加载中...
共找到 25,220 条相关资讯
Avshalom Shimi: [Audio Gap] differ materially from those projected, including as a result of changing industry and market trends, reduced demand for our products, the timely development of our new products and their adoption by the market, increased competition in the industry and price reduction as well as due to risks identified in the documents filed by the company with the Israeli Securities Authority. Online with me today are Mr. Shai Babad, Strauss Group's President and CEO; and Mr. Tobi Fischbein, Group CFO; and myself, Avshalom Shimi, Head of Investor Relations. We will begin with a review of the annual results by CEO, Shai Babad, and then move on to the financial highlights of the quarter and 2025 presented by CFO, Tobi Fischbein. We will then move to the Q&A session. Shai, the floor is yours. Shai Babad: Thank you very much, Avshalom. Again, we apologize deeply for the delay. The computer fell in the last moment after everything was ready. [ Murphy ] is slow, and we had to upload everything on a new computer. But let's start, and I'll try to be brief and to the point. Next. Next. The highlights of 2025. We have a very strong double-digit growth in 2025 and also a very strong double-digit growth in the last quarter of Q4 of 2025. In the year of 2025, we also managed to regain back our margins and improve the profit -- operational profit and the operational profitability, with margins reaching 9.6% without our kitchen activity, which is very, very close to the strategic guidelines that we gave. In net profit in the last quarter, we managed to improve the results by 100%, getting to ILS 150 million in one quarter of net profit, which is a substantial improvement and also to the free cash flow. In addition, lately, we acquired Yoki and we made a very substantial and large M&A in Brazil, which I will mention a little bit later. We also are in the journey of our productivity, and we can say that we are online with all the productivity targets that we set ourselves with, in line with the strategy. There's also been a lot of innovation that was done from diversified innovation to disruptive innovation with the new launches of Coffee and [ Shabbat ] machine in our water purification systems that was done in Q4. And last but not least, in the north of Israel, we launched a new plant for alternative milks under the Michael Strauss, our Founder, Campus, which was launched in October 2025. When we look at the results, we can see that here, there's a 15% growth all over the year, organic growth and a 12%, almost 13% growth in revenues in net sales in the last quarter. This is in addition to also volume increase that we had during this year. So most of the increase in revenue came from price increase, mainly in our Coffee International business, but not only. We managed to increase price to actually increase market share in most of the categories in which we play, in categories and very strong categories in Israel, overall categories in which we play in, we managed to increase market share by 1%. But also in Brazil, we maintained a very -- our position is #1, increased market share, but also increased prices. We can see here the EBIT improvement all over the year from almost ILS 800 million to almost ILS 1.7 billion -- sorry, is ILS 1.07 billion in EBIT. It's the first time that we actually crossed the ILS 1 billion in EBIT without our kitchen activity. And net sales remained with a smaller improvement from ILS 418 million to ILS 450 million, mainly due to tax payments and financial costs that Tobi will elaborate later. But in the last quarter, as you can see, already there is an improvement in the net profit and our ability to roll through our operational profit to our net profits. And in cash flow, of course, you can see also there is an improvement from last year with a negative cash flow. This year, we managed to get back to a positive cash flow with a very strong cash flow in the fourth quarter. When we look at our Israeli activities, as I mentioned before, we managed to increase market share in almost all our categories here. There was a lot of innovation that was done in Israel, which I'll talk about very soon. In Health & Wellness, while increasing sales and growing in sales, we also improved our EBIT. When we look at last quarter, EBIT in Health & Wellness, we kind of -- we stayed the same, but this is mostly because of marketing efforts that were done this quarter in Health & Wellness because of the launch of the new plant in the North for alternative milks. We invested more than ILS 14 million in marketing efforts in addition to what we've done last year, and this is the difference. But overall, Health & Wellness, good growth in revenues, also improvement in operational profit and in margins. When we look at Fun & Indulgence, here because of our confectionery business and because of cocoa prices, we went a little behind. And we can see that in the last quarter, there's already an improvement, as we've mentioned in our confectionery business. Looking into 2026, this will continue to improve and we'll see substantial improvement in our confectionery business, which will yield results that will be close to what we used to have in 2021. And also in Coffee, we managed to improve margins. And as you can see, of total overall in Israel, we grew by almost 6%. Operating income stayed the same because of cocoa prices because of its effect on the business in our confectionery business, which is starting to improve rapidly Q4 and also looking into 2026. And therefore, operating profit kind of remained the same with a very positive outlook into 2026. This is a little bit to show you a little bit of our innovation. In innovation, we have diversified innovation, stretching our brands from one category to another. You can see the milky brand here that -- [indiscernible] which is another yogurt was stretched into that brand. Also in Alpro, we stretch our confectionery brands into Alpro. You can see that we are going very much into the -- also improving innovation into the functional segments of Pro yogurts with proteins, drinks with proteins, and our Pro brand is being expanded. We can also see the disruptive innovation that was done in this year with the first time carb-free drinks, which is alternative -- which is imitation of the protein that comes from a cow that is produced through fragmentation with yeast or mushrooms, and therefore, we can produce milk that is just not being produced from cow and the same with cheese. We launched this in Israel, and we see already sales that are starting to grow. And with our new opening of our new plant in Israel as well, there was a lot of innovation and a lot of investment in new engines of growth that we've put in place. Next. When we look at our Coffee international activities, so this year for Strauss, it was the coffee year. We see substantial improvements in our business -- in our International Coffee business, mainly through prices increase that was done. You can see revenues increased and eroded by 30 -- almost 31% while operating income more than doubled itself on the coffee -- on the total coffee business. We can see here, Três Corações, our Brazilian business with tripling its revenues. Here, it's a very important to say. We saw a very unique and very good results in Q4 for our Brazilian business. We don't think we'll be able to maintain the same margins going forward, but of 12% or 11%, but we do believe we have a new platform in Brazil. And instead of the 3% or 4% margin that we used to have, we think we can be around the 8%, 9% margins going forward for this year. So -- we did maintain a new platform. It's not going to be as high as Q4, but it is going to be very strong operations in Brazil in the R&G. In addition, in the non-R&G, we are continuing to expand our activity in the non-R&G as part of our strategy to hedge -- to naturally hedge the green coffee volatility prices with the coffee activity with the non-R&G activity in Brazil. And one of the steps that we took, which is in line with the strategy was the Yoki acquisition, which I'll say a few words later on. When we look at our Water business, so we increased our installed base and revenue grew due to that, although there was a war, and we see also the impact this year that our growth is lower than what we are planning because of the war. But in parallel to that, we managed to maintain the profits, the operating profit of ILS 115 million each year. Israel grew its profit. But in China, as mentioned in the last quarters, Xiaomi gave a very hard competition and therefore, we went on to a tech mode in which we gave a lot of discounts, and we have reduced price in many cases and also put new platforms into the market. This has cut off our total profits from China. And therefore, the total result remained the same. The good news is that we already see in Q4 that we managed to come back to being a very strong #2 player in market share. We gained market share back in China. We managed to sell in a double-digit growth in the last quarter. We also managed to become #1 in the off-line sale and #2 in the online sale, altogether, #2 in the market, pushing Xiaomi back. We do think this stomach will continue with us into the next few quarters until we'll be able to get profits back on a high level in China. But overall, when it comes to revenue and growth and market share position, we managed to get that back. Next. When we look at our productivity, so we are in line with our productivity active -- targets that we set for this year. We will reach, we believe, within the target and even exceed the target between the ILS 300 million and ILS 400 million. This helps us a lot to achieve our results, to improve operational profit and to improve profitability. There's a lot of streams that are working. I'm not going to repeat all the streams that we talked in the last calls, but there's procurement, there's logistics supply chain in each one of them, there's