional management plans such as groundwater management plans to be approved. So while this will be in our future thinking, what I would caution is that these things do have a long lead time as we've seen with the actual Mardie port so far -- Mardie operation so far. Unknown Executive: Thank you, David. Now back to construction progress. Can you talk to the build package for the salt wash plant? Tell us a bit about the complexity of this work package? And what's the time range for build and commissioning? David Boshoff: Well, so the salt wash plant, as I mentioned in one of the slides, we have completed all the earthworks that has started late last year. That's all done. We've already awarded the concrete package. So that's for all our concreting works for footings, floors, blinding work, all of that has already been commissioned, it has already been awarded. Fabrication is currently underway for all the rebar and reinforcement, and we expect batch plant and other works to be established in the coming weeks on site. At the same time, design has progressed really well on the main, what we call SMP works, the structural, mechanical and piping. We are expecting to award the fabrication of the actual main structure in the coming month or so. And then that will go into construction. And then eventually, of course, E&I, that's electrical and instrumentation, that will be the back end of that process. That package will be -- that package is still a fair few months away. Expectation is that we will start commissioning in perhaps late October. That will depend, of course, on when our salt is available to be able to go through into November and be ready for production in November for shipments in December. So all of those time lines are lining up, and the progress on the salt wash plant construction package is very much on track. Unknown Executive: Thanks, David. Now talking about on track. I've got a question here about operations. So over the recent years, the area generally experiences a fair bit of rain during March and -- through March to May. Assuming Mardie does experience rain during this period this year, are there any potential impacts to brine density, particularly in pond 9? And then if there are, is there any impacts to the FSOS, that time line? David Boshoff: Yes, certainly, the area experience cyclones. Our model, I mentioned earlier Poseidon, actually integrates the weather model and has used the last 45 years of actual weather data to model what the likelihood is of rainfall or cyclones in the near future, and it actually has included a cyclone in that ramp-up period. So I'm quite confident that our modeling in terms of salt ramp-up and salt production includes the expected weather from our region. To the question whether it impacts FSOS if we have a big rain event in this period between now and end of December. Well, good thing is so far, this particular season, we haven't had any cyclones. Of course, it doesn't mean there's not going to be a cyclone. Even if we have a cyclone, we have considered that in the process, and there is buffer in our schedule to still be able to deliver first shipment for revenue before December is out this calendar year. I would also say is we've experienced 2 cyclones not long ago, and some of those on the line might recall that. Not long ago, we had Cyclone Sean in that region. That had actually quite a significant impact in our area. And the good thing is that it validated that our design prevents overland flow water to enter into the ponds, and only the water you only receive in that area is falling on the ponds. Now we have a specific design feature to accommodate that. So once the ponds reach operational height, we have areas where this water discharges as natural process into the ocean. And as you can imagine, when you have water density very high and you've got rainfall at lower density, the lower density water is lighter, it stays on top. So you have this effect of laminating effect of the fresher water on top and that then discharge into the ocean while minimizing the dilution of our high-density brine in pond 9 particularly. Unknown Executive: Thank you, David. We might finish on one last question for you, Steve. You shared a really interesting insight onto the market. Can you tell us because Mardie is expected to deliver a significant volume of salt to the market, do you expect this will flood the market and push the price down? Steve Fewster: No, I think the timing of when we ramp up aligns very nicely with the -- the new chlor-alkali and new soda ash plants that are being constructed at the moment. So as I mentioned, about 10.2 million tonnes of new salt requirements in the Asian region at the same time as we're ramping up. So I think, firstly, that certainly supports our confidence. A lot of that production, new production that's coming into the region is actually, as I mentioned, is replacing production that's occurring in Europe. And over the last couple of years, we've certainly talked about the demand for salt largely reflects global GDP. So the global GDP still holds. There's still a high correlation between demand for salt and that growth. But that shift, that structural change with plant, chlor-alkali plants shutting down in Europe, relocating and building that capacity in the Asian region is certainly very helpful. The question earlier around rainfall is -- equally applies to other regions. And what we're seeing, particularly in India and the Gujarat region, is their rainfall, on an annual basis, has been increasing steadily. So the net evaporation rate is consequently reducing, which is also reducing the amount of salt that they're able to produce. So the yield that's coming out of India certainly been affected over the last 3, 4 years is the weather is affecting that yield. The other thing that's happening in India, though, is 2 of the world's largest chlor-alkali plants under construction there. So one has been constructed by Adani. The other is being constructed by Reliance Group. So those 2 plants are being set up specifically for the plastics industry or the PVC industry in India, and that is to build plumbing supplies and household -- for household construction. And so it's very new demand that's coming in the market. We expect that about 8 million tonnes per annum of salt that's being exported will need to be redirected into that Indian market. Modi has also set some policy -- put some policies in place, restricting the expansion of salt production in India. So at Gujarat region, they're not allowing any more permits to be issued for new salt projects. So we think in the medium term, certainly, there are a number of factors that support our enthusiasm and confidence where the salt market, the high-grade industrial salt market is heading. Unknown Executive: Great. Thanks so much, Steve, and thank you, David, for your time as well. And thank you to everyone who have dialed in today. That's a wrap. Steve Fewster: Thank you. David Boshoff: Thank you.
Operator: Good day, and welcome to the Enova International Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova. Please go ahead. Lindsay Savarese: Thank you, operator, and good afternoon, everyone. Enova released results for the fourth quarter and full year 2025 ended December 31, 2025, this afternoon after market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today's call are David Fisher, Executive Chairman of the Board of Directors; Steve Cunningham, Chief Executive Officer; and Scott Cornelis, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements, and as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Enova reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I'd like to turn the call over to David. David Fisher: Thanks, and good afternoon, everyone. I appreciate you joining our call today. Also with me today are Steve Cunningham and Scott Cornelis. As I'm sure most of you know, effective January 1, Steve became CEO of Enova and Scott became CFO as I transitioned to the Executive Chairman role, have committed to remain as an executive chair for at least 2 years. With the full support of the Board, this move was thoroughly, thoughtfully and deliberately planned over more than a year and having worked closely with both Steve and Scott for many years, I'm confident that they are the right leaders to see Enova through its next phase of growth. And the timing has worked out even better than we had hoped. As Steve and Scott will discuss in more detail, Q4 was another very strong quarter, wrapping up a record year for Enova. And as announced in December, with our pending acquisition of Grasshopper Bank. We believe we have found the perfect partner at the perfect time to take Enova to the next level by simplifying our regulatory structure, opening up additional markets for our consumer products adding additional low-cost funding sources, providing a platform for new product opportunities. When I first joined Enova, I never anticipated staying for more than a few years. But this role unexpectedly grew into the longest, most challenging and most rewarding of my career. I unequivocally attribute that to the extraordinary people and the culture at Enova and due in large part to that team, the future of Enova is bright. Steve and I share a common vision that our focused growth strategy will steer our path forward. We will continue to adapt and innovate and remain committed to producing sustainable and profitable growth, while meeting the needs of our customers and driving shareholder value. With that, I would like to turn the call over to Steve. Steven Cunningham: Thank you, David, and good afternoon, everyone. I appreciate you joining our call today. Our fourth quarter results capped off another exceptional year for Enova. Strong originations growth and solid credit across our portfolio once again drove strong financial performance. For the full year 2025, originations grew 27%, leading to revenue growth of nearly 20% which when combined with stable credit and the significant operating leverage in our business model drove adjusted EPS growth of 42%. 2025 was our second consecutive year of adjusted EPS growth in excess of 30%, demonstrating the resiliency of our balanced growth strategy, and the ability of our experienced team to deliver consistent and differentiated performance by leveraging our diversified product offerings, flexible online-only model and world-class risk management and technology. Turning to the quarter. We're pleased to deliver fourth quarter results that were in line or better than our expectations. Fourth quarter originations increased 32% year-over-year to $2.3 billion. As a result of the strong originations growth, our portfolio increased 23% year-over-year to a record $4.9 billion. Small Business products represented 68% of our portfolio at the end of the year, while consumer accounted for 32%. Strong demand and solid credit performance enabled us to be more aggressive with our marketing during the quarter as we leveraged our sophisticated technology and analytics to capture this demand at attractive unit economics. Marketing expense was 23% of our total revenue during the fourth quarter, driving record quarterly originations. We expect marketing spend to revert back to more typical levels although we'll continue to opportunistically lean into marketing to meet demand with attractive unit economics. The strong quarterly portfolio growth revenue increased to the top of our expected range, growing 15% year-over-year to $839 million in the fourth quarter and profitability metrics grew even faster as adjusted EPS increased 33%, driven by strong credit and our significant operating leverage. SMB revenue accelerated to 34% year-over-year to $383 million and our consumer revenue increased 3% year-over-year to $446 million, both quarterly records. In addition to our strong growth this quarter, our fourth quarter credit results also demonstrate that both our small business and consumer customers remain on solid footing. The consolidated net charge-off ratio for the fourth quarter of 8.3% was down both sequentially and compared to the fourth quarter of 2024. External data highlighted that the U.S. economy ended 2025 on a good note. The Federal Reserve's recent wage book pointed to economic gains across most of the country. In addition, the unemployment rate ticked down to 4.4% in December, with recent unemployment claims status underscoring that the labor market remains relatively stable and resilient. Further, real wage growth continues to be positive, with average hourly earnings rising 3.8% year-over-year in December after rising 3.6% during November. In early reads indicate December consumer spending grew moderately and continues to support economic activity. Looking at our consumer business. This constructive economic backdrop supported the reacceleration of growth and improvement in credit metrics that we discussed last quarter. With the strong early default performance we were seeing at that time, we leaned into boosting consumer originations, which accelerated as we moved through the fourth quarter. And as we expected, credit metrics for the consumer portfolio improved both sequentially and compared to the year ago quarter. Turning to small business. Our SMB business continues its stream of outstanding performance. Our leading brand presence, scale and competitive landscape again resulted in significant growth in remarkably stable credit performance. Fourth quarter originations for SMB increased 20% sequentially and 48% year-over-year to $1.6 billion, marking the eighth consecutive quarter of year-over-year originations growth of 20% or more. Credit metrics for the small business portfolio continue to be very stable as they have been for the past 2 years. Our internal and external beta highlight that SMBs continue to express confidence in the economy and expect favorable operating conditions during 2026. In conjunction with Ocrolus, we released the nonfederation of our small business cash flow trend report, which offers key insights into the state of small businesses and highlights ongoing trends observed over the past year. Consistent with previous findings, the survey found that small business is still optimistic about future growth. Overall, growth expectations massed an all-time high with 94% of small businesses projecting growth over the next 12 months. Nearly 75% of small business owners reported bypassing traditional banks in favor of alternative lenders like Enova. Of those that went to a traditional bank first, 46% of those reported being denied alone. External data also supports these findings as the NFIB Small Business Optimism Index rose to 99.5% in December and remained above its 52-year average of 98%. NFIB's Chief Economist pointed out that while Main Street business owners remain concerned about taxes, they anticipate favorable economic conditions in 2026 due to waning cost pressures, easing labor challenges in an increase in capital investments. While these surveys and external economic data provide useful context, our proprietary data offers more real time and granular views into trends in the operating environment and the conditions of our customers. This data allows us to react quickly and nimbly as the operating environment is changing. Our deep experience serving non-prime consumers and small businesses, meaningful diversification, powerful technology and analytics and our disciplined unit economics approach have been key to our ability to navigate varying operating environments, while generating consistently strong financial results. And as we've demonstrated for many years, we believe our business is resilient across a wide range of macroeconomic environments. Before I wrap up, I'd like to spend a few moments discussing our strategy and outlook for 2026. We've demonstrated a long track record of consistency between stated priorities and execution and we remain committed to this approach. Our balanced growth strategy works, and we expect to generate sustainable and profitable growth, while delivering on our commitment to driving long-term shareholder value and on our mission of helping hardworking people get access to fast, trustworthy credit. Another key focus for 2026 will be closing the acquisition of Grasshopper branch that we announced last month. We're excited about this powerful combination by uniting Enova's sophisticated online lending platform with Grasshoppers national charter and deposit gathering capabilities, we'll be able to expand access to more consumers and small businesses, who've been traditionally underserved by banks. In addition, this combination simplifies our product and operational model under a national bank charter, providing significant opportunities to accelerate the growth of our existing products with an enhanced ability to serve our customers in more states and an ability to expand into new complementary products. Since our announcement of the energy and excitement from the teams for both companies have been tremendous. As together, we recognize the opportunities in our complementary capabilities, cultural alignment and significant synergies. As a reminder, we expect net synergies related to the transaction to increase adjusted net income by $125 million to $220 million annually within the first 2 years post closing. Driving adjusted EPS accretion of more than 25% once the synergies are fully realized. We filed our regulatory applications earlier this month, seeking approval from the Federal Reserve and the OCC and we continue to make great progress on integration planning in anticipation of closing during the second half of 2026. Overall, we're pleased to end the year with another strong quarter of solid revenue and profit growth. We have considerable momentum heading into 2026. And while it's still very early in the year, we're off to a great start with solid originations growth across our businesses. As Scott will discuss in more detail, and based on what we're seeing today, we expect 2026 to be another year of significant origination revenue and adjusted EPS growth. Before turning the call over to Scott, I'd like to sincerely thank the entire Enova team for all their hard work and dedication. You all are the force behind our success. We're thrilled to celebrate our 13-year streak on Computerworld's 2026 Best Places to Work in IT list, reflecting the creativity, collaboration and passion that fuel our technology teams. We're looking forward to another great year ahead. Thank you. And with that, I'd like to turn the call over to Scott Cornelis, our CFO, and who will discuss our financial results and outlook in more detail. And following Scott's remarks, we'll be happy to answer any questions you may have. Scott? Scott Cornelis: Thank you, Steve, and good afternoon, everyone. We're pleased to close 2025 with solid fourth quarter financial results that once again met or exceeded our expectations. Our strong financial performance in the fourth quarter and the full year 2025 continues to demonstrate how the powerful combination of our diversified product offerings, scalable operating model, world-class risk management capabilities and balance sheet flexibility allow us to consistently deliver strong top and bottom line results. Turning to our fourth quarter results. Total company revenue of $839 million increased 15% from the fourth quarter of 2024 at the top end of our expectations as total company combined loan and finance receivable balances on an amortized basis increased 23% from the end of the fourth quarter of 2024. Total company originations during the fourth quarter rose 32% from the fourth quarter of 2024 to $2.3 billion. Revenue from small business lending increased 34% from the fourth quarter of 2024 to $383 million as small business receivables on an amortized basis ended the quarter at $3.3 billion or 34% higher than the end of the fourth quarter of 2024. Small business originations rose 48% year-over-year to $1.6 billion. Revenue from our consumer businesses increased approximately 3% from the fourth quarter of 2024 to $446 million as consumer receivables on an amortized basis ended the fourth quarter at $1.6 billion or approximately 6% higher than the end of the fourth quarter of 2024. Consumer originations grew 2% from the fourth quarter of 2024, to $613 million. As Steve mentioned earlier, we successfully reaccelerated our consumer originations as we move through the quarter, particularly in December, thanks to strong demand and credit. For the first quarter of 2026, we expect total company revenue to be flat to slightly higher sequentially. This expectation will depend on the level, timing and mix of originations growth during the quarter. Now turning to credit, which is the most significant driver of net revenue and portfolio fair value. The consolidated net revenue margin of 60% for the fourth quarter was also at the higher end of our expected range and reflects continued strong credit performance across our portfolios. The consolidated net charge-off ratio in the fourth quarter declined 60 basis points from the fourth quarter a year ago to 8.3%. As we expected, the consumer net charge-off ratio improved to 16%, which was flat sequentially and compared to the year-over-year quarter. The small business net charge-off ratio was 4.6% which was within our expected range. And as Steve noted, has been remarkably stable over the past 2 years. Expectations for our future credit performance remains solid. As reflected by sequential and year-over-year stability or improvement in the 30-plus day delinquency rates and fair value premiums for the consolidated consumer and small business portfolios. The consolidated 30-plus day delinquency ratio at the end of the fourth quarter declined 70 basis points from the end of the fourth quarter a year ago to 6.7% and the consolidated fair value premium of 115% remains stable and consistent with levels we have reported over the past 2 years. Looking ahead, we expect the total company net revenue margin for the first quarter of 2026 to be between 55% to 60% as the impact of lower consolidated originations from our typical consumer seasonality is offset by the sequential improvement in the consolidated net charge-off rate we typically see in the first quarter. This expectation will depend upon portfolio payment performance and the level, timing and mix of originations growth during the first quarter. Now turning to expenses. Total operating expenses for the fourth quarter, including marketing, were 36% of revenue compared to 34% of revenue in the fourth quarter of 2024. As Steve noted, we leaned into our efficient marketing spend to meet demand with strong unit economics, resulting in record originations growth. Fourth quarter marketing increased to $192 million or 23% of revenue compared to $151 million or 21% of revenue in the fourth quarter of 2024. With the seasonality we typically experienced during the first quarter of the year, we expect marketing expenses as a percentage of revenue to range in the upper teens for the first quarter and will depend upon the growth and mix of originations. Operations and technology expenses for the fourth quarter increased to $68 million or 8% of revenue compared to $58 million or 8% of revenue in the fourth quarter of 2024, driven by growth in receivables and originations over the past year. Given the significant variable component of this expense category, sequential increases in O&T costs should be expected in an environment, where originations and receivables are growing and should be around 8% of total revenue. Our fixed costs continue to scale as we focus on operating efficiencies and thoughtful of expense management. General and administrative expenses for the fourth quarter were $47 million or 5.6% of revenue compared to $38 million or 5.2% of revenue in the fourth quarter of 2024. The current quarter included $6.7 million of onetime deal-related expenses associated with the pending Grasshopper acquisition. Excluding these items, G&A expenses were $41 million or 4.8% of revenue, reflecting continued operating leverage and disciplined expense management. While there may be slight variations from quarter-to-quarter, we expect G&A expenses in the near term will be between 5% and 5.5% of total revenue, excluding any onetime costs. Our balance sheet and liquidity position remain strong and give us financial flexibility to successfully navigate a range of operating environments, while delivering on our commitment to drive long-term shareholder value through continued investment in our business and disciplined capital allocation. During the fourth quarter, we acquired approximately 278,000 shares at a cost of $35 million. And we started 2026 with share repurchase capacity of approximately $106 million available under our senior note covenants. We were pleased to see the improvement in our valuation during 2025. Though we believe there remains additional upside given our track record of consistent growth and earnings, our expectations for 2026 and the significant future opportunities associated with the Grasshopper acquisition. With that in mind, we will continue stock repurchases opportunistically, while ensuring we are well prepared to close the Grasshopper Bank acquisition and transition to a bank holding company later this year. We ended the fourth quarter with approximately $1.1 billion of liquidity, including $422 million of cash and marketable securities and $649 million of available capacity on our debt facilities, providing us with flexibility to support our strategic objectives. Our cost of funds for the fourth quarter was 8.3% down from 8.6% in the third quarter, reflecting lower SOFR rates and strong execution on recent financing transactions. Even with no additional rate cuts by the Fed, we expect some reduction in our cost of funds during 2026. But the level will depend upon credit spreads on new financing transactions, our funding mix and the level of timing and mix of originations growth. Our effective tax rate for the fourth quarter was 20%. The sequential decline was driven by favorable state changes, a decrease in our uncertain tax position reserve and related interest and tax benefits resulting from share price increases on stock options exercised during the fourth quarter. While there may be variations from quarter-to-quarter, we expect our normalized annual effective tax rate to remain in the mid-20% range. Finally, we continue to deliver solid profitability this quarter. Compared to the fourth quarter of 2024, adjusted EPS, a non-GAAP measure, increased 33% to $3.46 per diluted share and adjusted EBITDA a non-GAAP measure increased 21% to $211 million. To wrap up, let me summarize our first quarter and full year 2026 expectations. For the first quarter, we expect revenue to follow our typical seasonality and to be flat to slightly higher sequentially. We expect net revenue margin of 55% to 60% on a consolidated basis as seasonally lower originations are offset by an improvement in the net charge-off rate. In addition, we expect marketing expenses as a percentage of revenue to be in the upper teens. O&T costs of around 8% of revenue and G&A costs of between 5% and 5.5% of revenue. Interest expense as a percentage of revenue is expected to be around 10.5% with a more normalized tax rate, these expectations should lead to adjusted EPS for the first quarter of 2026, that is 20% to 25% higher than the first quarter of 2025. Our first quarter expectations will depend upon customer payment rates and the level, timing and mix of originations growth. Now turning to our expectations for the full year of 2026. Assuming a stable macroeconomic environment with no material changes in the employment situation and a largely unchanged interest rate environment, we would expect growth in originations for the full year 2026 compared to the full year of 2025 to increase by around 15%. The resulting growth in receivables with stable credit continued operating leverage and a reduced cost of funds should result in full year 2026 revenue growth similar to originations growth and adjusted EPS growth of at least 20%. Our expectations for 2026 will depend on the macroeconomic environment and the resulting impact on demand, customer payment rates and the level timing and mix of originations growth. As a reminder, our 2026 financial expectations do not assume any contribution from the pending acquisition of Grasshopper Bank, which we expect to close in the second half of 2026. Our results in 2025 reinforce the flexibility and scalability of our business model. As we move into 2026, we are well positioned to drive meaningful financial results supported by a diversified product set, a continued focus on unit economics, favorable competitive positioning and balance sheet flexibility. And with that, we'd be happy to take your questions. Operator? Operator: [Operator Instructions] The first question comes from Moshe Orenbuch with TD Cohen. Moshe Orenbuch: Great. And congrats, David, Steve and Scott on all of the management changes and promotions. I'm hoping, Steve, if you could talk a little bit about the consumer business. You talked about the growth having slowed and then accelerated. How much faster kind of is the exit rate? How should we think about it? And are there impacts that we should be aware of given this upcoming tax season and new withholding types of patterns? Steven Cunningham: Moshe, thanks for the question. So as I mentioned in my comments and as we expected after seeing really remarkably good credit last quarter, we did accelerate the growth in the consumer business. And that growth rate accelerated as we went through the quarter. Similar to last year, we saw December exceptionally strong. So sometimes the seasonal pattern of consumer growth in the fourth quarter can vary depending on the timing of the holidays, but really for the second year in a row, we saw a significant amount of the growth coming in, in December. So we were really pleased with that. And as you can see, our nimble and efficient marketing allowed us to continue to kind of lean into that. I think we learned from last year, where we saw sort of a similar pattern and new -- if that demand sort of showed up the same way, we could take more of that down. So we're really pleased with that. When you look forward to the first quarter, similarly, we're seeing some of that strength continue into early January, similar to what we saw last year. And so we'll continue to meet that demand, where it is. It tends to fall off fairly quickly once it does fall off as you move through later January and into the -- further into the first quarter. With the tax refund season, I mean I would -- based on what we know today, it sounds like there's potential for some larger refunds this year, which would be great for credit for us. And so a lot of the originations that we put on should perform very, very well. And what we've tended to see over time is that can just shift around the demand curve a little bit in terms of when the demand timing restarts. But typically, it's just a matter of weeks. So -- we have a lot of experience with different tax refund seasons over our history, and our guidance reflects sort of our expectations, and we're feeling really good about how the fourth quarter wrapped up for consumer and how the 2026 consumer business is starting. Moshe Orenbuch: Great. And good to hear that you're moving, I'm sorry -- is it good to hear that you're moving forward with all the steps for Grasshopper. Are there things that you're going to do differently in your core portfolio prior to closing or maybe talk a little bit about what the early kind of earliest impacts that you might see starting in the second half of the year after closing? Steven Cunningham: I mean until we close the transactions -- the transaction, both companies are business as usual. So the outlook that Scott gave you is our expectation of continuing that track record of strong growth in our business and being opportunistic as we see demand and following our balanced growth approach. So you should expect more of that. And as we talked about on the Grasshopper call, I think once we're beyond the close of that transaction, step #1 is really with the product set that we have today, expanding our footprint to continue to serve more customers. And that's really the basis for the revenue synergies that we laid out and that I discussed on the call as well. Operator: The next question comes from Bill Ryan with Seaport Research Partners. William Ryan: Following Moshe, I'd like to say congratulations to everybody. A couple of questions. I mean you talked about mix of origination -- or the origination growth being about 15% in 2026. If you can maybe elaborate on kind of what you're expecting in terms of the mix between consumer and small business? Steven Cunningham: Yes. Bill. So yes, we feel like we're in a pretty good position with what we know today to grow around 15% for the year. With the resumption of the consumer growth that we just talked about, we think we'll settle in at more typical levels than maybe what we saw for some quarters in 2025. We think we'll continue a pattern that you've seen with SMB. Obviously, some of the growth rates that we've seen have been really, really strong, but we've had a track record of growing that business now at 20%-plus now for quite a while. So you may see what we've seen over the past couple of years, which is a slow tilt in our portfolio towards SMB, just in terms of where the demand has been, but we'll continue to be opportunistic. And then in prior years, we've seen sometimes where there's more opportunity in the consumer business, and it's grown faster. And we've seen in recent times, the SMB portfolio is growing a bit faster. We'll continue to follow that approach that we follow with the balanced growth approach to make sure that we're meeting the demand in both that makes sense to follow our unit economics and so that's what we expect from where we sit today. William Ryan: Okay. And just 1 follow-up. I know you guys can continue to make adjustments on your underwriting -- if you can maybe talk about that, any changes that you made on the consumer side in the fourth quarter? And specific to small businesses, was there any change in industry focus. Anything you dialed back on, anything you kind of opened back up a little bit? Steven Cunningham: Yes. As you know, Bill, we are making credit adjustments all the time. We talked an awful lot about that in 2025. So we continue to follow that same approach continue to be very nimble. So as we see -- sometimes there's always adjustments that we're going to make in both of the portfolios. In consumer, in particular, after we saw sort of the exceptionally strong credit in the third quarter we did try to move back to more typical levels of credit. And you can see that the consumer net charge-off ratio settled in as sort of the middle of the expected range we would have had that we would have expected for the fourth quarter. So we're really pleased about how that landed. And so I feel like we are sort of back to that making adjustments as we need sometimes opportunistic, sometimes pulling it back where we see things we don't like. I think on the small business side, it's been remarkably stable. I think our industry focus, we've talked about over time. We continue to keep a close eye on things like construction and transportation as well as some of those industries that we had felt could be most impacted by tariff and the trade policies. But we've been pleased to see that those have fell in really well. And it's business as usual in our credit space there, similar to consumer. We're always always making adjustments to make sure that we're serving as many customers as we can, while generating the returns that our shareholders expect. Operator: [Operator Instructions] The next question comes from David Scharf with Citizens Capital Markets. David Scharf: Great. I'll echo the congrats to the new team or new physicians actually. Steve, I wanted to switch just to sort of the post Grasshopper operations, and you may have discussed this when you first announced the transaction. But can you remind us post close, how we ought to think about regulatory capital ratios, you're going to adhere to and whether or not existing levels of buybacks are likely to continue under the new structure? Steven Cunningham: Yes. David, thanks for the question. So we did talk about regulatory capital a bit on that call. I think where we sit today, we're sitting at around 17%, 18% tangible capital ratio, which feels that's sort of analogous to the Tier 1 leverage ratio. We would expect to sort of be in that same ZIP code. So I would not expect us to be changing our leverage position dramatically 1 way or the other. And as we've done, with that said, then we get back to as we get post close, there should be opportunities with the strong ROEs that we expect to generate versus the strong asset growth to have some opportunity to return capital. But I think our focus early on will be investing in the opportunities that the new structure will present to us and the combination in making sure, as you know, our rank ordering on our capital allocation is organic opportunities that generate really strong returns in our unit economic model. Share buybacks and then inorganic is sort of down the list at [ 1/3 ]. We have the capital to do all of those things. But I think we will be most focused on all the opportunities that are in front of us with the new structure after we get past the close. David Scharf: Got it. No, that's helpful. And maybe just a follow-up on the consumer products. It's been quite a while. I mean as we look at sort of the quarterly disclosures that you provide in sort of the company schedules. It's been quite a while since line of credit volumes have materially eclipsed installment. And can you just speak to maybe not just today where we sit, but as you think about the risk-adjusted returns of those 2 products going forward, is there anything on the installment side that would lead us to believe that, that's going to kind of regain maybe its position is half the consumer sort of product suite? Or is there just something about either the credit profile or anything else structurally that is going to continue to kind of lean into a line of credit? Because it seems like there's less competition in line of credit, certainly. Steven Cunningham: Well, as you know, David, we're pretty agnostic across our products in terms of the growth. What we try to do is meet the demand that meets our unit economic hurdle rates. And so I think if you look back in our supplement, I think you can probably see that LOC sometimes is leading the way. We've had some opportunities in 2025 with our consumer installment products, particularly as it relates to refinance, which I spoke about last quarter. And so I don't think we're sitting back thinking we're going to grow 1 faster necessarily than the other. We let the demand kind of push us there, and we follow our unit economic approach and our ROEs to take down, we think the demand that's going to, again, meet as many customers as we can while generating really strong returns. So I think from time to time, you're going to see variations just like you have over time where you might see 1 quarter or 2, 1 product might be growing more strongly than the other and not just with consumer but across SMB and consumer as well. Operator: The next question comes from John Hecht with Jefferies. John Hecht: Again, congratulations on all the movement at the executive level. You definitely a testament to the long success of the company. I guess most of my questions have been asked. I guess when it comes to Grasshopper. Are there -- and forgive me if you mentioned this, are there certain geographies that you know you can go into that are not approachable by you or limited access at this point in time that would be somewhat meaningful? Steven Cunningham: John, thanks. So when we talked about some of that expansion last month on the call, -- there definitely are some states with our NetCredit brand that we would like to take on that perhaps we could with our current licensing and partnerships today, but we just haven't chosen to do so that a national bank charter will make it easier for us to do that. So there definitely are specific states that we have in mind when you think about states like California, Pennsylvania, Ohio, which we're in, but not to the extent that we might otherwise if we were a bank, just to kind of give you some flavor. So we definitely have a hit list and a plan for where we want to go first. John Hecht: Okay. And then I know this gives you some benefits from a regulatory perspective, just because you'll be able to centralize some of that that's within the bank. But then you'll have some stuff still outside the bank and the CFPB has really become less active -- so question is, can you just give me the quick description of how the regulatory framework and reporting mechanisms will look? And then are you observing any activity at the state level at this point in time that's worth pointing out? Steven Cunningham: So starting with that last question, it's relatively quiet at the state level. There's not really any -- outside of some of the noise that you've heard in the political arena, we haven't really heard any real policy or regulatory changes at the state level that we're particularly concerned about. As it relates to post-close structure, we will -- we expect to have CashNet in Brazil sitting outside of the National Bank as part of our nonbank affiliates under the holding company. The Federal Reserve will have some oversight of that. And obviously, -- we've talked to them for many years about that plan. In terms of reporting, I mean, I think we'll continue there'll be some transparency, obviously, continue with our SEC filings, that we call reports at the National Bank and then the Federal Reserve suite of filings for holding companies as well. So that's the -- that's our plan that we're working against today, and we hope to get that done here later this year. Operator: The next question comes from Vincent Caintic with BTIG. Vincent Caintic: Actually, another regulatory question, and it's kind of a broader topic, but when I was getting a lot from investors earlier in January about kind of broader consumer finance, and it was specifically, when the government started contemplating rate caps, and that was specifically on credit cards. But I wanted to get your thoughts, if you had any on this push for affordability and maybe how rate caps might have a potential positive or negative benefits to Enova and the industry beyond just the credit cards? Steven Cunningham: Yes. So I think the cap that's been discussed very specific to credit cards for 1 year. I think there's been a lot of commentary from the card banks on that and not just from them but from a lot of others, I think if that was to happen, that actually would probably be a positive for us, particularly for I think that there's a lot of studies that have shown rate caps tend to reduce availability for the very folks who need it the most, which tend to be those that are less served and so to the extent that some of those credit card customers are not able to access credit, we would be an alternative for them. So we would view that positively. And Vincent, you know over the years, I think 17, 18 years in a row that Congress or a member of Congress has introduced a federal rate cap. It tends to revolve around election time. It's a very popular topic around affordability, but hasn't really had any meat to it. And I think -- if anything, this ongoing conversation is probably highlighted how irrational rate caps can be as it tends to hurt again, the