marketing, RGM. In all of them, we are working very hard. And we are building capabilities, which will help us for the next upcoming years to even to continue to enhance, deepen and improve productivity. A word on strategy. If you look at the strategy that we mentioned in 2024 until the end of 2026, so we kind of ticked the box on all the targets and missions that we set in the strategy. We talked a lot about a strong home base in Israel with optimizing the portfolio in Israel, with double down on the core, with growing more than 5% in the segments that we decided to stay. We reduced SKUs from 1,300 to 780 in Israel while maintaining a higher CAGR than 5%. We've managed to improve margins. With the turnaround, we are expected to do in the confectionery business this year. We believe that the Israeli business will be fully on track with the strategy that we set. We're doing a lot of innovation activity. We built two engines of growth in Israel with the milk drinks and protein drinks and protein by itself. And on the other hand, the new factory that we build with alternative milks and the new factory that we built in the north that will be -- that will enable us to give all our brands in alternative milk version as well. So this is regarding Israel. Regarding the engine growth of Brazil, we said that we need to maintain and to improve -- maintain our position as first in market share, but also to improve our R&G profitability and total profit. And we've managed to do that. We've managed to have done that. If you look at the last 3 quarters, you can see that in quarter 2, quarter 3 and quarter 4, the results in Brazil have improved substantially. We are not going to be able to maintain the same margins as we saw in margin in quarter 4, but the margins will stay high. There's new platform of profitability for the R&G and this is also a tick on what we said in the strategy. On the other hand, the non-R&G is growing also more than 5% each year in the non-R&G activity in Brazil. We also managed M&A activities that we will do in the strategy and also that we can take with the acquisition of Yoki. So overall, we hedged -- we are hedging our activity with the R&G to be less exposed to the volatility of green prices on the one hand. But on the other hand, to continue to push for healthy growth, in the aim of becoming one of the largest dry food companies in Brazil. When we talk about our international water player, as an international water player, we talked a lot about multi-products in the water business. We launched 5 new products from affordable products to premium products, to under the same products to functional products such as the Shabbat and the soda products. Some of those products will be launched also outside Israel. We've managed to turn around our U.K. business in our water business as well. In China, we are opening now the second plant this year, which will enable us to push more on productivity, to reduce cost, to strengthen profitability, but also push growth. And all this is based also on the pillar of future ready and resiliency with performance improvement, which is all the productivity work that we have done and the resiliency that we built in the culture and the health of the organization through upskilling, reskilling leadership models and a lot of activities that we are doing in the streams of our health -- the health of our organization. One word, which is very important for me to say about the Yoki business. There was some eye lifted when we acquired Yoki with effect of why General Mills sold it and why do we buy it and the business is losing money. So I just want to make some sense out of this all. General Mills sold the activity for two major reasons. They have published this in their notification when they sold, so I feel free to mention this. One is their focus on global brands. They want to enhance their exposure to global brands and to focus very much on the global brands and not on local brands. And the other is their scale and their infrastructure in Brazil, which wasn't big enough to support profitability in Brazil. On the other hand, this is exactly in line with our strategy because our strategy is to support loved local brands. We will never have -- I wouldn't say never, but our strategy does not aim or focus on global brands. On the contrary, it focuses only on how do we take local loved brands and leverage those in order to make sure that we build strong brands. We know how to bring innovation and synergies into those loved local brands. If you look at our journey in Brazil, what we've done in our local loved coffee brands, which were #3 and #4 in the market and JD, which is a global brand was #1. We managed to exceed and to become the #1 player in coffee with loved local brands. With Yoki, it's the same thing. We are taking now under our wings very large local brands, very nonlocal brands. And what we have are very high synergies. When it comes to distribution, when it comes to logistics, we are reaching in Brazil more than 400,000 points where Yoki before through third party reached only 100,000 points. When we talk about scale and infrastructure because of our coffee business in Brazil and because of our already existing infrastructures in Brazil, we have much larger scale to support Yoki -- and very high synergies to support Yoki. And therefore, when we look at all the synergies, logistic synergies, distribution synergies and also G&A strategies -- SG&A synergies by combining and merging headquarters and management positions, we believe that within 18, 24 months, we will be able to turn around the business to make it profitable. And I think if our plans will work, we might be able even to do that sooner than that. And therefore, buying this company for 0.4 multiplier on revenues with the synergies that we have. And with our abilities and infrastructure that we have in Brazil, we believe that we'll be able to do a turnaround, and we believe that it's a very, very good fit to our existing business and very much in line with our strategy to become a larger food and dry -- dry food, sorry, a company in Brazil on the one hand. On the other hand, to continue to grow our non-R&G activity to hedge the vulnerable -- the volatility and the vulnerable that we have, the vulnerability that we have because of green coffee prices. And that was the rationale of the deal. And I must say that we are very confident about that, especially after building the new platform that we have now in the R&G in Brazil. And just to conclude before the last slide, looking to now, I talked about the qualitative targets of our strategy. I just want to remind us all the long-term financial targets that we set ourselves in the strategy. So we talked about a 5% CAGR. We are in line with that. We will actually exceed that by the end of 2026. We talked about margin expansion between 10% to 12%. If you look at Q4 of 2025, we are already at 9.6% margins. We don't know yet how 2026 will finish. There's a lot of unknowns regarding cost of goods and what will happen and how will that affect. But I think that we are in line right now to reach the target that we set on the lower part of it. So we feel confident also with that target so far. When we talk about productivity, as I mentioned before here, we are in line and even exceeding the target. When we talk about investments, we are investing a lot in digitalization, in improving our infrastructure, in opening capacity constraints in Israel mainly, but not only, we have reached capacity constraints where demand is much higher than what we are supplying to the market. So we are investing to put more lines to open those bottlenecks and to make sure that we can meet demand. And last but not least, focusing on the core. We said that 85% from 65%, 67%. 85% of our activity will be core. Core means growing 5% or more sustainable, having margins between 8% to 10% sustainable and being the #1 or #2 in the market. And in all of those criteria, I think that when we check all those criteria, 85%, as we've mentioned, of our activity will be by the end of 2026 core activity with the turnaround of our confectionery business. Already today, more than 80% is under the core. So overall, we think that we are accomplishing the targets of our strategy. And here, it's very important to note. These days, we are already working on the new phase of our strategy for years '27 to 2030. We will publish the new strategy out by H2, the second half of 2026. The focus will be on continuous healthy growth and expanding the business while we will leverage loved local brands in geographies in which we play and also in new geographies in which we want to enter. We will push hard on productivity, and we will enhance the build and the growth of our core activities as well. And all that will be out by H2, while we'll finish working on the new strategy. And we'll put the new strategy out to the market with the new guidelines of where we think -- what we think we can achieve and where the strategy will take us by H2. So stay tuned. And the last thing that I want to mention is our work in ESG. This is highly important for us. We continue working on improving our products by reducing sugar, by reducing nitrogen, by making sure that our products, the quality of our products are healthier. And also by increasing the portfolio of healthy products within our portfolio. So we go into proteins. We are enlarging. We are growing our dairy business. We are growing as we invested in alternative milks, in parallel, to make our portfolio more nutritious and more healthier. We are working on sustainable supply chain with working with our suppliers that they meet demands. Of course, our water business and extending our water business helps us a lot with reducing plastic bottles and helping the earth. We are investing a lot of time on people and communities, especially now during the war in Israel, but also in the war in Ukraine and Russia, helping the communities and helping our people and we're