very people that you're trying to help. So while the probability is likely not exactly 0, it's very, very low. And obviously, from a policy point of view, we're not supportive of any actions that reduce the ability to provide credit to those who need it the most. Vincent Caintic: Okay. Great. That's super helpful and clear. And then switching over to small business. So you gave helpful color earlier about the kind of the improvement to consumer loan growth. But consumer loan growth that accelerated quite a bit beyond your run rate. So it was up 34% year-over-year and you highlighted some of the surveys in your prepared remarks, but maybe you could talk about what you're seeing on the ground, how the environment is for small business and kind of what you think is sustainable for 2026 and the health of that's a small business customer. Steven Cunningham: Yes, you bet. So I mean, clearly, the numbers kind of speak for themselves. SMB is a -- now has a long track record of successful growth. And the credit profile has been remarkably stable in sort of a very narrow range that we've expected. So I think that reflects the strength of our ability to underwrite those customers, but it also reflects the stability of the customer base that we're serving. So there's been a lot of noise over the year of 2025 around the impacts of tariffs and the macro economy and where we are. But I think what I wanted to highlight in my commentary is that it's not quite as gloomy it seems on the ground. It seems that small businesses are looking forward positively. And I think it's reflecting in the demand that we're seeing. And clearly, our brands and our scale are allowing us to win competitively and grow very quickly. Sustaining 30%, 40% growth rates is not something that I would just be planning on. that would be fantastic. But I think we're expecting to continue a strong growth rate with the guide that Scott gave and continue to have a successful credit profile for 2026. Operator: Next question comes from Kyle Joseph with Stephens. . Kyle Joseph: You've had some solid year and reiterate all the congratulations on promotions, et cetera. Yes, most of my questions have been taken, but just kind of wanted to get your perspective. We talked a bit about the expected changes in tax refunds on the consumer side of things. Anything we should be thinking about on the SMB side from changes to the -- as a result of the BBB and any sort of implications for seasonality on that business for '26? Steven Cunningham: No, I don't anticipate any big changes in seasonality for 2026. And I think to the extent that customers, again, have a larger refund. It's good for our credit profile, but it also probably means they're going to spend it, which is going to be good for the economy, and that tends to be very good for our small business customers as well. So I think we're not expecting any disruption for our small business customers in 2026. If anything, it should be a positive. Kyle Joseph: Great. And then on the expense side, I appreciate the guidance you gave for the first quarter. And then obviously, we know what your EPS expectations are for the year, but kind of just walk us through maybe a little bit more color in terms of how you're thinking about the scalability of the business in '26, obviously, because first quarter has some seasonal impacts on marketing and whatnot? Steven Cunningham: Yes. Well, we think we're going to continue to generate that operating leverage and scale that you've seen. I mean, listen, the marketing, I think last quarter, we were remarking that we hadn't been quite at our 20% level of marketing spend. I think this quarter, we showed that when the market presents itself, we will lean into it to drive profitable growth. And I think you should continue to expect, as Scott laid out some of those numbers, you're going to continue to see a grind lower in some of those expense categories as we continue to grow overall. So you should continue to expect us to scale the OpEx and invest in marketing, where we see the demand, and we know we can generate the unit economics that we need. Operator: This concludes our question and other session. I would like to turn the conference back over to Steve Cunningham for any closing remarks. Please go ahead. Steven Cunningham: We thank you all for joining our call today, and we look forward to updating you next quarter. Have a good night. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the West African Resources Investor Webinar and Conference Call.[Operator Instructions] I'll now hand over to West African Executive Chairman and CEO, Richard Hyde. Thank you, Richard. Richard Hyde: Thanks, Nathan. Good morning, and welcome to the December 2025 Investor Conference Call for West African Resources, and thanks for joining us today. Joining me on the call today, we have our Chief Financial Officer, Padraig O'Donoghue; and our General Manager of Finance, Todd Giltay; our Chief Operating Officer, Lyndon Hopkins, is on site at the moment in Burkina. The December 2025 quarter delivered another strong period of gold production across both our Sanbrado and Kiaka gold operations in Burkina Faso with just over 112,000 ounces of gold produced across the operations, delivering an operating run rate that bodes well for our gold production in calendar year 2026. Our total gold production for calendar year 2025 was a touch over 300,000 ounces of gold with Kiaka stepping up in Q4. This was well within our production guidance for the year. What's more is that we completed this achievement with no significant health, safety or social incidents, which is especially important to us and demonstrates our commitment to operating in a safe and responsible manner at all times. We sold 105,995 ounces of gold at an average price of USD 4,058 per ounce for the quarter, and we remain fully unhedged, therefore, allowing WAF to take full advantage of the record gold prices we are currently seeing. With all our sustaining costs -- sorry, with our all-in sustaining costs averaging USD 1,561 per ounce across the two operations, we've been able to deliver AUD 389 million of cash -- sorry, cash flow in the quarter, and that's after making income tax payments of AUD 48 million. Our cash balance at 31 December 2025 is AUD 584 million, plus we still held another AUD 177 million worth of unsold gold bullion, and that's just due to timing of shipments. Looking at our sites, the Kiaka ramp-up has been excellent since its second quarter start-up. And its performance in Q4 really demonstrated that. This is the first full quarter of operations for the site. It produced 62,287 ounces of gold for the quarter, surpassing production at Sanbrado for the first time. Kiaka's costs continue to improve as production has increased, which was what we expected, and it's pleasing to see this panning out. We expect costs to further reduce as our reliance on diesel generated power reduces over the coming quarters. Kiaka produced just over 95,000 ounces of gold for the year after commencing operations in Q2 and having a shortened operational phase in Q3. Open pit mining continues to ramp up as more equipment is commissioned for use. At Sanbrado, our steady production continued, and we produced just under 50,000 ounces of gold for the quarter, bringing our total for the year to 205,228 ounces. Sanbrado performed well against production guidance, achieving the upper end of our 190,000 to 210,000 ounces production range. Open pit recommenced in the quarter under our new owner mining operating model. Open pit mill feed in Q4 was sourced from both the M5 North pit and previously mined ore stockpiles. Mined ounces for the quarter from M1 South underground was 37,955 ounces, which was 16% below the previous quarter. This was due to a 14% drop in mined grade as well as slightly lower ore tonnes mined. With that overview of our production, I'll hand over to Padraig to discuss our financial details for the quarter. Padraig O'Donoghue: Thank you, Richard. WAF, as Richard mentioned, WAF has benefited tremendously from being unhedged and generated AUD 662 million of gold sales revenue in the quarter at an average realized price of USD 4,058 per ounce. For the full year 2025, WAF generated more than AUD 1.5 billion of revenue. As Richard mentioned already also, we generated AUD 389 million of operating cash flow in Q4 and ended the year with a very strong cash balance of AUD 584 million. Our capital investing activities in Q4 used AUD 113 million of cash, which included AUD 89 million for Kiaka and AUD 23 million for Toega. Financing activities used AUD 23 million of cash in Q4 with payments for loan interest, principal and financing expenses offsetting cash received from the drawdown of equipment finance facilities. I now hand back to Richard. Richard Hyde: Thanks, Padraig. So on the exploration front this quarter, diamond drilling beneath the M5 open pit ore reserve has confirmed potential for us to extend open pit mining at Sanbrado. Gold mineralization was confirmed more than 300 meters below the current ore reserve and mineralization remains open at depth. And this is really the first substantial drilling we've done at M5 North since about 2017. So it's no surprise that we can see that this mineralization being extended and then we're considering our options there, but most likely, updated ore reserve would consider cutting back the northern part of the M5 open pit. So some of the drilling results included 16 meters at 11.2 grams per tonne as well as more typical broad intersections such as 45 meters at 1.9 grams per tonne gold. Diamond drilling at M5 North will continue through 2026 and we look forward to further results from the program to help us better plan for the future mining at Sanbrado. But the future looks very good. Our last ore reserve estimate was completed at a much more conservative gold price of USD 1,400 an ounce. So recalculating today we would expect to use a higher gold price and obviously deliver more ounces into reserve. We also have drilling underway at underground for Toega. We continue to develop a satellite operation for Sanbrado, which we continue to develop as a satellite operation for Sanbrado. We're currently completing a 13,500 meter infill drilling program, which is infilling the underground resource and we'll have more results over the coming quarters. Grade control drilling also confirmed during the quarter with -- commenced during the quarter with 6,600 meters completed. This program is expected to be completed in early Q1 2026 with results to follow. In other developments at Toega, earthworks for the mine services area were completed and the construction of mobile maintenance workshop office and ancillary infrastructure has commenced. The haul road construction is well advanced and remains on schedule to enable order delivery to the Sanbrado process plant in early Q3 2026. Toega open pit mining operations will be owned and operated by WAF, similar to Sanbrado. Mining equipment continued to arrive on site during the quarter with commissioning activities underway. All mining equipment is expected to be fully operational by the end of this quarter. Pre-stripping of open pit mining of the open pit commenced during the quarter with a total of 250,000 BCMs moved to date. Material movement is expected to ramp up to steady-state production by the end of Q1 2026. Across other aspects of our business, we continue to invest heavily in social programs, including education, health, economic development, including providing scholarships to high school students from the area, upgrading our community health centers and constructing a new primary school and refurbishing an existing school near Kiaka, which will also be used for community events outside school hours. In relation to discussions with the Burkina Faso government regarding Kiaka, we continue to engage constructively with the government on these matters. But at this stage, there are no material updates on that matter. Overall, I'm really happy with our performance and progress throughout Q4, particularly with our ramp-up at Kiaka. We're looking forward to releasing our 2026 annual production guidance and outlining our capital management strategy later in Q1 2026. I'll now hand back to Nathan for the Q&A. Operator: [Operator Instructions] Your first question comes from Mike Millikan at Euroz Hartleys. Mike Millikan: Just a couple from me. Firstly, talking about obviously, very strong cash generation at the moment. Debt service, are you going to accelerate some of those payments? Richard Hyde: Yes. So that will be a focus throughout this year and get debt down to a management -- a manageable level. That's our first focus. And then we're having active discussions in the office now and amongst our Board about capital management, which will take us past 2026 whether that's buying back shares or paying dividends, that's the discussion that we're having at the moment. Mike Millikan: Yes. Is that the plan, certainly a buyback probably makes a lot of sense. Richard Hyde: Yes. Look, they both make sense. We just really need to gauge the market and really from -- I'm a follower of Berkshire Hathaway, and they've always bought shares back and they've never paid a dividend though. So -- but it's either/or, I think it's going to be a good outcome for shareholders if we do either. But that's certainly our focus at the moment is to pay down debt and then either buy back shares or pay a dividend. Mike Millikan: Yes. Awesome. Just looking at, obviously, the royalty rates currently in country, obviously pretty high. Is there any sort of changes expected there? I mean just it's obviously on a slowing scale and obviously, gold price is very high. Has some of your discussions also been centered around royalties? Richard Hyde: No, not at this stage. I mean the gold price has risen so quickly. I think we're an average sale price of about USD 3,500 in Q3, and we've sold an average over USD 4,000 an ounce in U.S. Q4. So -- and already, we're well over USD 5,000 an ounce as we speak now. So really, the action has been pretty recent, and we'll be back in country in a few months' time and definitely raise that with the administration. Mike Millikan: Yes, cool. And finally for me, just on Kiaka grid power, has it all been going? Has it been stable? What's your expectations for calendar '26 in regards to reliability? And what do you factor in some of your forecast? Richard Hyde: So that will be kind of -- I think we can explain more of that later in the quarter when we put our guidance out. We had 2 or 3 weeks of stability or stable grid in December, and that allowed us really to ramp up production. And we consistently hit 30,000 to 35,000 tonnes a day in production at Kiaka, which was really, really good. So clearly, the last piece of the puzzle for Kiaka is stable power. We're also looking at installing a full HFO power station, which would allow us to have full production. So we'll have more information on that in our annual guidance. We've also increased the diesel capacity on site. So there's another 5 gensets arrived overnight on site. So they'll be plugged straight in, and that should give us about 30 megawatts of diesel on site. The last week has been pretty unstable with the grid, but there has been work being done by SONABEL, which is the government's energy provider in country. So we should be back on the grid in the coming days. And then we've also got some other equipment arriving on site, which will help stabilize the grid on our side. So look, it's early days with the grid. Long term, it's definitely the right option. In the short term, we've made provisions for additional diesel power and we're making a plan to have full backup with HFO, which is much cheaper to run in diesel. So that's kind of the summary at the moment, but I think the takeaway is that with full power, Kiaka is capable of producing of processing more than 10 million tonnes per annum without any capital -- without any material infrastructure changes. So does that answer your question, Mike? Mike Millikan: Yes, it did. And congrats on a very good quarter. I will hand it on. Operator: Your next question comes from Richard Knights at Barrenjoey. Richard Knights: Just wanted to see if I could get you to give us a little bit more detail on the discussions with the government regarding the Kiaka stake. Just anything relating to time frames or whether or not you've made any progress on those discussions with potential co-investments in other projects? Just any more detail you can give on that? Richard Hyde: Yes. Thanks, Richard. Look, there isn't a lot of detail to give, unfortunately. We responded late last year to SOPAMIB, and we provided them with a lot of information about Kiaka, our construction costs and economic models. And again, the gold price has moved significantly since then. So I mean the discussions have been quite good and cordial. They've made it quite clear that they believe in paying market price for additional share in Kiaka. And we did counter with a proposal saying that if you have a look at our current quarter, I think we paid indirect taxes and royalties, USD 90 million in one quarter. So clearly, we're a very good partner to the government. And probably in our view, that's the best model is that the government already gets a significant proportion of cash flow from mining operations in Burkina, which is getting close to 60% of cash flow at the current gold price. So -- and with obviously, the escalating royalty as well. So that's a significant proportion of cash flow now. So really, there's not a lot of detail to add. We're currently waiting on a response to our most recent correspondence. And we'll update the market as soon as we've got something back. But we've given them an alternative proposal, which we showed demonstrates much higher returns on investment, given that there are assets the government already owns that aren't generating any cash flow. So clearly, that would grow the government's share of revenue much more quickly than an incremental investment in Kiaka. But it's a discussion that we're having with them, and we're doing that in a transparent and polite way. Operator: Thank you. There are no further questions at this time. So I'll now hand back to Richard for closing remarks. Richard Hyde: Thanks, Nathan. Look, I guess, closing remarks, we've got a number of activities underway at the moment, including our resource reserve update. Our new 10-year plan will be coming out in late March. The 10-year plan will include drilling from M5 North and M5 South as well as extensions at M1 South underground. So I'd expect that to be a positive increase on the 10-year plan that we issued last year, which was very close to 10 years at 500,000 ounces per annum, which has been a target of mine for a long time. So obviously, we'll keep the market updated with our discussions with the government around the ownership of Kiaka and also with the stability of the grid as it improves. So thanks very much for dialing in today, and we look forward to keeping the market updated over the coming weeks regarding our activities.
Operator: Good afternoon and good evening. Welcome to Logitech's video call to discuss our financial results for the third quarter of our fiscal year 2026. Joining us today are Hanneke Faber, our CEO; and Matteo Anversa, our CFO. During this call, we will make forward-looking statements, including discussions of our outlook strategy and guidance. We're making these statements based on our views only as of today. Our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K which you can find on the SEC's website and the Investor Relations section of our website. We undertake no obligation to update or revise any of these forward-looking statements, except as required by law. We will also discuss non-GAAP financial results. You can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials as well as the shareholder letter and a webcast of this call are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. Unless noted otherwise, references to net sales growth are in constant currency and comparisons between periods are year-over-year. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Hanneke. Johanna Faber: Thank you, Nate, and welcome, everyone. During the third quarter, we delivered another period of very strong financial performance. With the exception of pandemic peaks, we drove record non-GAAP operating income and earnings per share. Very strong non-GAAP gross margins once again underscore the quality of our portfolio, the strength of our brand and innovation and our unique operating discipline and top line growth of plus 6% in U.S. dollars and 4% in constant currency was broad-based across regions, channels and categories. The strong third quarter results were driven by our strategic priorities. First, superior products and innovation. At the end of September, we launched the MX Master 4, the next generation of our flagship mouse. It is selling at record levels. It sold more units in the first month following launch than any other personal workspace mouse in Logitech's history. In gaming, we delivered winning news across price bands. The premium Pro X Superlight 2 mouse was a top-performing new product in the quarter, boosting the Pro line. We also had strong demand for the new entry-level, China-for-China G3116 gaming keyboard, which helped drive market share gains in China. And AI now plays a pretty critical role when it comes to superior video and audio innovation. We are well beyond AI proofs of concepts and experiments. We are shipping AI products globally at scale. In the third quarter, those included both AI-powered devices like the Rally Board 65, the site video conferencing camera and its own 2 wireless headsets and AI-enabling devices like the spot sensor. And just last week, we announced a Rally AI camera and Rally AI Pro, our smart new video conferencing solutions for large rooms, like board rooms, auditoriums and classrooms. None of those products are AI for the sake of AI. These are products that solve real user needs, and that shows in their popularity in the market. Our second strategic priority driving results was doubling down on B2B. Logitech for business demand significantly outpaced B2C demand in the third quarter driven by strength in video collaboration and our education vertical. Third, we executed with excellence around the world. The December quarter was the first in fiscal year '26 with positive year-over-year net sales growth and increased demand across all 3 of our major geographies. Around the world, it was great to see our teams [ excel ] with great holiday in-store execution and terrific social-first digital brand building campaigns. Finally, our performance underscores our unique operational excellence. Product cost reduction, targeted pricing actions and FX offset tariff headwinds and strategic promotions and drove a very strong non-GAAP gross margin of 43.5%. Importantly, we continue to drive manufacturing diversification. As we committed, we successfully reduced the percentage of U.S. products manufactured in China from 40% last April to less than 10% by the end of December 2025. And we maintained strong cost discipline across the company, highlighted by non-GAAP general and administrative expenses which were down 7% in the absolute year-over-year. Now looking ahead, we live in a dynamic world, but there is still so much opportunity for Logitech to grow. One of the opportunities I am excited about lies in leveraging the existing global PC footprint to drive continued growth. Consider that of the 1.5 billion plus PCs in use today around the world, less than half of those have a mouse attached and less than 30% of existing PCs have an external keyboard. Taken together, that PC installed base represents over 1.8 billion opportunities to add peripherals and upgrade users to enjoy vastly superior productivity and comfort. We warmly welcome obviously the tens of millions of new PCs that are sold each quarter but we believe the existing base remains the far greater price. So with that, Matteo, I'll hand it over to you to cover the financials in a bit more detail. Matteo Anversa: Okay. Thank you, Hanneke, and thank you all for joining us on the call today. So the team delivered a another solid quarter, demonstrating continued focus on profitability and growth. Non-GAAP operating income reached $312 million, reflecting a 17% year-over-year increase alongside a 220 basis point expansion in profitability. . Our strong P&L performance, combined with disciplined management of working capital, resulted in an exceptional cash flow generation of approximately $500 million a 30% year-over-year increase. Now let me walk you through the key financial highlights for the third quarter. So net sales were $1.4 billion, up 4% year-over-year in constant currency, and this growth was driven by strong demand and represents our eighth quarter of consecutive top line growth. Now more specifically, personal workspace net sales increased 7%, with 9% growth in pointing devices, fueled by the launch of our MX Master 4 as well as double-digit growth in tablet accessories. Video collaboration net sales grew 8% with double-digit growth in EMEA and Asia Pacific driven by continued sales strength of our AI-enabled Rally Board 65. And as we indicated in the past, the B2B nature of this business tends to be lumpy quarter-to-quarter. But the long-term trajectory of the business is very strong momentum. Gaming net sales grew 2%, driven by double-digit growth in Asia Pacific while Americas and EMEA declined single digits due to the market contraction. Geographically, Asia Pacific led the way with a 15% year-over-year growth driven by double-digit growth in gaming, video collaboration and tablet accessories. EMEA grew 2% due to double-digit growth in video conferencing as well as solid growth in keyboards and combos. And the Americas reversed the negative trend of the past couple of quarters with the U.S. returning to modest growth with pointing devices up double digits, offset by gaming. On the profitability side, our non-GAAP gross margin rate was 43.5% and up 30 basis points from the prior year. We were able to expand the gross margin rate despite a challenging tariff environment. And similar to last quarter, the negative impact of tariffs was entirely offset by our pricing actions and continued manufacturing diversification efforts. Product cost reduction and favorable foreign exchange more than offset increased promotional activity in the quarter. We also maintained strong operating expense discipline. Non-GAAP operating expense was $306 million, a decline of 2% year-over-year, and this decrease was primarily driven by a reduction in G&A as a result of the measures that we implemented to mitigate the impact of tariffs. Now it is important to note that if we normalize for the bad debt expense we recorded in the prior year period, non-GAAP operating expenses would have increased approximately 2% and while delivering 70 basis points of leverage. And finally, cash flow. Cash flow was extremely strong in the third quarter. We generated approximately $500 million of operating cash flow 1.5x operating income, thanks to efficient inventory management, strong collections and profitable growth. Our cash conversion cycle improved by 18% down to a highly efficient 27 days. We maintained a very strong balance sheet, ending the quarter with a cash balance of $1.8 billion. Now as we look ahead, we are closely monitoring external dynamics, including geopolitics, tariffs and the consumer confidence. While the backdrop is mixed, we believe Logitech is exceptionally well positioned, and this confidence is reflected in the outlook that we are providing for the coming fiscal quarter. Net sales in the fourth quarter are expected to grow 3% to 5% year-over-year in constant currency with a gross margin rate of approximately 43% to 44%, and non-GAAP operating income is expected to be between $155 million and $165 million, up 20% year-over-year at the midpoint. As a result, we expect to close fiscal year '26 above the long-term model targets for non-GAAP gross margin and non-GAAP operating margin that we outlined at our Analyst and Investor Day last year. Our performance underscores the durability of our model and our consistent ability to convert profit into cash and generate compelling returns on invested capital. As we transition into the new calendar year, we remain confident in our ability to execute at a high level as the environment evolves. I want to thank all our teams across the globe for their dedication and flexibility. And with that, we can open the call to questions. Operator: Thank you, Matteo. [Operator Instructions] Our first question comes from Asiya with Citi. Asiya Merchant: Great. Both well, there's just so much macro factors. I mean, obviously, memory affecting PC demand. Hanneke, you talked about the installed base. Just if you can walk us through what gives you this confidence relative to your long-term target model that you guys have laid out about the growth looking ahead, not just through March, but you're not approaching the end of fiscal '26 into fiscal '27. Just some commentary that you could share on that. And 1 for Matteo while I can. Just on the gross margins, I mean, they just continue to upside representing really strong execution here. Just as you think ahead, given the macro backdrop and concerns around consumer spending, how should we think about gross margins going forward? Johanna Faber: Yes. Thank you so much. Overall, it's too early to discuss fiscal '27. But I would say we're really encouraged by the momentum of the business around the world. This year, as Matteo said, we're going to deliver at the high end of our long-term model. And we're expecting that our team will continue to deliver with excellence. This is a company for all seasons. A lot of things were thrown at us this year, we expect that we can continue to work well in the year ahead. Let's -- let us touch actually on memory and on PC potential. So overall, what I would say is we don't believe we will be materially affected by both of those factors and let us unpeel that a little bit. In terms of memory availability, the vast majority of our portfolio is not impacted by the current tight memory availability. We simply don't use those chips in most of our portfolio. Only our video conferencing products and only a portion of our video conferencing products are impacted by the memory availability issues. And we believe we are mitigating those impacts in fact. So from a supply point of view, we've seen this coming, and we've taken proactive steps to ensure supply. So we don't foresee a supply impact in Q4 nor in the first half of our next fiscal year from the memory availability issues. There may be a modest cost impact. But as you've seen, we're really good at mitigating cost impacts through cost reductions and through targeted pricing if needed. So that's on memory. On PCs, you've seen our great personal workspace results in this quarter, high single-digit growth. We grew share 120 basis points in PWS, and we believe our peripherals business, in general, continues to have excellent growth opportunities, whatever the environment. Our data shows that if you take out the 2 years of COVID, which were crazy. Over a 10-year period, we grow 300 to 500 basis points ahead of PC sales. And why is that? It's because the peripheral market is relatively immature around the world on that big installed base of 1.5 billion PCs plus less than half of people use a mouse, less than 30% use an external keyboard. And they're basically leaving productivity and comfort on the table. And so that installed base opportunity, combined with trading up, people who are in the category is a far bigger opportunity, like far bigger opportunity for us than just attaching to new PCs, which, of course, we'll continue to do, but our growth over the years has come from penetrating that installed base of PCs. So that's what we will continue to do, and we're confident that we can continue to grow the peripheral business as we have. Sorry, it's a bit of a lengthy answer, but I know it's on many people's minds. So thanks for asking. Matteo Anversa: Maybe Asiya I will address your gross margin question. So first of all, let me say, I appreciate your comments also on behalf of the team because I really agree with you. I think the team has done a fantastic job. If you take a step back and we use just the midpoint of the outlook that we provided today for the fourth quarter, that implies that we will close the year with a gross margin rate around 43.5%, which is pretty much flat to fiscal year '25. And so the ability of the team to deliver this outstanding result in spite of all the tariff environment that we discussed throughout the fiscal year, I think it's pretty remarkable. And so I think the -- it's way too early to talk about fiscal year '27, but I think the foundation of this gross margin and our ability to maintain the gross margin to this level, I think the foundation is there. And what I mean for foundation, really, I'm referring to a couple of key aspects. Number one, our fantastic brand and the pricing power that this gives us. Number two, the continuous work that the team has been doing on innovation. We'll talk a little bit in the prepared remarks, another tremendously successful launch with the MX Master 4, just as an example. So that's really the engine of the company. And third, the continuous work that we are doing every year on product cost reduction through value engineering and supplier negotiation. So that's really, to me, is the foundation of what we are doing, and that's here to stay. Now, with that being said, obviously, we are all seeing commodity prices going up. We are seeing cost of components going up. So we will have to factor all these components when we discuss in the next earnings call about '27, but I think the foundation and the execution of the team is there, and that's what you can count on us on deliver also next year. Operator: Okay. Our next question comes from Yorn from UBS. Joern Iffert: And hello, everybody. I would ask 2 questions if it's okay, and then I go back in the queue. The first one is, I mean, you elaborated on your resilience and more volatile PC markets. But do you have some data for the attachment rates on mice and keyboards, where this has stood 5 to 10 years ago? . Just to compare a little bit the trend changes of rising attachment rates, which potentially was helpful for the PC unit outperformance? And the second question would be, please, on gaming. Isn't this a little bit concerning that the U.S. and Europe is now seeing decline in gaming markets. Gaming is one of your key growth drivers. What are you doing against the strategic fee for the next 12 months to bring this back to growth and also, if you somewhat detailed was PC gaming down or all the manager [indiscernible] and headsets. So some more details here would be appreciated. Johanna Faber: Let me take the gaming question first and then maybe you take the attach question Matteo, if that's okay. So on gaming, First of all, another quarter of good global Logitech Gaming growth, 2% up. Demand was higher than that. And as you saw, that's really driven by our outstanding performance in the world's biggest gaming market, China. We gained past 3 months share across gaming mice and keyboards in China. That's the first time since I can remember and since I've been here. So that's great. We delivered strong double-digit gaming growth there in terms of net sales. And I think what's important, and that's important for the rest of the world as well is we're winning at the top end with Pro and we're winning at the entry level. With the China-for-China innovation, the most important one that came out this quarter was the G316 keyboard, mechanical keyboard for gaming. That's doing very well as well. So it's important that we cover both ends of the market. In the U.S. and Europe, we held share in a declining market indeed in the quarter. What's good to see there is that our U.S. share stabilize after a couple of quarters where share was a little soft as we took pricing, first implementing it and then getting the consumer to get used to it. So it's good to see it stabilize. And the other good thing there is that we're seeing great growth on the top end of our business, so both Pro and SIM growing double digits in the U.S. and Europe. Now to your question on the gaming market, the markets in the U.S. and Europe have been pretty soft. We believe that's temporary and we can discuss the causes, but they're probably part economics part game release related. And in that context, we think we've prepared ourselves really well for the year ahead. So when it comes to economics, there clearly is a bit of a K-shaped economy. When I meet gamers in the U.S. and Europe, they are a little more choiceful in terms of what they spend money on. So what we've done for the year ahead is really thoughtfully designed our portfolio to win at the top end because there's a lot of gamers who do have money, but also to win at the entry level. Just like we've done in China already. So that is one. And then second, in terms of gaming title releases, again, they've been a bit more muted in the West than they have been in China and gamers in the U.S. and Europe that I speak to are saying, well, I'll just wait and see a little bit till GTA 6 and some other new releases come out. So they're sitting on their money. But fortunately, our business, again, doesn't depend on a single game alone. And for big existing games, whether it's Call of Duty or League of Legends or Valorant. You need the best gear. So we're excited. SUPERSTRIKE is coming out, start shipping here in a couple of weeks. That is a step change in competitive performance for FPS games, existing FPS games. And again, I think that will position us really well to continue to gain share whatever the market does in gaming. Again, sorry, a bit lengthy, but I know it's on many people's minds. Matteo Anversa: So Yorn, the -- so let me start. Overall, if we look at take about 10 years' worth of data and you normalize for COVID, generally, the sale of our peripherals outpace PC sales by about 300 to 500 basis points on average. So with that being said, though, I go back to Hanneke's point, the biggest opportunity for us is really on the installed base, where of all the PC out there, less than half have a mouse and less than 1/3 have a keyboard. And that's really where in a way, the focus has been. And actually, if you go back in history. The vast majority of our sales really comes from the increase in the attach rate to the installed base versus new PCs to Hanneke's point in her prepared remarks, we also like, obviously, the new PC sales, but that's where the focus is. Johanna Faber: And I think Jorn you were asking, do we know attach rates to new PCs in the past. We know what they are today. they're actually fairly low, somewhere between 9% and 14% depending on the type of master keyboards. So they're relatively low. We don't have that historical data. But given how low they are, there was opportunity, obviously, going forward to go up, but they cannot have been that much lower in the past. Operator: Okay. Our next question will come from Erik Woodring with Morgan Stanley. Erik? Erik Woodring: Can you hear me okay? Matteo Anversa: Yes. Erik Woodring: Just I wanted to circle back on just a PC question, Hanneke. The 300 to 500 basis points of outperformance versus PC sales. Just a clarification, is that versus PC revenue or PC units. And the only reason I ask is, if you look at, for example, IDC forecast, the variability between PC sales may be flattish versus PC units potentially down 5% to 10%. What make you difference between -- again, if we use that kind of historical context. The business growing versus declining? So just a clarification on that point. And if it is attached to PC sales, just how do we think about the attach to revenue when we think about its kind of like an attached to the unit. I just want to get a better understanding of that. And then just a quick follow-up for you Matteo. Matteo Anversa: Yes, sure. Erik, it's -- what we refer to is unit sales. So that's the way we think about it. So that's all I can tell you. Erik Woodring: Okay. Totally fair. And then maybe Hanneke, just again, on the PC peripheral kind of attached to the PC base. So I think that makes a ton of sense. On one hand, I guess I would say, perhaps we can assume these devices might not have a peripheral for a reason. -- whatever that may be. So how do you convince that user that's underpenetrated to get that mouse or to get that keyboard. What is it that Logitech will say or it can do, whether that's incentivization, promotions, et cetera, that gets that easier to say, you know what, I do need this. This is an awesome product I need to buy it. . Johanna Faber: yes. What a great question. And it comes down to product superiority and real benefit for the user. So let me take the MX Master 4 as an example, which again is off to a fabulous start in terms of creating both new trial and up-trading existing mouse users. Why is that? It's a very premium, it is $120 mouse is an expensive mouse. But consumers, including in the U.S. and Europe, where they're being more choiceful absolutely doesn't hesitate to go and buy one because, A, it clearly is superior versus what's out there in the market, the haptic feedback, the actions during the new software, the beautiful design the aesthetics, clearly superior. It clearly answers the user need in terms of productivity. So -- we are -- when you use that MX Master 4, you're going to be faster, you're going to be more accurate and more productive. That's important both for users, by the way, and for B2B choosers. So the procurement people in businesses that are buying mice for their employees. And then marketing, of course, plays an important role as well. We did up marketing in the quarter. We're measuring that very tightly. The return on investment there is excellent. And I think we have a lot more opportunity to do more social first digital marketing for our top superior products to drive that penetration. So it all starts from the superior product that really answers the user needs in the case of MX, the user need is productivity. In the case of gaming, it's performance, you're going to win that game. And in the case of a line like ERGO, it is comfort. You're not going to have that pain in your arm. So really important in any marketing. We're seeing really great results. There's opportunity there going forward. Operator: Okay. Our next question comes from Ananda with Loop Capital. . Ananda Baruah: Two, if I could. So let me just ask another, this is a PC-related one. Do you think people are obviously interested in the PC, the PC attached because of the dynamics going on with memory in the PC market and the impacts we've already begun to see there. Do you think that this is one of those years where the company could see sort of growth above the average sort of few hundred basis points range that you guys typically have. I know in past years, when you've seen amplified growth above the PC market, there are times you've been a thought process maybe people aren't buying a PC, but they can do something to make their PC experience more enjoyable dress up their PC experience. So I just want to ask that question. And then I have a quick follow-up as well. Johanna Faber: Yes. So it's too early for me to speculate on the year ahead. But I think you're right, historically, again, this is a company for all seasons. We can win in any environment. And in an environment where I say gaming, the price of gaming PCs is