investing a lot of that. And of course, governance. There's been jumps ahead in governance in the company where we have our own risk assessment team that was embedded already 1.5 years ago in Strauss and we upgraded our ability in risk of risk analysis. And on the other hand, internal control and auditing -- internal auditing actually was built through a local team, inside team inside the company from external adviser. So those front line, second line and third line of defense are being built within the company. And therefore, you can see, I think the rating that we have through the different rating companies on ESG is very high, and we take it very, very seriously. So with that, thank you, and -- we'll move it to Tobi for the financial results. Tobi Fischbein: Thank you, Shai. On Slide 15, we have a Q4 net sales, which totaled ILS 3.2 billion, up 10.2% year-on-year. Growth was broad-based across all businesses with strong contribution from our Coffee International segment, offset by currency impact from stronger Israeli shekel vis-a-vis local currencies in most of our foreign activities. On Slide 16, full year 2025 net sales reached ILS 12.5 billion, up 11.6% year-on-year. All core segments contributed to this performance. Strauss Israel delivered solid mid-single-digit growth despite the impact of divested activities. Coffee International sales grew 30% in shekel terms to record high sales. And Strauss Water achieved steady growth, driven by a larger installed base in Israel and in the U.K. On Slide 17, Q4 2025 group EBIT was ILS 282 million, up 62.3% year-on-year with 8.9% EBIT margin, up from 6.1% in Q4 of 2024. For the full year, group EBIT grew 35.6% to a record ILS 1.02 billion with an 8.2% EBIT margin. The strong growth and profitability improvement was driven largely by our Coffee International business and productivity gains across the group. On Slide 18. In Q4 2025, Strauss Israel's EBIT was ILS 136 million, up 13.6% year-on-year. Coffee International's EBIT increased by 270% to ILS 173 million. And Strauss Water's EBIT remained flat at ILS 40 million. For the full year 2025, Strauss Israel EBIT totaled ILS 530 million, up 0.4%. Coffee International more than doubled its EBIT to ILS 493 million, and Strauss Water contributed ILS 115 million, flat year-on-year. On Slide 19, we see the net income. In Q4, the net income attributable to shareholders more than doubled to ILS 151 million, reflecting strong EBIT growth. Full year net income reached ILS 450 million, a 7.6% increase over 2024, driven by EBIT improvement while impacted by higher finance expenses, mainly due to a stronger shekel and higher interest expenses in Brazil as well as higher tax expenses due to the profit mix and release of provisions in 2024. On Slide 20, we see the cash generation improved significantly. In Q4 2025, we generated free cash flow of ILS 554 million, an increase of ILS 110 million year-on-year. For the full year, free cash flow turned positive at ILS 215 million versus negative ILS 51 million in 2023. These gains were driven by higher business profitability and lower CapEx. Slide 21. We ended 2025 with net debt of ILS 2.2 billion, slightly higher than a year ago, while our net debt-to-EBITDA ratio improved to 1.6x at year-end compared to 1.7x a year ago, underscoring our strong financial position and moderate leverage. On Slide 22, we see Strauss Israel's sales performance. On Slide 23, Strauss Israel Q4 2025 sales were ILS 1.34 billion, a 4.4% increase year-on-year. Growth was driven by Health & Wellness higher volumes and improved mix as well as our Snacks and Confectionery segment while Coffee Israel had pricing actions, mitigating green coffee cost inflation and slightly lower volumes following the Coffee-To-Go divestiture. On Slide 24, we see Strauss Israel full year sales. And we see them reached ILS 5.46 billion, up 5.6% versus 2024. Health & Wellness segment sales grew 2.7% through increased volumes and better product mix, offset by the divestiture of the Ultra Fresh business. Snacks and Confectionery saw double-digit growth, driven by pricing, volume and mix. Coffee Israel delivered high single-digit growth following pricing actions and volume growth, offset by the exit of the Coffee-To-Go chain. On Slide 25, Strauss Israel Q4 2025 EBIT increase and margin improvement were driven by improved profitability in Coffee Israel and in Snacks and Confectionery. While in the full year 2025, profitability gains in Health & Wellness and in Coffee Israel, combined with successful productivity initiatives helped offset much higher raw material costs used in the confectionery business, resulting in stable overall yearly EBIT. On Slide 26, we turn to Coffee International, our global coffee business, which delivered exceptional growth in 2025. Coffee International highlights on Slide 27. We see a record performance in our International Coffee segment. Q4 of 2025 net sales were ILS 1.6 billion, up 24% year-on-year. Q4 EBIT jumped to ILS 173 million, a 270% surge versus Q4 of 2024, expanding the EBIT margin to 10.9% from 3.6% a year ago. For the full year, Coffee International sales reached ILS 6.2 billion, up 31% and EBIT more than doubled to ILS 493 million for an 8% EBIT margin. On Slide 28, we see our Brazil joint venture, Três Corações has achieved strong double-digit growth in Q4 driven by pricing actions to offset green coffee cost inflation and continued expansion into non-R&G categories, offsetting slightly -- offset slightly by a weaker Brazilian real. In Central and Eastern Europe, we saw volume increases and successful pricing adjustments led by focused sales execution, gaining market share across all our key markets, Poland, Romania, Ukraine and Russia. These factors led to an overall 24% sales growth in Coffee International for Q4 of 2025. On Slide 29, we see the full year Coffee International net sales grew 30.8% in shekel terms and over 45% in local currency in Brazil. Três Corações had a record year in Brazil. The CEE region also delivered robust performance in 2025 with effective price management and volume growth across the region. Slide 30, for the Três Corações, our Brazilian JV results. We saw Três Corações has posted outstanding results with Q4 of 2025 net sales at BRL 3.59 billion, up 23.9% year-on-year and EBIT of BRL 464 million, up 364% with Q4 EBIT margin of 12.9% versus 3.5% in Q4 of 2024. For the full year 2025, Três Corações achieved BRL 14.1 billion in sales and BRL 1.26 billion in EBIT, an increase of 226% year-on-year, bringing annual EBIT margin to 8.9%. These records were driven by excellent sales execution and pricing management to mitigate green coffee cost inflations, continued growth in non-R&G products and operational efficiencies. Moving to Slide 31, to discuss our Strauss Water segment, actually on Slide 32. Strauss Water delivered steady growth in 2025. Q4 2025 sales were ILS 237 million, up 7.4% year-on-year, driven by a larger installed base in Israel and in the U.K. and also by an improved product mix. Q4 EBIT was flat at ILS 40 million. For the full year 2025, sales reached ILS 895 million, a 5.5% increase and full year EBIT reached ILS 115 million, unchanged from 2024. Solid growth in Israel and in the U.K. was offset by softer results in our China water JV with higher due to increased competition. On Slide 33, we see higher Strauss Water performance where we saw high single-digit top line growth in local Chinese currency. Q4 of 2024 sales at HSW were CNY 543 million, up 7.5% year-on-year. However, net income for the quarter declined 48% to CNY 42 million as we invested heavily in marketing amid intensified competition, but we are able to maintain market leadership position. For the full year 2025, HSW's revenue grew 8.7%, while net income totaled CNY 179 million, down 25% from 2024, reflecting higher costs to successfully protect our market position in China. Let's move back to Avshalom for the Q&A session, please. Avshalom Shimi: Thank you very much, Tobi. We will now move on to the questions you have sent. So we have the first question coming in, and I will read it out. Has the current conflict created any new near-term challenges or impediments to operations? Shai Babad: So not in a substantial way. There are -- we have to still continue to monitor that. We have two missions in this period of war. One, we put two main focuses on target. One is business continuity to make sure that all our factories all around the country in the north and in the south are continued business operations as usual, and we continue to produce. And so far, we've managed to do that. And second, to take care and to make sure that we take care of our people and our frontline workers and everyone in the company. And in those two missions, we are highly at focus. So far, we managed to pull and to maintain and to provide business continuity to the consumers here in Israel. It all depends on the length of the war. We think that as long as the war is not going to take more than a couple of months, then this will be able to continue. If not, we'll need to examine and reexamine our activity. But so far, there's no real implications of the war. Avshalom Shimi: Thank you, Shai. And we move to the next question. What kind of productivity initiatives remain for this year? Shai Babad: So we continue with -- we have 8 streams of productivity initiatives. One is working capital, other one is logistics, S&OP, manufacturing, revenue management, marketing, ROI, working capital, and I'm missing one, I think, right now. And in all of those streams, there are targets that were set for each year. We're continuing to work on that to improve procurement, which is one of them as well. We're continuing to improve each one of them working with a very detailed and deep plan in each of those streams with stream leaders that are working on that productivity, and that will continue until the end of 2026. While we will issue our new strategy 2027 ahead, we will also put a new plan in how do we deepen