definitely up. But when I don't have money to get a faster CPU, I can buy a SUPERSTRIKE mouse and improve my gaming speed and performance that way. So we've definitely seen that in the past, and we're going to make a plan to do that going forward as well. Matteo Anversa: Maybe Ananda, for whatever is worth, too early to talk about next year, but if you look at the quarter we just printed, if you look at personal workspace, actually in its totality, the growth in personal workspace in constant currency outpaced the growth of the company. So it was faster. Ananda Baruah: Good context. And the follow-up, this might be more for Matteo. But although you guys don't have material exposure to some of the components that are -- that we're seeing the meaningful price increases in the memory chain is others as well. Do you think you could have seen some pull-forward sales from folks who might not necessarily understand that you don't have material exposure to those components? Matteo Anversa: Not, I wouldn't -- if your question, Ananda, is on the video conferencing being up 8% year-over-year in the quarter, I would not attribute that to the hoarding or anticipated by due to the memory -- due to the memory situation. I think we're all deals that the team has been tracking for quite some time. We are building the muscles as we discussed during Investor Day. And I think through the growth that we had in videoconferencing. By the way, the fact that overall, B2B outpaced, B2C in the quarter in terms of strength, thanks to education vertical that has been doing very well for us also this quarter. I think it's really execution by the team. Johanna Faber: Yes, I see a lot of customers. I didn't get a sense that they we're hoarding ahead of any memory shortages in our video conferencing portfolio. Videoconferencing because it's 100% B2B, basically is a little choppier net sales-wise, just because there's big deals one quarter that may not necessarily be in the next one. So I would look at that business over a little longer period than just quarter-by-quarter, but this was a really good one. But take a little bit longer perspective on VC to really look at the health of it. Operator: Okay. Our next question comes from Joe Cardoso with JPMorgan. Joseph Cardoso: Maybe first one here, I just wanted to follow-up on the last comment and maybe just not specific to videoconferencing, but broad-based across the portfolio, just because we're hearing some maybe more downstream from a PC perspective, talking about pull forward of demand in the backdrop of kind of this rising memory cost environment. Just curious as it relates to Logitech's portfolio, and once again, broad-based, maybe not specific to videoconferencing and maybe your attach here. Are you guys seeing any of the benefits from potential pull forward either this past quarter or the quarter that we're in itself? And then I have a follow-up. Johanna Faber: No. I mean, again, about 60% of our business is B2C. So the consumer is definitely not pulling things forward. But also on the B2B side, where we're kind of half personal workspace half videoconferencing, we really -- I have not seen or heard of any pull forwards in our business. Joseph Cardoso: Got it. Very clear. And then maybe just a follow-up. You talked about the reaching the 10% of U.S. products originating from China or less than 10%, I think, was the exact comments, which seems a bit better than what you guys were targeting. So now that we've reached that point, maybe can you touch on whether there's further headroom to reduce that? And as we think about the combination of ramping those other manufacturing sites, those processes potentially maturing and the pricing actions you've already taken, any new thoughts on how you're thinking about the implications to margins from those actions? Matteo Anversa: Yes. So first part of your question, at this point, I think we are happy where we are. The team has done a fantastic job. Our target was to limit the import from China into the U.S. to 10% by the end of December. And we are, as you correctly so pointed out a little better than that. At this point, I think we are happy with the current landscape. We also -- as always, want and cherish the flexibility because the tariff environment is pretty fluid. So we want to make sure that we have the appropriate flexibility to move things around, and that's the beauty of the [ China Plus 5 ] strategy that [ Sri ] and the team implemented now for quite some time. I think on the gross margin side, if we look at what we have done in the second quarter, what we've done in the third and also the outlook that we indicated today for the fourth, we are really happy where things played out. Basically, the positive impact of the price actions that we took in April in the U.S. combined with the diversification action that you just mentioned, we're able to allow us to offset entirely the tariff impact. And I think we're in a good spot. And then we'll see, we'll talk more once we close the year. Operator: [Operator Instructions] And with that, our next question goes to Didier with Bank of America. Didier Scemama: Yes. A couple of quick ones, if I may. So I think can you give us a sense of the components of the personal workspace organic growth. So how much of that is volume versus price? Because the reason why I'm asking is because I think the question has been asked multiple times in different ways. If you got a PC market next year, tablets down 10% because of higher memory prices, you're going to face like very tough comps, effectively having raised prices this year to offset the tariff impact. So I guess the question is if we've got a very tough PC market outlook in terms of '27 big decline in volumes, would you be happy to just take down pricing? Or would you be happy to just keep pricing to maintain your margins and potentially lose share? Johanna Faber: So we don't break out the exact units versus price versus mix for the company or for PWS. But what I am comfortable in telling you is that the great PWS growth that we saw in the quarter was a combination of all 3. So positive units, positive premiumization around the world, people trading up to the MX Master 4 and other premium products and U.S. pricing. So it was a combination of all 3. And in terms of -- I'm never happy to lose share. So we're going to put the right plans in place to continue to grow and defend share. And I think you see that in the quarter as well. We're very intentional and strategic on when we need to promote on certain parts of the portfolio and very surgical. We're not just throwing promotions and deals across the market but there's places in the quarter where we need a little more, and we do that intentionally and strategically. Matteo Anversa: To this point, the -- if you look at where we closed the quarter in terms of gross margin rate versus what we were discussing 3 months ago, we are in the higher end of the range. And this is really thanks to the diligent and very surgical promotional approach that Queen and the commercial team around the world are having to Hanneke's point. So. Operator: Okay. And that looks like our final question will come from Martin with BMP . Unknown Analyst: Yes. On my side. Just 2 follow-up is First one is can you just walk us through what the main strength factors for the Q3 constant currency guidance to reach the high end or the low end? Is that still mainly the U.S. consumer? Is there any on the China sustainability, is it gaming or the PC market slowdown. And then maybe attached to that, the sell-through was pretty strong, but it's a sell-in, and that was primarily in APAC and EMEA. Was that difference mainly due to promotional activity? Or was there also some in terms of restocking in the channel? That was my 2 questions. Matteo Anversa: So let me take them then, Hanneke, so let me start with the first one, the fourth quarter outlook. So our outlook contemplates a couple of things. So if you look at the midpoint, right, pretty much performance is in line with what we've done in the third quarter. And this applies in totality and this applies also by the 3 different regions. So AP -- we are expecting AP to continue to grow in the mid-teens like we did in the third quarter, low single-digit growth in EMEA, and flat to low single-digit growth in AMR. So that's the midpoint. On the high end, pretty much AP, EMEA remains the same as we did in the third quarter. So the swing factor is, to your point, AMR. We have seen during the third quarter, an acceleration of the momentum, particularly in the United States and mostly towards the end of the third quarter. So the high end assumes that this momentum continues into the fourth and AMR grows into the mid-single digit. So that's really the difference between the two. On your question on the sell-through, sell-in. So -- you have to keep in mind that sell-through is a gross number, right? So it does not include the impact of foreign exchange, and it does not include the impact of promotion, right? So when you look at the total company, sell-through was up 10% year-over-year in the third quarter. We have a couple of points of foreign exchange, so call it 8% in constant currency. And then you have a couple of points coming from higher -- slightly higher promotional spend as we anticipated getting into the holiday season, which is pretty normal. And then a slightly negative mix coming particularly from the high sales on tablet accessories, which is tied to some of the work that we have done on the education vertical. But that's your walk. Unknown Analyst: Okay. Great. So there's no bigger inventory. Matteo Anversa: No big selling, sell through. Yes, correct. No. We're pretty happy at... Johanna Faber: Yes, we're really happy with the inventory. So really healthy channel inventory levels as we exit the holiday season and excellent own inventory turns. So all of that looks pretty good. . Operator: This concludes the Q&A portion of the call. I would now like to turn things back to Hanneke for closing remarks. Johanna Faber: Great. Well, thank you all. It's great to see you. We look forward to seeing you in the follow-ups and thank you for being with us for today. Have a great week.
Operator: Thank you for standing by, and welcome to the Syrah Resources Q4 Quarterly Report Update. [Operator Instructions] I would now like to hand the conference over to Mr. Shaun Verner, Managing Director and CEO. Please go ahead. Shaun Verner: Thank you. Good morning, and thanks for joining us on the call today. With me is our CFO, Steve Wells, and our EGM of Strategy and Business Development, Viren Hira. I'm pleased to report our Balama operations delivered a solid quarter of campaign production and closed the year out with real momentum. Our commercial team had a busy fourth quarter, meeting good ex-China demand for breakbulk shipments of our Balama fines, and solid sales of coarse products into the global industrial markets. At the same time, the policy and market backdrop is moving into a pivotal period for support of the growth and potential development of our Vidalia anode material business, a period in which there is potential for acceleration of qualification and further commercial activity. Today, we'll work through the presentation provided with a quarterly report and update you on the key developments in the quarter, then we'll be happy to answer any questions at the conclusion of the call. So turning to Slide 3, and I wanted to remind everyone of our clear and differentiated investment proposition. Syrah is the leading integrated natural graphite and active anode material producer outside China, having deployed significant investment into infrastructure and operating capability with readiness to immediately increase upstream and downstream supply, providing significant lead times over the following projects. Vertical integration from mine through anode delivery to end customer offers a secure source of high-quality, critical graphite material supply outside China. Our unique asset base can be OpEx competitive with China and leading ex-China, and we are well placed to generate strong margins over the long term as operating capacity utilization increases. Our leading sustainability and governance position, including broad-ranging external assessment and low emissions intensity compared with Chinese products provides full auditability and traceability from raw material to finished anode. And finally, in response to expected continued growth and regionally specific requirements in our end markets, we have clear expansion opportunities that we can execute in line with the needs of our customers and government stakeholders with support from capital providers. Moving on to Slide 4 now, our critical underpinning values at Syrah are safety and sustainability. And as we continue to develop as a leading ex-China critical minerals producer, we're guided by 3 core objectives: being positive for the communities in which we operate, being sustainable for the environment, and providing secure high-quality supply for our customers. In the fourth quarter, performance against our key safety and sustainability metrics was very strong. We continue to demonstrate how our people and our local communities are critical to our success. The health and safety and security of employees and contractors will always remain Syrah's highest priority. As we strive for 0 harm in our operations, we saw our total reportable injury frequency rate remained very low at 0.9 incidents per million hours worked, a result which any operation globally would be proud of. Our safety focus is underpinned by our work on critical risk hazard management and infield leadership interactions, which are a daily priority for the leadership teams. For the full year, we saw continuing improvement trends in our injury frequency rates across both operations and further refinement of our asset risk profile. I'm also happy to report that in December 2025, we finalized a new community development agreement with Balama host community and district government representatives. The new agreement extends our community development framework that's been in place since 2017, and commits a further USD 5 million from Syrah to important social and economic initiatives focused on infrastructure, essential services and sustainable income generation programs. Importantly, the priorities for these projects are determined in conjunction with our local host communities in Cabo Delgado. Syrah's operations are clearly aligned with leading global sustainability and governance standards. Last year, Balama became the first graphite operation globally in the first mining operation in Mozambique to achieve the Initiative for Responsible Mining Assurance or IRMA 50 level of performance for sustainability. This achievement highlights nearly a decade of strengthening our differentiated performance, including a strong safety record, investment in training and developing a highly skilled workforce, ongoing community interaction and development and human rights due diligence. Along with our ISO certifications and external auditing required under our U.S. government funding arrangements, we continue to prioritize health and safety and environmental management systems, confirming our commitment to operating sustainably and driving continuous improvement. Final point I wanted to reiterate here is the independent life cycle assessment or LCA of Syrah's integrated operations conducted by [ Minderoo ] on global warming potential. From Balama origin to Vidalia customer gate, our global warming potential is estimated at 7.3 kilograms of CO2 equivalent per 1 kilogram of anode material produced, which is around 50% lower than equivalent natural graphite from the benchmark supply route in Heilongjiang province in China and 70% below the synthetic graphite benchmark in China. This whole sustainability focus, along with the lower global warming potential with our integrated natural graphite anode product relative to other suppliers should provide Syrah competitive advantage on these parameters as the most sustainable source of integrated natural graphite anode material available at scale today. On Slide 5, turning to a more detailed look at our performance in the fourth quarter. Total production at Balama was up 34% on the prior quarter to 34,000 tonnes. This result was in part driven by a clear improvement in recovery rates to 76% and good plant availability. It's worth making a specific mention of the operational performance in the most recent production campaign through December, where we produced 16,000 tonnes at 83% recovery whilst maintaining high product quality. This is in line with our best prior operational performance, and the team is confident that further improvement at higher throughput for greater cost efficiency is achievable. Since recommencing production after the nonoperating period through most of the first half of 2025, it's been great to see the Balama operational team delivering high performance and closing out the year on a strong note. As you'll recall, we restarted operations in mid-June '25 and in July, we recommenced shipments from Balama and subsequently lifted the force majeure declaration that has been in place since December 2024. As a result of campaigns from restart comparisons with the prior 2 quarterly periods are less meaningful here, given that we're still ramping up operations after an extended outage but we are demonstrating clear and continuous improvement and operating comparisons will be more relevant over future quarters. Natural graphite sales of 29,000 tonnes were up 21% on the prior quarter. We continue to have demand to drive our operating campaigns and product inventory requirements, and we essentially sold everything we produced in the quarter, noting the lead time required to port and shipments. This included 2 further breakbulk shipments to Indonesia in the quarter, with solid demand evident for ex-China feedstock into the anode market. Our weighted average sales price for the quarter of USD 577 per tonne CIF was up 2% on the same quarter last year, but down quarter-on-quarter on the customer and product mix. Our C1 cost was USD 535 FOB per tonne during the operating period and freight averaged $74 per tonne. Importantly, this all provides a good basis for lower C1 costs as we can lift capacity utilization and increase volumes. Along with indications of better than historical pricing as ex-China differentials are embedded, positive future cash flow opportunity is clear, subject to demand continuing to increase. Balama has always had potential to generate good margins of greater than 50% capacity utilization and the price premium is being achieved for ex-China sales compared to domestic and FOB China prices. At Vidalia, the operations team continues to build significant operating experience through small batch production periods and qualification interactions. We continue to work through the highly detailed and extensive qualification requirements, and we are making positive progress, albeit obviously slower for conversion to sales than we would like. We're also responding to continuing refinements that have been requested by customers as their own processes and requirements mature in newly developing battery operations and product mixes in the U.S. Our product quality and performance is excellent as per the key technical performance outlined on Slide 13 in the appendix of today's slides. There is no issue with our product specification or performance, and we continue to deal constructively with a highly complex mix of policy, commercial and technical factors. We remain singularly focused on achieving sales as early as possible, but it's clear that greater certainty in the policy and result in pricing and supply environment, which is expected in the first quarter of 2026 will be critical for the next steps in commercial progress. The removal of the Section 30D consumer tax credit in September 2025 saw a marked reduction in U.S. EV demand in Q4, given sales have been brought forward prior to the change. The growth profile is expected to normalize from there. And as the broader policy and AD/CVD or antidumping and countervailing duties case position crystallizes throughout this year. This will be important not just for Vidalia but also for Balama's continuing sales growth. So we emphasize that the extensive work of our operating and commercial teams will pay off with our investment and development experience demonstrating considerable time and capital required for others to follow, creating a sustainable lead time advantage for Balama and Vidalia. I'll hand over to Steve now to talk about the current financial position and interaction with our U.S. government lenders. Steve? Stephen Wells: Thanks, Shaun, and I'll turn your attention to Slide 6 to cover the cash flow for the group. We started the quarter with USD 87 million in total cash, the cost -- restricted and unrestricted cash balances. Our cash flow from operations during the quarter of negative $18 million included receipts from sales of natural graphite product shipments of USD 13 million. Cash outflow was higher than the September 2025 quarter, mainly due to a $4 million partial payment for a breakbulk shipment being delayed into January for a December shipment and higher adviser costs associated with DOE and DFC loans. In addition, the prior quarter's operating cash flow was also positively affected by the receipt of a $12 million Section 45X U.S. tax credit for Vidalia. We experienced some working capital buildup at Balama, ongoing working capital draw from Vidalia through this low production qualification period, and increased adviser cost associated with the loans, also noting that we continue to draw on the DFC loan in the quarter. Our clear focus remains on increasing sales from Balama to facilitate further improvement in the quarters ahead, and to bring Balama to operational cash flow breakeven as soon as possible, as well as completing the qualification process of Vidalia to expedite ramp-up in sales. Through this period, we are highly focused on managing the cost position of both assets. Other movements to call out in this quarter were the $8.5 million disbursement from the DFC loan to fund working and sustaining capital at Balama, which netted USD 1.1 million of financing repayments and transaction costs, led to the $7 million net proceeds from financing amount. At the end of December, the group had a closing cash balance of USD 77 million. Of this closing balance, there is $18 million of unrestricted cash and $59 million of restricted cash under both loans. Of that restricted cash, $10 million is available to fund Balama operating and capital costs and restricted cash of $17 million is available to fund the Vidalia costs. In addition to sales, of course, further liquidity of $7 million is available under the current DFC facility for TSF funding purposes and subject to meeting loan terms and conditions. Interest payments on the DFC loan are currently deferred to May 2026, while debt service obligations on the DOE loan are deferred to 2027 under the Forbearance Agreement Syrah has with the Department of Energy. We continue to work with both lenders given the market dynamics as a result of the geopolitical and policy landscape, which Shaun has referred to, and to the clear strategic nature of the assets and Syrah's market conditions as well as the specific loan requirements, which include various event default and a requirement for further funding by March 1. This also forms part of the overall strategic advisory process we have previously announced with Macquarie. And with that, I'll hand you back to Shaun. Shaun Verner: Thanks, Steve, and I'll spend some time now providing an update and our perspectives on various market developments and the evolution of government policy through the last quarter of 2025, and implications for our business in 2026. On Slide 7, you can see on the left-hand chart, the global EV demand remained strong, though volatile month to month. In 2025, global EV sales were up approximately 24% on 2024 with strongest growth in China, positive developments in Europe, and a spike in demand in the U.S. in Q3 prior to the expiring of the Section 30D consumer tax credit. As noted earlier, we expect the U.S. demand growth profile to normalize over the coming months. And whilst still positive, we expect the growth rate to moderate from prior forecasts. Anode production in China continues to grow, approaching almost 3 million tonnes in 2025, reflecting not only the EV market, but also the rapid rise of battery energy storage systems or BESS requirements for data centers and other stationary storage applications. Synthetic graphite anode material production overcapacity in China has resulted in intense competition for market share and destructive pricing behavior in the domestic market. Although the addition of BESS demand is starting to see some improvement in utilization in conjunction with some early evidence of capacity rationalization. Prices for synthetic graphite anode material, especially lower-grade products remain below estimated production costs in many cases. Synthetic graphite anode margins have also been impacted by higher coke feedstock costs, maintaining pressure on Chinese producers as only 2 or 3 major producers have significant export market share. These elements are now indicating that prices may be coming off historical sustained flows. In the natural graphite space and anode material production, low overall anode material prices have kept precursor margins and upstream feedstock margins very low over successive periods. Below a few of the larger Chinese anode material producers remain profitable, an increasing number of Chinese natural graphite feedstock and precursor suppliers are not operating due to poor margins and low demand driven by domestic market price substitution, seeing Chinese anode material supply at around 85% synthetic graphite. In the ex-China market, which is more balanced between products, natural graphite anode material demand was lower in Q4, largely due to the U.S. consumer tax credit removal. But through further development in 2026, we expect to see continuing structural shift driven by policy. U.S. government tariff policies and preliminary AD/CVD investigation outcomes have already seen transition to lower Chinese exports evident in the chart on the right-hand side of this page, replaced by supply from Indonesia into the U.S. and Chinese owned facilities. This has been positive for Balama supplying Indonesia, and there is potential future demand in other ex-China production capacity. As the antidumping and countervailing duty investigation is expected to finalize in this first quarter of 2026, the potential for implementation of minimum 5-year antidumping tariffs and countervailing duties may support Vidalia further through increasing demand for ex-China supply and potentially underpin capacity expansion. There are continuing deep market challenges and financial pressures across the global battery and input materials sectors arising from the dominance of incumbent Chinese producers in both cell production and feedstock and precursor supply. Policy decisions will be key to the evolution of both demand and pricing for ex-China supply, and we do expect to see support for diversification decisions and positive developments from a more level playing field for ex-China production. Slide 8 sets out the current position on a number of these government policy settings, which deliver potential support to Syrah's strategy to be the leading ex-China integrated natural graphite and anode material producer. Over the course of 2025, we saw key U.S. government policy changes, in particular, the antidumping and countervailing duties investigation and combined preliminary tariff imposition of at least 105% and various other import tariffs and policy instruments, including the definition of prohibited foreign entities impacting future availability of the 45X tax credit to battery and auto manufacturers, credit, which is very important to their profitability. The ever-present specter of trade tensions also keeps concerns arising from China's export license controls alive for graphite anode and processing equipment similar to those restrictions imposed on rare earth exports. This remains a key driver of ex-China purchasing diversification considerations for potential customers. The combination of these factors should level the playing field for ex-China supply through this year and Syrah's major investment and capability build will allow us to capitalize on both the competitiveness and value of Balama feedstock and our anode material from Vidalia for OEMs and lithium-ion battery manufacturers in the U.S. Turning now to Slide 9, and a summary of our key strategic priorities and milestones over the coming 6 to 12 months. In the first half of 2026, we'll target campaign production to support increasing natural graphite shipments to ex-China anode material customers with a particular target on breakbulk shipments for efficiency. This will continue to generate important revenue for the company as we progress our technical and process qualification steps with the data customers to progress sales from there, concurrent with the near-term evolution of commercial and policy positions. At an industry level, we're awaiting the final determinations for the antidumping and countervailing duties investigation in the U.S., which are due by the end of the first quarter. If the preliminary duties are finalized, they will be in place for a minimum of 5 years, providing important stability and a marked leveling of the competitive position for Syrah relative to Chinese exports to the U.S. Geopolitical developments, including government focus on addressing the vulnerabilities caused by the concentrated structure of graphite supply and anticipated demand growth, particularly outside of China, underpin our loan restructuring efforts and pursuit of further strategic transaction opportunities. We're advancing a process advised by Macquarie to review strategic partnering and funding options to enable strengthened position in which to pursue developing market opportunities. At Vidalia, we expect to further progress technical and process qualification with the high-quality products with customers' immediate purchasing decisions informed by policy developments. Concurrent with driving our Vidalia operations into commercial sales, we're targeting additional customer and financing commitments to facilitate potential expansion steps through 2026. We're optimistic about improving market and policy positions soon, and we see a number of clear positive catalysts ahead that have the potential to create significant value. We strive to deliver against these objectives safely and rapidly, and we look forward to communicating further progress as we move through. We're now happy to move across to questions. Thank you. Operator: [Operator Instructions] Your first question comes from Austin Yun with Macquarie. Austin Yun: Steve, good to see continued production ramp-up at Balama. The first 1 is more around the market color. I know you touched on that briefly. I'm keen to understand the current market dynamics from the pricing front, like we see that lithium market is flying with a strong BESS demand where half of the BESS battery requires graphite. Just trying to understand, are you observing any customer behavior changes for the ones you're engaging with or new markets emerging and also the pricing changes into the March quarter. I'll come back with the second one. Shaun Verner: Thanks, Austin. I think we are seeing an ex-China pricing differential, call natural graphite. I think differently to the lithium market, the graphite market is still dominated globally by synthetic graphite anode material, and that is seeing a weight on the overall pricing for graphite. But the growth of ex-China manufacturing capacity, particularly in the natural graphite space, starting to create a bifurcation in that pricing between China domestic and ex-China pricing for the natural graphite feedstock. I think more broadly on anode material, the regionally specific policy matters that I mentioned during the course of the call, will be the greatest determinant on pricing. But assuming that the policy conditions continue to evolve in a positive and supportive manner, there's strong underpinning potential for improvement in prices for both anode material and demand for Balama feedstock. Austin Yun: Second question is on the balance sheet and the cash flow. Just keen to understand your liquidity requirements given that Balama is up and running again, which I assume requires a bit more working capital, also assuming you would need to tap into the $10 million restricted cash for Balama in the March quarter. Is that the right understanding? Shaun Verner: Yes, I'll hand over to Steve to make some comments there, Austin. Stephen Wells: Yes. Thanks, Shaun. So within our sort of cash balances, you'll see we have restricted cash as well as unrestricted cash. So within the restricted cash we have funds at Balama of $10 million that can be used for working capital, plus obviously, receipts from sales and Shaun has talked about some of the positive direction there. And we also have $7 million available under the DFC loan that can be used to fund the TSF, which is probably not a Q1 expense but more spread out over the year. So we have that available. Obviously, the key swing factor is -- does relates to sales. And then at the end of the year, we also had that $18 million of unrestricted cash also. So very much dependent on the production side of things as well as the receipts that we get from sales during the quarter. I just kind of highlight as well, as I talked about in my comments that a $4 million partial payment for the breakbulk that we did in December was also received in early January as well. So that's part of our cash consideration for the quarter. Operator: [Operator Instructions] Your next question comes from Mark Fichera with Foster Stockbroking. Mark Fichera: Shaun, just a couple of questions. Firstly, you've guided regarding production of no less than 30,000 tonnes of graphite in the March quarter. I just -- I assume that in terms of sales, which you're looking at least 30,000 tonnes as well, just given you've built up your inventory now at Balama. Shaun Verner: Yes. Thanks, Mark. Yes, we've been very clear that we're using our sales forecast to drive our production decisions. And we are seeing a more consistent and stable demand outlook. So that is supporting that view. Should that change, we have capability to produce further through the quarter, but that's the view at this stage. The coarse flake markets relatively stable, and we watch very carefully what the supply-demand balance looks like in those markets as well. But it will really be that ex-China anode material demand profile that drives our production and sales position for the quarter. Mark Fichera: Right. Okay. And a second one, regarding the battery energy storage systems market, you mentioned that the future market for the company. I was just wondering, yes, can you elaborate a bit on that in terms of how you would approach entering that market in terms of what potential impact on Balama and Vidalia in terms of the operations to enter that market? Shaun Verner: Thanks, Mark. I think it's still very early stage to talk through that. The vast majority of battery energy storage system cell supply and battery supply is coming from China at this stage. And therefore, the majority of anode material supply is obviously domestically procured in China and synthetic graphite. One of the key requirements of that segment is long warranty periods and cycle life performance is key. And you might recall from other discussions that we've had that natural graphite anode material has a higher energy density than synthetic graphite, but synthetic graphite tends to have a longer cycle life performance than natural graphite. So it's certainly something that we need to take into account. But what will be driven by is the development decisions of the battery manufacturers, primarily in the U.S. in the requirements or specifications that they need, and it's pretty early stage in terms of their thoughts on that front because most of the capacity in the U.S. is currently geared towards EV. Operator: [Operator Instructions] There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Oleg Vornik: Good morning, and welcome to the DroneShield December Quarterly Investor Presentation. I'm Oleg Vornik, the Chief Executive Officer of DroneShield, and with me is Carla Balanco, our Chief Financial Officer; and Angus Bean, our Chief Product Officer. I will aim to speak for about 20 to 30 minutes, and then we'll turn to Q&A, which will be the majority of this session. I encourage everybody on this call to submit your questions as you go as opposed to wait until the end of my presentation, so we can commence the responses to Q&A as soon as we're done. I'm going to skip the basics of DroneShield as I assume most who have dialed into this call [Audio Gap] in revenues as well as about $202 million in cash receipts. This is a truly outstanding result and approximately just under 4x the increase from the top line of last year. But importantly also, we have started really strongly on the 2026. And a reminder that we are going in calendar year-end. So roughly this time last year, we would have begun the year with maybe $5 million or $10 million in locked in cash receipts and revenues while today, we're essentially $100 million that we have carried over from the end of last year, and that will be reflected in the next 1 or 2 quarters, plus any additional business that we're currently working on. The SaaS revenue similarly has continued to climb. So we have gone from just under $3 million in '24 to just under $12 million in '25, and we have already locked in over $18 million for 2026. And again, this we anticipate to continue to climb as we secure more sales with SaaS attached to it, but more on that as we speak about our SaaS strategy. In terms of the profit before or after tax, we're going to be releasing this in about a month from now as part of our annual results, and that is what our finance team are busily working on. The next slide gives roughly a quarter-on-quarter and a year-on-year comparison. So across all top line metrics, the revenues, the customer cash receipts, the SaaS revenue and the operating cash flows, we are seeing significant increases. The revenue from customers and the secured revenues is not the only metric. The pipeline remains strong at about $2.1 billion, and that is a small reduction from the $2.4 billion roughly that we had about 3 months ago. And a lot of it is driven by a -- us essentially being slightly more conservative when it comes to the civilian revenues in the U.S. We're seeing still a lot of momentum in those non-military opportunities in the U.S., and I'll talk more about it. But essentially as part of us being more strict in how we apply those metrics and also remembering that U.S. civilian sector is a very nascent industry and much like what military used to be several years ago when you had the early stages, you are not always seeing that progression. And if you go -- just give me one second. I have received and know that I need to reshare the slide deck, so I will do so now. [Technical Difficulty] Okay. Now you should be able to start seeing the screen again. Apologies for the IT issue. So $2.1 billion pipeline, which is an exceptionally strong pipeline that I will talk more to in the next couple of slides. But ballpark, we're talking 300 deals diversified across products, geographies, stages of maturity and so on. Underpinning all this is about 350 world-class hardware and software engineers here in Sydney that has taken a decade for us to build. There is no team of this sophistication and quantum in the market that we're aware of. And this is what's leading to the highly differentiated nature of our products, both the current products, which I believe, are the best out there, but also the next generation of products that we'll be commencing release of in the second half of the year, which we think will completely transform how our customers think about counter-drone solutions. The $70 million plus R&D spend and we expect that to continue, slightly increase, but not a lot. So we expect to go from about 500 to 600 people, assuming our recruitment program goes on track by end of '26. Most of those would be engineers as well as ops and salespeople. And this will continue building on our highly -- basically high gross margin products, so 65% gross margin as well as a healthy cash balance. So let's talk about the individual geographies. U.S. has, for a long time, been the engine of growth of the business, so 70% revenues. Last year, Europe has taken that title and Europe will continue driving a lot of our momentum as we're seeing a number of countries really ramp up their defense, realizing they cannot just rely on the U.S., they need to be self-reliant, and increasing their defense expenditures significantly. And within that, we're really well positioned, including setting up manufacturing in Europe. We have a number of well-credentialed distributors that we trained and are deeply ingrained with our military but also critical infrastructure and customers through Europe and set up our office in Amsterdam led by Louis Gamarra, our Global Chief Commercial Officer, who is then managing those distributors around Europe. In the U.S., after a relatively quiet '25, we expect to have a very strong '26 once the current U.S. congressional '26 budgetary discussions are concluding. And hopefully, that will be all in the next month or so. And that is across several verticals. The defense budget, which is already at the record of USD 1 trillion in '26 is proposed to be USD 1.5 trillion in '27 and we believe we're well positioned as JIATF 401, which is the centralized procurement office for counter drone in the U.S. will start kicking in. Outside of the defense, the Department of Homeland Security has set up a dedicated team, the Program Executive Office with USD 1.5 billion contract vehicle. And that's also linked into the FIFA World Cup in June, July where you need significant security, including counter drone. And Safer Skies Act in a nutshell enables police and majority of police in the U.S., state and local, not federal, enables states and local police to be able to jam on our product, if you think DroneGuns, RfPatrols, DroneSentry-X, on-car sensors and effectors are perfectly suited for police deployment. And also, we have been included in the Golden Dome, the $151 billion SHIELD IDIQ. Now those are primarily missile protection sites, but all of them will need counter drone protection. So that's where we intend to play. In the U.K., those of you following me on social media would have seen that I shared a picture in Hereford about a day ago where there was a U.K. Minister of Defense visiting the SAS HQ facility, and that was our RfPatrol basically being demonstrated as part of the visit, and that is not a stage marketing opportunity. This was a genuine visit unrelated to DroneShield and this shows how deeply embedded DroneShield is within the various arms of the Ministry of Defense. And we believe that the actual opportunity is much more than just $17 million or 5 projects. This is what we are actively tracking. But I think the U.K. will be spending significantly on counter drone, and I believe we are, by far, the best positioned business there. In Australia, we've recently been included into a Line of Effort 3 panel for LAND 156, which is saying