enhance our productivity with also AI coming into life and into our industry and also into our company. So with all that will be out when we get into 2027 to 2030 strategy with the new plan to enhance productivity. But so far, we are still in the original plan, and we are on track. Avshalom Shimi: We have -- thank you, Shai. We have another question. Can you elaborate why or how are you confident about the ability to generate synergies and make the turnaround for Yoki? And are there any low-hanging fruits that you can discuss? Shai Babad: So yes, as I mentioned before, the fact that we reached 400,000 points in distribution today in Brazil. And that today in Brazil, we sell around BRL 14 billion already of dry food, mainly coffee, but not only in Brazil. The synergies that we have and the connections that we have with all the retailers. When we talk about logistics and logistics costs in Brazil of warehouses. Here, we see many low-hanging fruits in which while we will embed Yoki activity into our activity, those synergies will come into life. During the due diligence process, which is a very long process, we have actually examined that. And some of the categories in which Yoki are doing now in corn, for instance, we have already today in Três Corações as well. So when we look at their categories in the categories in which we in the cost, logistic costs and distribution costs that they have, in parallel -- in comparison to our logistics costs and distribution costs, we see a lot of potential of synergies there. On the other hand, we also have headquarters and SG&A costs, which we believe that once this will be embedded in one company, there's a lot of headcounts, which we we'll be able to let go. And there's a lot of headquarters and managers that can be actually synergized and combined. And also there, we see a low-hanging fruit. The third is also the potential to grow sales by higher exposure. When we reach 400,000 points and they reach 100,000 points, we have much higher exposure to the market with high connection. And General Mills mentioned it by themselves that their scale of infrastructure today in Brazil is not strong enough or not support enough in order to make the business profitable, which is in contrary, the opposite to what we have in Brazil, through the Três Corações business. If this was just a stand-alone business by itself without all the infrastructure and the logistics and warehouses and the distribution that we have in Brazil, then of course, we wouldn't have had any synergies and any [ hanging ] fruits. The fact that those dry food categories are in line, totally in line with our dry food categories in some cases, are the same categories because we are producing the same products and selling the same products in the market under different brands. And the fact that they have such -- Yoki is such a strong loved brands in Brazil, we see a very, very high match with Três Corações loved known local brands in Brazil. So when we take those loved local brands with our loved local brands, and we add to that our synergies of logistics, distribution and our ability through the exposure to exceed sales and also the merge of headquarters and reduce of headcounts, we see many hanging fruits that through a very thorough and deep work that will be done by the management of Três Corações. We believe that within 18 to 24 months, we'll be able to do the full turnaround, and we actually believe that we might be able to do it even before. We also have experience in that. This is not the first M&A that we are doing in Brazil, the family and the Três Corações and the [ Limor ] Brothers family are managing the company in Brazil have done. There have been businesses within the coffee and not only coffee that we've bought along the years, and all of them were very successful because they're all built on the same synergies. So we also experienced on how do you take and merge loved local brands from Brazil that were not in our portfolio and to embed them in our portfolio, whether it's in coffee or whether it's in other categories. So to your question, we feel very confident that we'll be able to do the turnaround. We've done a very thorough due diligence, checking those synergies. And we -- the proof is up to us. We have to actually show and perform to see that what we say, this is what will happen. And luckily for all of us, we'll meet here again in 18 to 24 months, and we'll see the results. But we are very confident, as I mentioned. Avshalom Shimi: Thank you for that, Shai. And I see we don't have any further questions. So I will now return the call to Shai for closing remarks. Shai Babad: So as you can see from the results -- thank you, Avshalom. As you can see from the results, we had a very successful year with a double-digit growth in revenues with improved financial parameters all through our P&L with much higher operational profit with higher margin and also in the last quarter also, our net profit already improved. We are entering 2026 with a very good back wind. And we hope that the trends that you've seen in the last quarter of 2025, and in '25 will continue in 2026. In Brazil, it will not be to that extent, but it will be a new platform. We are looking into the turnaround of our confectionery business in 2026, which will also help us improve our results. And we are looking to see how the engines of growth that we put in place such as the new line in [indiscernible] milk drinks or such as the new line -- such as the new factory in the north of alternative milks in Campus Michael, those will actually will help us and to contribute to continued growth and to continue improving our results. And with Brazil, we are looking into doing a successful implementation of our Yoki business. And more than all, we are also looking into -- and these days, we're working very hard on our new strategy for 2027 to 2030, to show how we're going to continue and to set a path of how we're going to continue this healthy growth and continue to expand the company, mainly in the global arena and less in Israel. And how do we leverage our power, our infrastructure, our innovation capabilities into loved local brands in those different geographies and continue our path of growth. Last but not least, those are very difficult times in Israel. So I just wish for everyone to be safe. I wish that our soldiers will come back home safely and that the war will be over as soon as possible that everybody can go back to normal days. Until then, we will be continuing to working very hard to make sure that we, on the one hand, provide business continuity. And on the other hand, take care of our people, and take over our people in the front line that are working on those factories that are under the attack. And I just wish all of us quiet and happy days. And for the coming Easter and coming Passover, anyone is celebrating. So also happy Passover and Happy Easter to all of us. And we hope to see you here soon in our first quarter and to continue to show you the positive trends that we've been showing in the last quarters. Thank you. Avshalom Shimi: Thank you, Shai. And thank you, guys, for joining Strauss Group's Fourth Quarter and Full Year 2025 Results Earnings Call. And this concludes our call for today. Thank you.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Kuaishou Technology Fourth Quarter and Full Year 2025 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. [Operator Instructions] I will now turn the call over to Mr. Matthew Zhao, VP of Capital Markets and IR at Kuaishou Technology. Huaxia Zhao: Thank you, operator. Good evening to everyone. Welcome to Kuaishou Technology Fourth Quarter and Full Year 2025 Financial Results Conference Call. Joining us today are Mr. Chen Yixiao, Cofounder, Chairman and CEO; Mr. Jin Bing, Chief Financial Officer. Before we start, please note that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ from those discussed. The company does not undertake any obligation to update any forward-looking information, except as required by law. For all important information about this call, including forward-looking statements, please refer to the company's public information or the fourth quarter and full year 2025 results announcement ended December 31, 2025 issued earlier today. During today's call, management will also discuss certain non-IFRS financial measures. These are provided for additional information and should not replace IFRS-based financial results. For a definition of the non-IFRS financial measures, a reconciliation of IFRS to non-IFRS financial results and related risk factors, please refer to our fourth quarter and full year 2025 results announcement. For today's call, management will use Chinese as the main language, a third-party interpreter will provide simultaneous English interpretation in the prepared remarks session and a consecutive interpretation during the Q&A session. Please note that English interpretation is for the convenience purposes only. In case of any discrepancy, management's standards in the original language will prevail. Lastly, unless otherwise stated, all currency mentions are in RMB. I will now hand the call over to Yixiao. Yixiao Cheng: [Interpreted] Hello, everyone. Welcome to Kuaishou's Fourth Quarter and Full Year 2025 Earnings Conference Call. Over the past year, guided by our tech-driven user-centric philosophy, we accelerated the execution of our AI strategy across all major business areas, our Kling AI, multimodal large video generation models maintain a global leading position, and we continue to leverage our advanced capabilities to empower Kuaishou content and commercial systems. These efforts supported a high-quality growth across the user scale, revenue expansion and profitability. In Q4 2025, average DAUs on the Kuaishou app reached 408 million, representing solid year-over growth. Total revenues for Q4 2025 increased by 11.8% year-over-year to RMB 39.6 billion. Revenue from our core commercial business, including online marketing services and other services, primarily e-commerce increased by 17.1% year-over-year. Adjusted net profit increased by 16.2% year-over-year to RMB 5.5 billion. For the full year 2025, average DAUs in Kuaishou app reached 410 million, and total revenues increased by 12.5% year-over-year to RMB 142.8 billion. Adjusted net profit for the full year increased by 16.5% year-over-year to RMB 20.6 billion, with an adjusted net margin of 14.5%. As we scale AI investments, we continue to deliver steady improvements in the group's overall profitability. Our AI capabilities have become a core engine driving Kuaishou's long-term growth. Meanwhile, as disclosed in the results announcement given the company's business performance, the Board has recommended the payment of a final dividend of HKD 0.69 per share for the year ended December 31, 2025, amounting to approximately HKD 3 billion in total. This reflects our confidence in company's long-term growth prospects and solid financial position as well as our unwavering commitment to enhancing shareholders' value ensuring the benefits of the company's strong cash flow generation. We are sincerely grateful for our investors to continue to support quite a steady growth. It would not have been possible without the trust and support of our shareholders. Looking ahead, by staying closely aligned with the business development and market conditions, we'll flexibly evaluate and continue advancing diversified shareholder returns, including share repurchases and dividend distributions to deliver the fruits of our growth to all our shareholders. Next, I will walk through the details and progress of our major business segment in Q4 2025. First, our AI strategy and the progress of our large video generation model, Kling AI. Kling AI remained committed to its core vision of empowering everyone to craft competing stories with AI aiming to become the premier inclusive, efficient video regeneration infrastructure for the AI era, while driving continuous breakthroughs in model capability, product experience and monetization. In Q4 2025, Kling AI accelerated rollout of multiple model upgrades across several iterations. We launched the Kling01, the world's first unified and multimodal video model developed on the multimodal visual language architecture, Kling01 transcends traditional [indiscernible] video generation models by integrating multimodal text video image and subject increasing a single generative managing engine. Kling01's unified architecture enables end-to-end content creation within 1 model system, allowing users to envision systematically from generation to editing and refinement without switching tools. We also released the Kling Video 2.6 model, which incorporates simultaneous audio visual generation capabilities. The model can generate a complete video containing natural voiceover, sound effects and ambient audio in single process, enhancing creative efficiency across the AI video creation flow. Kling Video 2.6 also introduced a motion control feature that enables users to replicate a specific movement from uploaded videos or from the online motion library. By pairing this with the character reference image, users can generate character specific videos with the frame level precision in both body movements and facial expressions. In February 2026, we launched the Kling AI 3.0 model series developed under on all-in-one product framework, Kling 3.0, supports full multimodal input and output, spanning text images, audio and video, integrating video understanding, generation and editing within a single streamlined AI workflow. This modes unifying multiple tasks within a native multimodal architecture, enable more complex narrative logic, automated story boarding and precise shot control while maintaining strong prompt adherence. Kling AI's innovations in foundational models and product features have paved the way for what is spread commercial applications across professional creative sectors, including marketing, e-commerce, film and television, short plays, animation and gaming. These capabilities have supported a stronger adoption among professional creators and enterprise clients globally, earning the model's widespread acclaim and accelerating their monetization. In Q4 '25, Kling AI achieved revenue of RMB 314 million. Notably in December 2025, Kling AI's monthly revenue exceeded USD 20 million, corresponding to an ARR of USD 214 million. At the same time, Kling AI's motion control feature gained significant traction across major global social media platforms, driving widespread discussion and organic distribution. This momentum brought in Kling AI's reach beyond professional creators to a broader mainstream user base. In Q4, '25, we continue to deepen the impact of large AI models to empower our content and our commercial ecosystems while driving further quality and efficiency improvements or organizational infrastructure. In terms of strengthening the foundation of our content ecosystem, our proprietary multimodal large language model, Kwai Keye-671 billion model has demonstrated strong video comprehension capabilities. Meanwhile, we upgraded our short video and live streaming content understanding in the system and launched a TechNext, our next-generation teching system, which enables more accurate content understanding, driving higher app usage time per user and the retention rate. In content recommendation, we iterated our end-to-end generator recommendation large model with the launch of OneRec-V2, continuously enhancing the precision of the recommendations. For online marketing services, we further optimized our end-to-end generative recommendation technology by deeply integrating multidimensional business data, we enhanced model performance and improved the precision of online marketing material recommendations. For intelligent bidding technology, we developed a unified bidding large model built on multi-scenario and multi-objective data. Together, our generated recommendation large models and intelligent bidding models drove roughly 5% of growth in Domestic Online marketing services revenue in Q4 '25. While reducing the cost of generating online marketing materials, AIGC technology also unlocked additional budgets from our online marketing clients. In Q4, the total spending from online marketing services driven by AIGC marketing materials was nearly RMB 4 billion. For e-commerce business scenarios, during Q4, we further iterated our end-to-end generative retrieval architecture OneSearch. We introduced editable structured Semantic identifier tailored to the e-commerce business, enhancing sematic understanding for mid- to long-tail search query. This drove a nearly 3% increase in search order volume in shopping mall in Q4. In addition, we expanded the application of end-to-end regenerative recommendation technology from pan-shelf-based e-commerce to content driven scenarios such as livestreaming rooms and short videos, propelling GMV growth in all e-commerce scenarios. For live streaming business scenarios, we further refined the AI Universe gift customization feature to deliver better interactivity, reach our dynamic presentation, more refined visual aesthetics, significantly increasing users' willingness to send virtual gifts. To drive the organization efficiency, we have completed the upgrade of our intelligent coding tools, our self-developed AI programming tool CodeFlicker has evolved from a coding assistant to an AI engineer with more engineers adopting the agent-based coding model and the generation rate of new code has roughly risen over -- to over 40%. Moreover, our AI advancements are underpinned by our investments, and we're going to optimization in computing power infrastructure. Building on the success of our self-operated in-house self-built data center, we are steadily advancing the construction of our new computing power center to continuously elevate server and bandwidth operating efficiency. Second, user growth and content ecosystem. In Q4 '25, average DAUs on the Kuaishou app reached 408 million, and MAUs reached 741 million with average daily times spent per DAU on the Kuaishou app was 126 minutes. We're committed to building a vibrant community with the distinctive quality Kuaishou characteristics, continuously strengthening high-quality user growth, differentiated premium content supply, traffic mechanism optimization and interactive scenario development to achieve a healthy, sustainable expansion in both the user scale and traffic to drive the high-quality user growth that we refine user acquisition strategies across channels to continue to optimize the user segments and improve the retention rates. We also leveraged AI technology to enhance push strategies, including resulting in a higher open rate for Kuaishou app. In addition, we introduced innovative user engagement retention initiatives that are consistently improved ROI. Harnessing our established capabilities and content operations, we supported the growth of benchmark creators like Xinyu the Ostrich Lady and continue to create and cultivate high quality top-tier content IPs with the distinctive Kuaishou characteristics, rural culture and entertainment activities, exemplified by the Village Gateway Mini Stage in able to call rural residents to transition from passive viewers to active on-stage participants, featuring diverse content ranging from intangible cultural heritage performances to agricultural technology demonstrations. These initiatives enriched the rural culture life and provided a new channel fo showcasing rural culture. We produced the 6th anniversary concert for Teens in Times, which garnered over 680 million live streaming views. Leveraging live streaming, interactive features and AI-powered creative content, we crafted a shared youthful memory that fosters a mutual bond between the fans and idols. We optimized our traffic mix of increased traffic exposure for top-tier original content, fostering a virtual cycle between