to be the managing contractor on specific sites. And we expect that work to commence as in the participants on those panel will start getting those roles sometime this year as well as us being part of Line of Effort 2, which is purchases of portables like DroneGun and RfPatrol and where we received initial small couple of orders totaling $6 million last year, and we expect to get more off the back of that. In Asia, a lot of our efforts are driven off Japan and the rest of Chinese neighbors, and we expect that to continue ramping up significantly. Outside of all these geographies, South America is probably the key driver where we're very active in both Colombia and Mexico, and Colombia has announced USD 1.7 billion counter drone budget. And the key focus for South America tend to be fixed site systems, our drone DroneSentrys, which provide protection for the whole facility. I'll likely skip through the Safer Skies Act except to say that this is significantly increasing our U.S. law enforcement demand. On the products, again, I will skim and maybe refer back to it during the Q&A session, but a reminder that we do a complete range of dismounted and on-the-move and fixed-site products. So we are a radio frequency AI-enabled drone detector and defeat maker, but we are also an integrator. So integrator of third-party detectors and third-party effectors. And this is quite important, especially when it comes to fixed sites. I want to spend a little bit of time talking about the software strategy. So today, software is a small, about 5% part of the total revenue. We plan to have it as close to 30% over the next several years as possible. And this will be achieved by every new product that will be released going forward, having one or multiple SaaS streams on top of that product. DroneSentry-X is a good example. So today, when you buy DroneSentry-X, you have RFAI, which is our AI-enabled engine that runs as a SaaS product on that. But then you're also probably going to have it deployed as part of your site. And within that, our C2 is also the other SaaS product that will be applicable to you. If now you happen to run multiple sites, our enterprise SaaS, so DroneSentry-C2 Enterprise kicks in, which gives you a region or a country-wide awareness and that is an additional product again. Now if you're having a multisensor solution, chances are, you have cameras, so our DroneOptID SaaS, you probably have radars where there's SaaS attached to it as well. And we'll continue releasing new SaaS families, optimizing for more and more of the SaaS offerings on top of the hardware that we sell. I think selling as hardware and software positions us really well competitively. I would not want to be a pure software business in the world of ChatGPTs, et cetera, today, where you're worried that the big AI is going to eat your lunch. And I think hardware, which is highly customized, high IP sort of product, we have a lot of effort that we've been putting in, in terms of designing that circuitry, designing those antennas, how it all sits together. And having AI that works on that hardware, not in the cloud, it's not large server farms, but on the device, AI on the device, is making us a truly unique proposition that is very difficult for somebody to replicate. And I don't believe we have any competitors that are doing anything quite like we are in terms of our deployment of AI to sense and take down drones. And so this is our strategy to then grow our SaaS to 30%. But then importantly, selling to militaries and government agencies is recurring by nature. So in the world of counter drone where you really need new hardware every 3 or 4 years, whatever the customers are buying today in terms of hardware, they'll be fully replacing in about 3 or 4 years. In fact, some of our customers are already seeing the trend and they're asking us, and I think this is potentially where the industry is moving, towards Counter-Drone-as-a-Service. So instead of paying us x dollars for hardware and then continuing to pay SaaS, it's basically becoming one giant SaaS and the hardware refreshes are baked into that. Now this is not going to be done by everybody. And this will enable us to continue receiving those bigger one-offs in the short term from the hardware purchases as well. But I think in the long term, so over the next 5 to 10 years, I think a lot of the industry will move towards Counter-Drone-as-a-Service, which will further smooth out our cash flows. Number of differentiators, so technical and commercial, I've talked to many of you about this before. On the technical front, the AI. So our enormous database of drone signals, the largest proprietary database of its kind in the world, we believe, which is collecting drone signal data from 70-odd countries in which we operate. And this is one of our also key advantages compared to, say, North American or European competitors, a lot of whom focus on their regions because the markets are big enough. Coming out of Australia, we always had to be a global export business because the market here doesn't support a business of our size, and that enabled us the global reach as well as building those enormous databases. And then we have data engineers in Australia, cleaning, tagging the data and enabling them the dedicated hardware with an AI engine to perform against drones. Now we're super excited and we can talk more about it in the Q&A if people are interested on this call about the next generation of AI engine that we are planning to release later this year, which we really think will be the game changer in the performance of the drone detection as well as the defeat. So as a result, our gear can detect, further defeat, further be lighter, smaller and be in various form factors. So on-the-move, fixed-site or both. On the commercial front, we are one of the most global counter drone businesses. Now we don't supply to the likes of Russia, China and North Korea, Iran and so on, but within the Western and Western allied countries, I don't believe there is a counter drone company with a wider deployment than DroneShield is. And over the last 10-plus years, and we've truly been a pioneer in this business, and there are a lot of people in this company with very significant longevity. We've seen the whole cycle, both from the commercial and technology experience. We have this think tank capability of understanding where the threat is moving, what the drones are likely to do, how to direct our road map, what makes sense, and this is also our competitive advantage. In the world where you have to have understanding, not just with military technology, drone technology, but also the acquisition cycles and how various customers like. On the competitive positioning, we have 1 or 2 competitors usually across most of our product lines, but we are aiming and I believe we are today the leader in every product segment in which we operate. Traditional defense primes, we see more as our customers rather than competitors just due to the requirement to rapidly evolve like 3 to 4 years hardware cycles, quarterly software updates and also be cost competitive. Live defense primes are not positioned for that kind of performance. Theirs are more like, if you want to build a tank or a missile with very different sort of competitive moat. And I believe that we remain the only publicly listed pure counter drone company in the world. There are other publicly listed companies that do lots of things as well as counter drone being a relatively small part of what they do. But we are the only pure-play counter drone listed company in the world. And on the manufacturing capacity expansion and maybe in the interest of time, I'll stop on this slide, we are on track to expand to $2.4 billion by end of the year. We are -- we're just in the process of completing the move now to our 8x. Beside the facility expansion in Sydney, we are setting up manufacturing in Europe and in the U.S. So the idea is for smallish orders up to maybe $5 million, we can usually deliver really rapidly. So for example, the order that we announced on the 30th of December last year, about a month ago, we delivered the following day, and this was in Europe. And for larger orders like the $62 million order we received in the middle of last year, we delivered that within 2 months. And the idea is that if we receive an order in hundreds of millions of dollars, we can still deliver that within, say, 2 quarters. So that's the goal of manufacturing capacity and how we look at the inventory. I'll stop there and see if there are any questions in the function. Just give me one moment. Oleg Vornik: So the first question is why did the pipeline move from $2.5 billion to $2.1 billion? So this was what I was alluding to earlier about in the U.S. when it comes to the civilian sector, we had more bullish assumptions that we have today in terms of follow-on projects. So some of those non-military, non-law enforcement, more nascent industry type situations, where I still think there's going to be an enormous business to be done in data centers and airports and energy infrastructure. But a bit like what we've been seeing with the military sector, say, 5 years ago, those customers are still struggling, given it's their very first time buying counter drone equipment. They need to figure out how much they want to spend, how they want to lay it out. So we have significantly trimmed and made more conservative our near-term forecast for the U.S. non-law enforcement, non-military sector in terms of what we presented in the pipeline. So in the very near term, I still expect defense to be the majority driver of business in this company, except in the U.S. where I think law enforcement will be a very significant contributor. And I think over the next 3 years or so, the civilian sector would really start picking up to the point where if you think about the total addressable market, the USD 30 billion for the military and USD 30 billion for the civilian sector, I'd see in the long term, this business being 50-50 military and non-military. Any guidance or TAM for SentryCiv? So SentryCiv is our commercially focused more affordable product that we released several months ago. We already started having early sales to customers. And this is focused on civilian customers who are budget conscious and they want to be spending hundreds of thousands of dollars or in the low millions for their deployment, but rather they want to be spending tens of thousands of dollars a year. And it's a little bit too early to tell. And I think a lot of that adoption will drive as the civilian market starts to take on. So we're talking potentially farms concerned about activists, and we've already been seeing purchases on that front, some energy infrastructure, stadiums and so on. The next question is when or how would we consider a U.S. listing to increase exposure to U.S. investors? I think there will be a time when that makes sense. However, my view is that you need to be significantly larger. So today, we're about AUD 4 billion market cap or US, call it, USD 2.5 billion. But while that is significant. So we are probably halfway on the ASX200. That is truly a micro cap by the U.S. standards, and I believe that it's going to be a disservice for our shareholders if we list on the U.S. market now. But say if we are 2x or 3x the size, which given the growth we achieved, we more than tripled just last year alone in terms of the share price and the size, that could start making sense. So I think this is a regular thought that we're having. But right now, my personal opinion, a bit too early in terms of diluting from our primary listing in Australia. The next question is, when are we expecting to start manufacturing products in European Union and in the U.S.? This half year. So in Europe, this quarter, and in the U.S., the following quarter. Are we finding any challenges to slow this down? No, I mean, there's obviously the usual process, nothing simple in terms of the supply chains and whatnot, but we're not seeing an issue. The next question is how do we counter fiber optic drones? So there's actually a slide in the appendix of the investor presentation that I will draw those of you who are interested in this question, but I'll give you a short summary. So radio frequency and drones are very closely linked. I see this a bit like wheels and cars because there's been so much invested in road infrastructure, whatever cars will look like in 50 years, they'll probably have wheels on, whatever they'll look like. So similarly, radio frequency is so core to the drone technology that the reason why fiber optic and attempts at AI exist is to try to circumvent what we do, but we are still dealing with the vast ramp of what drones are. And fiber optics have very severe limitations like you think practically, right, flying a drone with 10 kilometers of a fishing line attached to it and snagging at other things or snagging the line itself, very, very difficult. You can't fly quickly. And a lot of the images by the way, coming from Ukraine, I wouldn't necessarily trust what you see. Information warfare is prevalent. They say in war the first casualty is off on the truth. So -- but if you are really looking to make sure you can counter them, remember we're an integrator as well. So we build in radars and cameras that can track fiber optics, and we can integrate, and we already have, in fact, integrated things that can effectively count current electronic systems inside of our DroneSentry that can deal with that as well. But frankly, our customers are not seeing a lot of concern based on everything I'm observing on fiber optics, and it's more of a media thing. The next question I may pass to Angus about RFAI and our next generation and what it means. I'm personally really excited by that. So Angus, over to you. Angus Bean: Thanks, Oleg. Good morning, everyone. Thank you again for attending this morning and your continued support and interest in DroneShield. Yes, very keen to talk about our next-generation AI technologies. As many of you know, we have been a pioneer in the counter drone space. We're also a pioneer in utilizing what we call micro AIs. So these AIs are run on the edge. As Oleg mentioned, these are not cloud-based, big server farm, big GPU-based systems. These are very low power, very high throughput AI systems that run essentially on the edge. And that strategy that we developed over 8 years ago has proved to be incredibly accurate as our detection performance often, as you can see in the results of '25, has been really good, and there's been a large adoption of these systems. And the other thing that it allows us to do is attach a software and service license arrangement to the products as well to get those recurring revenues. The AI, the next generation is coming through, and we're really excited about the developments. So we -- our current models, RFAI-ATK and RFAI V2 are doing really well in the market. We are working on both RFAI-3 and RFAI-ATK-2 that will be reduced -- sorry, will be released onto the existing products but also, as Oleg alluded to, our next-generation platforms later this year. And there will be a slow rollout through the different products that are appropriate over time. One last point I'd make on here is the key thing you need to understand about building an AI business is the algorithms that you develop are important and they're difficult. But once you get through that, it really becomes a race for information or a race for data. DroneShield has more data available on drones than almost any company in the world and we're utilizing that as the core foundation to both sustain our current generation AI models. But more importantly, that's also the bedrock of our next-generation AI models, which will be much more open and much more applicable to the new varieties of drone technology that we're seeing in the future. So a bit of color on that one on to you. Oleg? Oleg Vornik: Thanks, Angus. The next question is, do our products -- I'm paraphrasing the question slightly. Do our products have any familiarity to systems developed by Palantir? So Palantir develops more broader software only based battle space awareness systems. This is quite a bit different to us. We are focusing specifically on counter drone, we're doing a fusion of hardware and software. And in fact, I believe that going forward that fusion, that working together of software, the C2 and the hardware will become increasingly more important. So no, I don't quite see us competing with Palantir, which I think is a great company. The next question is, do we think that any of our customers are delaying purchasing our current generation of products for the next generation? Look, I doubt it. So the next generation of products will come in batches through to and probably from the end of the year onwards. I mean it's probably a bit of an analogy. Would you not buy an iPhone and wait for another year for another iPhone. Look, you probably would wait except if your life depended on it, you'll probably buy the current iPhone as it stands and then you'll buy the next one when that is released. So I don't believe there's any way. There's expectation, in fact, that military see working with DroneShield as a long-term partnership, which is also how the 65% gross margins are justified, in that we're doing significant ongoing investment in R&D, which means we will be releasing new hardware every several years, software every quarter. And they will be having to upgrade and also that's where counter-UAS, the service idea comes in. Next question is, can we talk to the new product road map and any changes in the mix of potential uplift? So there's not everything that I can speak about. But the general comment I would make is that the average sales price would be higher. So we're pricing our product to the gross margin, which we -- on the hardware front in -- are planning to keep at 65%. But the extra product cost is likely to be close to triple just due to the more advanced chips, circuitry and so on. But essentially, it would mean that the revenue should continue to rise, I believe, as low market situation and customers are looking to still have counter drone products where they often have very little by way of the civilian sector hasn't been started, for example. And so larger dollar numbers, but similar margins. And hopefully, as SaaS continues to increase as a percentage, that will, in time, increase the gross margins across the business. The next question -- sorry, it's a bit of a long one. I'm trying to read it as I go. So maybe I'll turn this one to Angus as well. So the person is asking about the -- us previously talking about the ongoing cat and mouse dynamic in the technology. Can we give an update on how the landscape is evolving? So what are the drone makers doing to make our life difficult essentially? And how are we responding? And then a follow-up, what are the fundamental shifts in the underlying technology that we're seeing and how we're positioned with those changes? So Angus, over to you. Angus Bean: Thanks, Oleg. Great question. So yes, we are definitely in counter drone 2.0, and we talk about that a lot on DroneShield where we really are in the second era of counter drone warfare, whereby the big shift here is that the drone manufacturers are actively building systems and technologies to mitigate previously deployed counter drone solutions. And so we are seeing a really large uptick in that. And we've spoken about this before. This is the reason why we invest so much of our time and energy and financial resources into R&D. We have, as Oleg mentioned, the largest R&D team specifically to meet the needs of this emerging market. So to give you some examples of what we're seeing and drone manufacturers use, we are seeing really wideband RF communications. We're seeing mesh networking in drones. We're seeing obviously the fiber optic, which we still feel is a very niche use case, technology becoming into play, and we are responding accordingly. But we're responding with solutions that our customers can actually purchase and field. There's a lot of solutions out there, particularly once you get into kinetic and high energy and laser systems that either financially or operationally are not really something that a lot of our customers can deploy easily to the level that we basically expect from DroneShield. So we're responding with solutions that are going to work for our customers, most importantly. The thing -- and going back to the point forward, we've been looking at this for 10 years now. But the thing that we really understand is the core principles of the drone technology. We've watched this technology evolve over time. We have some pretty good understanding of where the evolution is going and it really is going back to first principles. There are physical limitations on what you can do with the radio system, there are physical limitations on the airframes and once you understand those first principles, then you can build technology to meet those changing needs. And as Oleg mentioned, what are we doing about it? We are looking at integrations of a number of different technologies that we don't plan to build ourselves. I think a good example of that is the interceptor drone category, but we are currently doing test evaluation, and we are in very close communication with a number of interceptor drone companies around the world that market itself very competitive, no clear owner and winner. So we plan to take a strategic view and just partner with best-in-breed. We are doing that work now to work out who those partners are and pushing those integrations. Oleg, did you want to talk to anything on the M&A front on that side? Oleg Vornik: On the M&A front, our goal is to ensure that we continue being best of breed in anything that we buy. So you'd notice we have $200 million in the bank. Obviously, we