content creation and consumption. In Q4, the number of high-quality content uploads increased more than 15% year-over-year. To further develop engagement scenarios, we continued to innovate private messaging engagement features, driving year-over-year increase of nearly 3 percentage points in daily average penetration rate of private messages among users with mutual followers during the quarter. Third, online marketing services. In Q4, revenues from online marketing services to reach RMB 23.6 billion, up 14.5% year-over-year. The accelerated integration and innovative application AI across diverse online marketing service scenarios, not only empowered our ecosystem partners, but also injected a new growth momentum into our online marketing services business. In Q4 '25 within lifestyle service sector, where clients primarily operate under lead-based model, we have the clients to reach users more efficiently and achieve the higher user conversion rates by upgrading our private messaging products and optimizing our algorithms at the same time by continuously expanding into more industries and acquiring new clients. We broadened our online marketing client base and generated incremental marketing placements. In addition, as the lifestyle service actor clients are predominantly small and medium-sized business, we leveraged AIGC tools to enhance their ability to produce market materials. These enhancements for the barriers for marketing placement and drove further growth in online marketing spending. In Q4, content consumption sector, led by short plays, comic-style short plays, mini games along with the application sector were the key growth revenue driver for the non-e-commerce online marketing services. In the content consumption sector, short plays continue to sustain solid growth by optimizing marketing materials exposure format. So we increased the marketing spending in short play vertical meanwhile, empowered by the deep integration of AI technologies. Comic style short plays advanced rapidly through continuously comprehensive supporting programs and rolling out the comic style short play AI agent, we further expanded high-quality and diverse content supply to capture emerging growth opportunities in the sector. Moreover, rising market budgets from clients across the AI application vertical, we leveraged our insights into industry placement pace and market trends to consistently optimize resource allocation and commercial efficiency, effectively channeling and capturing marketing placement and spending from AI application clients. In Q4, for online marketing products, we continued to upgrade offerings including our UAX placement solutions, the AIGC marketing material solutions, live streaming digital human solutions and digital employee solutions. These enhancements helped to lower various marketing placements, improved client placement experience and drive further growth in online marketing spending. Specifically during the quarter, UAX developed a periodic delivery and account level smart replacement product. These upgrades enable clients to extend managed campaign cycles and alert system management from the app unit level to account levels, thereby improving overall delivery efficiency, raising the selling floor campaign scale and providing more stable cost performance for our clients. In Q4, penetration rate of our UAX placement solutions accounted for nearly 80% of the non-e-commerce marketing spending and its penetration rate among active users exceeded at 90%. For e-commerce marketing services following our consolidation of e-commerce business and related online marketing team made September last year to advance traffic synergy, we established our closed-loop capabilities and pricing traffic, transaction, online marketing conversion and merchant services. This was designed to align our platform's overall revenue growth with merchant mix refinement, enabling e-commerce merchant in GPM and CPM for marketing services to improve in tandem in Q4. In first half of 2025, we essentially completed capability refinement of our omni platform marketing solution. In the second half, we focused on addressing differentiated scenario needs across diverse customer segments, effectively increasing incremental GMV generated for e-commerce merchants across omni-domain scenarios and enhancing business stability. In Q4, our omni platform market inclusions accounted for even greater share of our total e-commerce marketing spending, rising further to 75%. Our omni platform product promotion achieved full coverage across products and scenarios, becoming the primary placement offering for our e-commerce marketing services. Our fully managed the auto placement and product combo for small and medium-sized merchants gained broader adoption and recognition, driving a significant increase in spending by these customers. In Q4, by continuously optimizing our pan-shelf-based e-commerce scenarios and strengthening the synergy of omni domain supply and aligned distribution, our e-commerce marketing services revenue pan-shelf-based scenarios increased rapidly year-over-year. Fourth, our e-commerce business. In Q4 '25, our e-commerce GMV grew 12.9% year-over-year to RMB 521.8 billion, building on the systematic omni domain operations category for their integrated pathway between public domain, traffic conversion and private domain asset accumulation, unlocking a new growth engine for merchants and supporting their stable, sustainable operational development across diverse scenarios. During Q4, we continue to empower merchants, strengthen their private domains and operational efficiency, broadening a variety of supply as a result, repeat purchase frequency of active e-commerce merchant users further increased year-over-year. Meanwhile, by enhancing the operations of our key product categories, anymore precisely identifying the needs of our core user bases, we drove continued growth in ARPPU. In Q4 2025, we mobilized the combined strength of service provider agencies and industrial zones to broaden our e-commerce supply, guided by a full life cycle framework. For new merchant development, we deepened our cost reductions and efficiency enhancement, stepped up incubation programs for new merchants, strengthened support for merchants from industrial zones and for the optimized business environment. Collectively, these measures bring force to merchants operational stability, empowered both new merchants in a small and medium-sized merchants to grow and enhance long-term predictability, sustainability of merchant operations during Q4. Both newly onboarding merchants and newly onboarded active merchants growing year-over-year and quarter-over-quarter, driving our active merchant base to another record high, up 7.3% year-over-year. Furthermore, in Q4, we launched the Voyage Initiative focusing on in-depth partnerships with the top tier brands in diverse sectors through a coordinated resource empowerment and initiative aimed at a pioneer new model of mutually reinforcing growth for both the platform and the brand. At the end of December, we began to capture early benefits from our high-quality product and content supply as well as merchant mix optimization. In terms of our live streaming scenario development, the Pop-Up Follower Red Envelopes initiative, which was launched in Q3 to drive targeted follow growth, achieving a meaningful result. By increasing the streaming frequency of streamers with over 10,000 followers, the program drove a 12.7% year-over-year increase in the number of average daily active streamers hosting live sessions with over 10,000 followers, further reinforcing virtuous cycle follower growth and transaction performance in Q4. Through coordinated operations with agencies and leading to organizations, we expanded our KOL supply to further empower KOLs, we advanced our platform endorsed product offerings, which are trusted by both merchants and KOLs building on this foundation, our KOL Blockbuster Initiative focus on high-demand product categories, highlighting our platform's strong order aggregation capabilities and driving greater KOL participation and distribution. The penetration of KOL within our distribution pool continued to improve with a number of active KOLs more than doubling year-over-year, supported by our platform endorsed product offerings, mid-tier to small and medium-sized KOLs were able to overcome product selection challenges and with platform traffic support, they achieved meaningful leaps in operational scale. In Q4, our omni domain operations ecosystem, including pan-shelf-based e-commerce and short videos, continue to demonstrate steady and resilient development. In Q4, the contribution of pan-shelf-based e-commerce GMV to total e-commerce GMV remained broadly stable quarter-over-quarter. We continue to expand our supply scale driving sustaining year-over-year and quarter-over-quarter increases in average daily active merchants for pan-shelf-based e-commerce. Super Links and the official channel for platform recommended products continue to strengthen its role as a core operational tool for shelf-based offerings, which achieved a record growth during the quarter. In Q4, Super Links penetration rate and pan-shelf-based e-commerce product cards reached 19.1%. We also encouraged merchants to expand omni domain operations by leveraging our marketing hosting tools. We guided merchants in content-based scenarios towards shelf-based operations significantly increasing the penetration rate of active merchants using our marketing hosting tools quarter-over-quarter. During Q4, we further advanced our short-video e-commerce content supply, prioritizing refined merchant-centric operations. By continuously leveraging the synergy between short videos and live streaming, we enriched our high-quality content supply and optimized funnel efficiency. These efforts led for a significant growth in short video e-commerce GMV, which continued to outpace overall e-commerce GMV growth. In Q4 '25, we deepened AI integration across e-commerce scenarios delivering tangible efficiency gains for merchants while supporting their growth. The broader rollout of OneRec, OneSearch and other large language model technologies across the e-commerce scenarios continue to generate incremental value. powered by e-commerce knowledge graph and leveraging large models' world knowledge and reasoning capabilities, we strengthened our foundational understanding of products, videos and users. This enabled a more accurate long-term user-interest modeling, improved recommendation diversity and drove higher revisit and repurchase behavior. E-commerce content new generation capabilities have also advanced during the fourth quarter. Features such as live streaming highlights and AI-assisted content creation further strengthened merchants across scenario operating capabilities, propelling step change growth in both content output and GMV. To improve operating efficiency, we launched an AI-powered order analysis feature in Q4, helping merchants identify abnormal orders more effectively, reduce pre-shipment refund rates. Next, regarding our live streaming business. In Q4, live streaming revenue was RMB 9.7 billion. We remain focused on fostering healthy live streaming ecosystem during the quarter, oriented towards high-quality, value-driven content and reinforcing the platform's community-centric core. For live streaming supply, we continue to intensify in professional operations of our core competitive categories, including group live streaming and multi-host live streaming, while strengthening coordinated development across multiple categories. This enriched our live streaming content operations portfolio and drove us to develop improvements on the supply side, better serving users diversified preferences. Our Grand Stage deepened integration between online and offline scenarios supporting the incubation of distinctive streamers on our platform while increasing user engagement. On the product side powered by Kling AI video generation capabilities, our AI universe gives a series with customizable special effects, enhanced interactive feature experience, dynamic motion rendering and visual aesthetics. As of the end of the fourth quarter, the number of cumulative AI Universe gift creations succeeded 1 million. In addition, we expanded the application of the AI capabilities in our live streaming rooms, empowering streamers with AI Interaction Assistant and AI Digital Avatar Solutions to improve streamers' service efficiency. In Q4, our live streaming+ model extended the boundaries of the live streaming ecosystem while also unlocking additional commercial value. Through refined operations, our Ideal Housing and Kwai Hire business deliver both quality improvement and efficient gains. In Q4, the average monthly number of Ideal Housing paying clients increased by over 40% year-over-year. Finally, our overseas business progress. In Q4, we remain firmly committed to our high-value growth strategy, supporting a virtuous business cycle across our overseas business. Despite a complex market dynamics, we achieved a steady growth in overseas business. On the traffic front, while improving customer acquisition efficiency and optimizing our user growth structure, we strengthened the user mind share for the Kuaishou community by expanding the supply of content with a distinctive Kuaishou characteristics, further broadening our core user base. Brazil, our key markets of our overseas development, maintained stable DAUs and time spent per DAU. For online marketing services, we captured the industry opportunity to expand brand presence in Brazil, growing our client base across diverse industries. In addition, we upgraded our products and solutions and actively exploring the new content-driven marketing scenarios, including short videos to improve client performance visibility and unlock new growth momentum supporting our client's long-term development. Our e-commerce business in Brazil achieved a steady year-over-year growth in GMV transaction scale and order volume in Q4, supported by AIGC driven improvement in e-commerce content and quality and operational efficiency and aided by more refiner logistic cost to management, our overseas profitability improved significantly. Looking back over the past year despite multiple challenges, we anchored our core AI-first strategy, leveraging our profound technological expertise, a thriving diverse content ecosystem and continuously enhanced infrastructure and commercial footprint. We collaborated with ecosystem partners to drive systematic growth. Looking ahead, although challenges will intensify, we remain steadfastly guided by our user needs. We're deeply cultivated the building of a one inclusive and a universally accessible digital community, while continuously deepening the seamless integration of AI technologies across our business. This empowers our merchants and marketing clients to effectively elevate their operational productivity. Staying true to our long-term vision, we will deliver a superior user experiences, build broader platform for our partners and create a more sustainable value for our shareholders, collectively unlocking new growth opportunities in the AI era. That concludes my prepared remarks. Next, our CFO, Bing will review the company's financial data for the fourth quarter and full year 2025. Bing Jin: [Interpreted] Thank you, Yixiao, and hello, everyone. Looking back to the past year, we significantly progressed our AI strategy and achieved remarkable results, leveraging our advanced AI capabilities. We strengthened Kuaishou's content and commercial ecosystems, delivering high-quality growth across both our operational and financial metrics. We continue to refine our user growth and retention strategies, resulting in an average DAUs reaching 410 million for the full year. At the same time, we deepened the application of AI large model across multiple business scenarios delivering superior experience for our users, creators and business partners while further improving our operational efficiency. For the full year of 2025, total revenue grew 12.5% year-over-year to RMB 142.8 billion. Adjusted net profit reached RMB 20.6 billion, up 16.5% year-over-year with an adjusted net margin of 14.5%. Importantly, we achieved this growth while continuing to scale our investments in AI, making steady improvements to the group's overall profitability throughout the year. Now let's take a closer look at our Q4 financial performance. Our total revenue grew 11.8% year-over-year to RMB 39.6 billion in Q4. The increase was mainly driven by growth across normal marketing services, e-commerce and Kling AI. Online marketing services revenue increased 14.5% to RMB 23.6 billion in Q4 from RMB 20.6 billion in the same period last year. The growth was primarily driven by AI-powered upgrades to our online marketing product solutions which improved the conversion efficiency and grow higher spend from our marketing clients. Revenue from other services, including e-commerce and Kling AI business reached RMB 6.3 billion in Q4, up 28% from RMB 4.9 billion in the same period last year. The increase was mainly driven by growth in e-commerce GMV, which boosted our e-commerce commission income. And by the continued expansion of our Kling AI business by continuously refining Kling AI's financial models and developing more innovative features, we have expanded this to a range of applications for professional creators and driven new breakthrough in commercialization. In Q4, our live streaming revenue was RMB 9.7 billion. We continue fostering a rich healthy live streaming ecosystem. At the same time, we refined operations across our core categories, providing users with a more diverse high-quality content, leveraging the end powered product innovation. We also drove greater user engagement through high-quality live streaming content. Cost of revenues increased 9.2% year-over-year to RMB 17.7 billion in Q4, accounting for 44.9% of total revenue. The increase was mainly due to higher revenue sharing costs and related taxes in line with our revenue growth. In Q4, our gross profit grew 14.1% year-over-year to RMB 21.8 billion. Gross profit margin was 55.1%, up 1.1 percentage points year-over-year. Turning to expenses in Q4. Selling and marketing expenses were RMB 11.4 billion compared with RMB 11.3 billion in the same period last year. Selling and marketing expenses declined to 28.8% of total revenue, down from 32% in Q4 last year, reflecting the stronger effectiveness of our sales and marketing. R&D expenses increased 20.1% year-over-year to RMB 4.1 billion, accounting for 10.5% of total revenue. Increase was really due to higher employee benefit expenses, including share-based compensation expenses and increased investments in AI. Administrative expenses was -- were RMB 930 million compared with RMB 8.7 million in the same period last year. And administrative expenses accounted for 2.4% of total revenue, largely flat year-over-year. Group level net profit for Q4 was RMB 5.2 billion. Group level adjusted net of profit rose 16.2% year-over-year to RMB 5.5 billion with an adjusted net margin of 13.8%. Our balance sheet remains robust. Cash and cash equivalent, time deposit financial assets and restricted cash totaled RMB 104.9 billion as of December 31, 2025. Net cash generated from operating activities in Q4 was RMB 7.3 billion. Additionally, we actively delivered on our commitment to shareholder returns based on the market conditions. As of December 31, we had repurchased approximately HKD 3.12 billion or around 56.78 million shares, representing about 1.32 percent of our total shares outstanding for 20. Next, I'll provide a quick overview of our financial performance for the full year. For the full year of 2025, our group's total revenue reached RMB 142.8 billion, up 12.5% year-over-year. This includes online marketing services revenue of RMB 81.5 billion, which rose 12.5% year-over-year. Revenue