have ability to use our stock as well, but we do not want to buy one of many. And I think there have been cases in the counter-drone industry where people went out and purchased companies that were not best of breed basically just for the sake of making transaction. We are very disciplined, which is why in our 10-plus year history, we haven't done an opportunity yet, but that's not to say that we're not actively looking. And in fact, we have hired [ Josh Bollo ] to start with us this week and one of his explicit focus areas is assisting us to identify M&A targets for us. And so we -- this is something that we're actively thinking about, but it has to be a success for the company. I often find that, and as you guys may well know, I come from M&A background myself. In a transaction situation, the target benefits much more than an acquirer. And obviously, here as being an acquirer, I want to make sure that it is value add to the shareholders. So we're being very careful. But I believe the opportunity is there in terms of acquiring best-of-breed capability, otherwise, we'll just keep developing things organically. The next question is around the Golden Dome. So the SHIELD IDIQ, the USD 151 billion program that we are now a part of. And the question is, has the U.S. given any context to the time lines and when we're going to see pipeline from SHIELD IQ (sic) [ SHIELD IDIQ ]. So there is no pipeline from SHIELD IDIQ in our sales pipeline right now because it's a little bit too early. On the timing, it's really difficult to tell. There have been, as you probably know, a large number of companies included in that IDIQ, but it's also a very large program. So I'm hoping to get some news over the next 6 to 12 months on this. And I'm glad we're included. And like I said, all of these missile protection sites will need to have a counter drone program attached to it. And so I believe we're well positioned. So the next question is -- I'm trying to summarize it, is that basically, I think, the asker is wanting to get some more background around me selling the stock of the performance options in the business back in November last year. So look, the background is as follows: myself as well as a number of senior executives in the business get rewarded when we hit revenue thresholds. Those are exceptionally ambitious thresholds. When we had no revenue to speak of, it was $10 million. When we hit $10 million, the next threshold was $50 million. When we had $50 million, the next threshold was $200 million, which is the one that was achieved in November last year. And now the next threshold we communicated, which is more of an industry best standard, is a number of those thresholds rather than what you call cliff vesting, which is what we've been operating in a more elegant way up to now, where you have $300 million, $400 million and $500 million in revenue as your threshold and for each one of these numbers being reached, you have some vesting of the options immediately and some the other half 12 months later. So it's a very, very staggered fashion. So once those performance options have vested and I've chosen to exercise them, that essentially crystallized immediately half of that as a tax bill, regardless whether I would have sold them or not and regardless where the share price would have gone. So essentially for me to immediately crystallize $25 million in tax liability regardless where the DroneShield share price is, which is a huge burden. So clearly, anybody looking at this now would have said, okay, well, Oleg is looking to sell at least $25 million worth of stock to pay the bill to the ATO. And then the rest, look, I grew up in a fairly poor condition as some of you who followed me would know in social housing and so on. So this was an opportunity for me to secure my financial future. I had a mortgage, a fairly significant renovation bill, unfortunately, that went out of control, but more generally secured the financial future. Look, unlike what some of the articles reported, I did not sell everything. I still have a multimillion dollar equity position through the stock options and obviously continue to care about the business. And I would also say that while the price has reduced a bit before, like from about $6 plus to about $4, it was completely unrelated to selling. It was before the selling. And this was in line with the general listed market slide down after a hard run up a couple of months before. And in terms of impact from misselling, well, the price now is higher than what it was before I started selling. So those that would have held on. I'll be seeing the money. And I would say that we are #1 performing stock in terms of 3x plus growth out of the ASX200 in 2025. And I hope as we continue to keep goals, the share price will continue to perform. And maybe the last thing I would say is that while obviously I was in the news as a director and my filings are public, there are a number of employees in the company that also benefited from this, and I'm really glad for them because life at DroneShield is not simple. In order to achieve those revenue targets, the amount of effort and the sacrifice on people's family life and so on is very, very significant. We're not just posting these results because we're lucky. So I'm glad that all of these employees, they've been around for many years and have prioritized the company over anything else in their lives, have been rewarded and continue to be rewarded as part of the stock structure and this is aligning with obviously investor interest. And then ultimately, as we'll continue to keep goals in terms of our financial performance, the stock price follows that as we've seen through '25. I think the next question I might pass to Angus in terms of the other current supply shortages across semiconductor industry expected to impact 2026 revenue. And maybe more generally, Angus, if we talk about our supply chain and how we deal with that. Angus Bean: Sure. So one thing we're really proud of at DroneShield is we've never missed a delivery. So in all of our history, when we have been working with our customers, many of those had been urgent requests for equipment, we've been able to supply generally into the time line in which the customer needed that equipment. That's something we're really proud of, and that's the sort of thing that gives many of our end users and our customers the confidence to go with DroneShield and -- so that they can place significantly larger orders with DroneShield and know that we'll meet their demands. I mean the great example we had last year was the very large European order, over AUD 60 million, which we essentially was able to turn around in just over 2 months which is an incredible feat of our operations team, working very closely with our various supply chain partners. In terms of the supply chain, we are investing a lot of capital into ensuring that we can meet those long lead time items, we can build confidence in our supply chain partners, and we can secure the stock that we need. And obviously, the much larger facilities that we already have in Sydney at the moment are supporting that as well, having additional warehousing and just logistics support to do much larger orders and turn them around very rapidly. So we're not experiencing any delays that are material to us in delivering on orders at this time. And so we're in a relatively good position there. Oleg Vornik: Thanks, Angus. The next question is around whether DroneShield is being affected by the Trump tariffs. So we have revised our pricing and fully passed on the tariffs when they were introduced last year. So no, we are not affected. The next question is slightly long, so I'm trying to summarize it. It's around how do we continue to innovate in response to new drone technologies such as fiber optics. So to kind of reiterate what me and Angus said before, DroneShield at the heart is an engineering organization. We have 350 engineers, but not just slabbed together over the last month, but a lot of these people have been in the organization, especially in the senior roles in the last 5, 7 years, right? I've been in this company now for more than 10 years. Angus has been here for a very similar amount of time. Even outside of the engineering functions, Carla, our CFO, has been here for about 8 years. So there's a lot of longevity in the business and understanding of the trends and where things might go, right? And the drone makers are a clever bunch, but physics is physics and there are natural limitations of what those guys can do. And I guess, further up the curve you go, the more difficult it gets and where they are waiting for them as they're making their technologies more sophisticated. So to me, innovation in drones is a very positive thing. If the drone makers stopped innovating, the counter drone industry would commoditize and our gross margins would collapse. So that rapid engineering mindset and deep experience in anything to do with counter drone is our key competitive advantage, and we actually want the drone makers to keep innovating. Our customers do not want us to be -- what -- they're not expecting us to be 100%, nobody is, but they want us to be materially better than competition, which I believe we are, and to continue to innovate. The next question is whether we can give an update on the Homeland Security World Cup. So this is the June, July event and how we're positioned. So there was a grant from FEMA, a U.S. government agency for about $0.5 billion. And there are a number of U.S. law enforcement agencies that have been applying for these grants at various degrees of that process. There's only so much I can share. And obviously, under the Safer Skies Act, a lot of these guys once they go through their Huntsville, Alabama FBI range training school are able to use jammers as well. So we are well positioned. Obviously, the urgency is there. So I'm pretty optimistic, but I can't give solid update in terms of the dollar numbers that we're currently associating with the program in part because I think there's just going to be so much movement over the next several months. There are next couple of questions, which are essentially asking us for revenue forecast for '26. Look, I'd love to have a crystal ball. So we don't give guidance. The reason why we don't is because you're in a nascent industry and it will just be irresponsible for us to give a number. We're not a toll road, we're not an airport. I can tell you that my internal direction to the sales team is to have a very meaningful increase like we're talking multiple increase over '25 sales. And obviously, we'll update the market as we continue to push towards the target. And I would notice that we already started the year with essentially $100 million in the bank in terms of the revenues, which is by far the strongest where we had in any of the years in the past. The next one, I'll pass to Angus. Does DroneShield have concerns with the emergence of microwave-based drone defense technology? How we differentiate ourselves from the company's focus on that technology, specifically combating drone swarm defense? Angus? Angus Bean: Thanks, Oleg. So yes, high-powered microwave solutions are emerging as a counter drone technology. We -- many of you would remember, we do have a strategic relationship with a company out of the U.S. called Epirus, who are, in our opinion, the leader globally in that space. The technology is incredibly impressive. However, it has very large limitations around cost. We are talking multiple tens of millions of dollars per panel, which is a price point significantly higher, many pages higher above where many of our solutions are priced. So it's a very different price point. So often we don't compete directly with these types of companies, and we see them more as a strategic partner for those customers, and those customers have a very limited subset of the core defense customers that we have who are interested in that technology. We have ways to partner with various companies to provide that should we be requested. So a very different price point, very different technology and very complex to deploy, very complex to sustain. So incredible technology, and we think we've got some great partnerships there, but it's a very different strategy than the much more broader, larger piece of the pie that DroneShield is going after. Oleg Vornik: Thanks, Angus. And to reinforce what Angus just said, I firmly believe that for counter drone solution to work, it has to be cost effective. So drones are costing a few thousand dollars a piece. You can't have a $10 million, $20 million piece of equipment unless you're protecting only what will be effectively, a couple of sites in a nation where you basically throw anything at that in a counter drone solution. So if you want to be selling more than 5 or 10 of something, you can't be costing $10 million or $20 million in the counter drone land, which is also why we don't really see defense primes in this situation. The next question is about dividends. Also a topic we get periodically. When will the dividends be payable given -- well, the question was also saying, given performance options are taking priority? So firstly, I wouldn't see dividends and performance options as a trade-off. They're related to entirely different things. Performance options related to basically motivating the staff to achieve the results that shareholders are looking for. And the dividends are about capital allocation in saying, are we wanting to invest the capital for rapid growth? Or do we want to return the excess capital that we don't have deployment for to achieve the growth to shareholders. And right now, we're seeing an immense amount of opportunity as we continue to post these record results. And so dividends are not a priority at this time, but this is something that the Board regularly reconsiders. But I would see this, frankly, more of a consideration when we finish the growth rate at the incredible levels that we are doing now. The next one is thoughts of being part of ASX100? So we got into ASX300 in September '24, into ASX200 in September '25, if my memory serves me right, or I could be slightly off. And we are, today, I believe, sitting somewhere around a number, depending on how you count 120 or 130 but in order to get into the ASX100 , you can't be #99 and you need to be more like further up. So there's a significant jump from where we are to get to ASX100. But hey, if we tripled in the share price last year, depending on where we get to this year, this is all in the realm of possible and obviously, that opens additional angles in terms of further funds investing into the company. The next question is, can we give some context into the $800 million opportunity that we're working on? What stage of the sales cycle are we in this deal? So it's a European countrywide deployment where this is a part of a much bigger deployment, but our share of it is about $800 million. It's the same customer that we had the $62 million order with in the middle of last year. I hope to see the project awarded in the second half of the year. But as you'd expect of mega projects of this size, there's a lot of political angles to it, budgetary locations at the national level. So there are a lot of moving parts. But I'm hopeful to have the order in the second half of the year. And then the question is, how soon do they want it fielded? So whether it's ASAP or whether it will be staged over a period, over a year or a couple of years, perhaps, and also what are the payment terms? So obviously, we'll be seeking payment terms to ensure that we either have no or absolutely minimal cash drag. And remember, 65% gross margin means that you don't need to have enormously favorable payment terms not to have cash drag or on an order of that size. So the next question, I think this is the last question that we currently see in the line. So if you have more, please feel free to ask now. Can we talk -- can we speak -- sorry, I'm just trying to summarize this. So -- can we talk to market-sensitive contracts, which are now under $20 million threshold. For example, would LAND 156 or other Australian government contracts always be market sensitive? So I think the question is, for contracts, which are not quite $20 million. So $20 million is a dollar threshold over which we will always announce. If it's under $20 million, but it has some kind of a deep strategic element, would we announce it? And the answer is, if there is a deep strategic element, meaning it has a clear pathway towards larger sales, the fact that we got a particular contract, then we would be looking to consider announcing, but there needs to be that strategic element for us to do so. So you wouldn't be expecting a lot less cadence in the amount of sales announcements we do, but obviously each one is going to be a lot more material than what people have seen in the past. The next question is about the expense. So do we expect to increase our fixed expenditure line? So maybe I'll pass this one to Carla, our CFO. Carla Balanco: Thank you, Oleg. So on the question, it asked specifically if the $800 million would increase our fixed expenses? And the answer to that is no. So it would not significantly increase it because we are currently putting structures in place so that we can increase our manufacturing to way above that level. So therefore, everything that we are currently doing in terms of uplifting all the internal structures, focusing on our manufacturing capability, we will not need to significantly increase our fixed cash costs. Oleg Vornik: Thanks, Carla. And in terms of our base costs, so as we said in the investor presentation, there is about $150 million in run rate cash cost. This is not what the question was asking, but I'm just expanding on that. As of December, and this is based on about 500 people head count plus the on cost, like the spaces we lease and so on. So that will increase a bit as we get from 500 to 600, but at the revenue growth that we're expecting, our aim is to continue being operating cash flow positive as, in fact, we have been in the December quarter, as you can see from the 4C quarterly. Then the next one is, do we have any update on Mission Syracuse? No, we do not. And if there is an update, chances are you will hear it from the Commonwealth before you hear it from us. That's usually how the nature of the Australian defense announcement works, you have to let the customer make the announcement first. The partnerships question. So maybe I'll pass it to Angus. So, is DroneShield considering partnerships with specialist connectivity providers such as Elsight to enhance resilience and stability of RF communications, avoid signal loss, tight integration, it sounds like an outside shareholder asking this question, and enabling tighter integration across different platforms, assets and operating environments. Angus, over to you. Angus Bean: Thanks, Oleg. Look, we have a number of partnerships, some of which we do talk about it, a lot of them we don't. And that is for supply chain resiliency, but also just for commercial reasons, we don't always announce our partners. Look, we are open to partner where it make sense. But also, I think one of the hard lessons we've learned over the last 10 years is your core capabilities, core technologies, if you don't have them in-house, you don't control the destiny of those technologies, it's very hard to keep pace with where the market is going. And so we do have a strong tenancy for core technologies, particularly those 2 right now -- or sorry, those 3 are the RF detection, and RF defeat and the C2 layer. These are our core technologies, we remain in-house. And then we look to partner with the integrators and different technology providers to layer on top of those 3 and equip the units. And the story behind that strategy is those are the 3 elements that most of our customers need first. So DroneShield is generally the first partner that -- or first supplier that most of our customers come to. They're the first 3 layers that they look to put in place, then we can work with those end customers to layer additional partners and technology. So we want to control that relationship. We want to supply the intelligence and our understanding of the industry to those customers, and that's why we focus again on those 3 layers. And then we had those additional ways where it makes sense. Oleg Vornik: Thanks. A question that just came through, have any major European and North American institutional investors already discovered DroneShield? If so, which ones? In terms of public information, you would see that Fidelity has been a substantial shareholder, so over 5%. I think they're currently sitting at about 7% according to their substantial shareholder notices. So that's obviously a sort of a pan, call it, Boston, London, huge investment giant, and now they've been with us for quite some time. I want to say probably over a year, if I remember correctly. And then we can't really comment on the registered composition, but we see a $4 billion market cap and quite deep liquidity and inclusion in a bunch of indices. We're now getting to the press piece of being on the screen for a lot of the funds. And we are starting to do an active outreach using opportunities like quarterly release and annual report that we're releasing in a month to market to those institutions. We still remain a majority retail-held stock, and I think it just reflects our heritage, having grown very quickly from a tiny company to a fairly big one. But I think in the long term, this would be a majority institutionally held company as you'd expect. I believe that concludes all of the questions. So we'll stop there. Thank you for your time. And if you think of anything else, please feel free to email us with your question at investors@droneshield.com. Thanks for your time.