from our online -- our live streaming business increased by 5.5% year-over-year to RMB 39.1 billion. Revenue from other services, including our e-commerce business, totaled RMB 22.2 billion, an increase of 27.6% year-over-year. Gross profit margin expanded by 0.4 percentage points year-over-year to 55% in 2025. Our adjusted net profit for the full year of 2025 was RMB 20.6 billion, up 16.5% year-over-year with an adjusted net margin of 14.5%. Looking ahead, we will continue to prioritize the user needs and we remain committed to investing in AI, leveraging our leading AI capabilities. We will drive further innovation across Kuaishou's content and commercial ecosystems, maintaining our core competitive edge in the rapidly evolving market and delivering high-quality and sustainable long-term growth for the company. Here concludes our prepared remarks. Now we can open for Q&A. Operator: [Interpreted] [Operator Instructions] The first question comes from Lincoln Kong from Goldman Sachs. Lincoln Kong: [Foreign Language] Congrats on the solid fourth quarter results. My question is about Kling AI. So we have seen an accelerating pace for various video generation models across the industry, including CDAS 2.0 launching recently. So what's the impact for the overall industry and to Kling itself. And therefore 2026, what are the strategy or the plans for Kling in terms of our model capability, product upgrade as well as monetization? Unknown Executive: [Interpreted] Thank you for the question. As we mentioned before, large video generation models are highly complex, both the input and output modalities are open-ended, which allows for considerable flexibility in technical pathways and product strategies, leaving significant room for innovation. At this stage, we believe video generation technologies and products are so far from maturity, but especially from diverse players in the ecosystem can help exonerate industry advancement and better meet user needs. Recent accelerated updates to large video generation models, including CDAS 2.0 and others have brought positive momentum to the industry. While lowering the threshold for everyday users to create content, they also have increased the penetration of AI video generation across a wider range of applications scenarios, effectively expanding the overall market. CDAS 2.0 adopts the multimodal input architecture, which aligns with the Kling01 model we released in December last year, underscoring our revisionary early positioning in multiple iterations centered on multimodal capabilities. Kling AI continues to maintain globally leading position in both model and product capabilities. Kling AI was ranked among the top video generation models by artificial analysis.ai with exceptional benchmark scores. Regarding character consistency and controllability, fiscal realism and stability in complex scenarios, including AI 3.0 model series demonstrate stronger performance reinforcing Kling AI's differentiated advantages among professional creators and enterprise clients. Kling AI played a key role in the production of virtual singing and visual effects in the recent hit drama supports into cloud shares produced by film and TV. It delivered high quality and commercial-grade content while significantly reducing production costs. The partnership is a primary example of Kling AI's commercial value in top-tier film and television production. It validates our focus on film and television production scenarios, as the live strategic direction. In terms of revenue, Kling AI maintained a strong month-over-month growth throughout the year, reaching an annualized revenue run rate or ARR of over USD 300 million in January. Based on what we are seeing now, we are confident that Kling AI's revenue in 2026 will more than double. Regarding Kling AI's model iteration over the past year, we have consistently evolved in the unified native multimodal path. When we launched the Kling AI 2.0, we introduced the concept of multimodal visual language or MVL which enables creative expression by combining multiple modalities and addresses the limitations of pure text interactions. With the release of the Kling01 large model in December 2025, we advanced the MVL interaction architecture even more, enabling multimodal inputs across text, image and video. Around the same time, we launched our Kling 2.6 model for simultaneous audio visual generation, multimodal product capabilities. In February this year, we launched the Kling AI 3.0 model series, developed under an all-in-one product framework and this series towards full multimodal input and output within a single model. Looking ahead, we plan to expand the many modalities in our models to further enhance controllability and video generation, including modality for motion and facial expressions. We will also focus on addressing the configuration and consistency challenges of complex scenarios. Meanwhile, on the product front, we will keep advancing our AI agent capabilities to enable fully automated end-to-end content creation. The goal is to empower our models to automatically plan storyboards based on user needs, ensure consistency across characters and scenarios and simultaneously generate well-aligned audio and visual design lighting, visual term and camera movement. Overall, Kling AI remains committed with its vision of empowering everyone to craft [indiscernible] stories with AI. We will continuously refine our model and product capabilities, sustaining Kling AI's global leadership in technology, product and commercial monetization. Operator: [Interpreted] The next question comes from Daniel Chen of JPMorgan. Qi Chen: [Interpreted] So my question is related to the AI investment strategy. So besides the multimodal and video generation area which related to Kling AI, where do -- what are the other segments that management thinks are worse, more investment in the future? Unknown Executive: [Interpreted] Thank you for the question. Regarding the direction of our AI investments, beyond the multimodal video generation domains, we will continue to invest in the research and development of an application of large models across our content and commercial ecosystem scenarios such as large generative recommendation models and large multimodal understanding models. In terms of the large generative recommendation models, over the past few quarters, we have seen significant potential for generative models in recommendation scenarios and we will continue to explore in this direction. For example, in our online marketing recommendation system, we are exploring deeper integrations between generative models and our ranking architecture, shifting from single request optimization to long-term value modeling. In terms of the model capabilities, by leveraging our lens to introduce a stronger logic reasoning, inference and broader world knowledge, we are attempting to break the data feedback loop problem found in traditional recommendation systems. Concurrently, we are building a native, highly concurrent and scalable next-generation ranking architecture for large recommendation models. Through system design and foundational engineering upgrades, we aim to ensure that the expansion of computing power and parameter scale translate into performance improvements. In the direction of the large multimodal understanding models, our proprietary multimodal foundational large language KwaiYii empowers Kuaishou's content understanding infrastructure. In core short video and live streaming scenarios, KwaiYii performs video parsing and user behavior inference effectively driving improvements in the user time spend and retention metrics. Moving forward, we'll upgrade our AI capabilities from one-way passive Q&A to a long-term contextual understanding and a complex task processing further expanded the application to core monetization scenarios such as online marketing services and e-commerce and develop practical intelligence assistance with multimodal interaction capabilities to drive greater commercial value. In 2026, we will also explore the application of agent capabilities across other various business areas. For example, in online marketing scenarios, we are developing an AI agent that delivers automated marketing placement for our e-commerce merchants. This covers the entire workflow from intelligent product selection, creative editing and AI-generated materials, smart bidding and dynamic pricing and customer support and post placement data analysis, lowering the threshold for clients to place marketing materials and improving placement of performance and cost stability. Additionally, we will also explore sales AI agents for lead focused sectors, helping clients improve lead conversion efficiency and reduce customer acquisition costs. In e-commerce scenarios, we will improve the user search experience through the development of a search and recommendation agent, driving higher user search-based order volumes. We will also explore agent-based automated computing power optimization. We will further share our progress on these fronts with you at appropriate time. Finally, we will also advance the construction of the new computing power centers. Computing power is the core foundation and underlying support of our AI development, meeting the company's demand for R&D iteration, model training and inference enhancement. We have integrated the construction of computing centers into our strategic planning, aiming to solidify the computing foundation for AI development. By reserving expansion space to accommodate long-term needs, these centers will deeply support core tasks such as AI algorithm optimization and large model training, empowering our AI innovation with a robust computing foundation. In summary, we will continue to deeply calibrate the R&D of core technologies and their implementation across multiple scenarios. With firm computing investments and a deep AI talent pipeline, we will empower our content ecosystem and realize continuous growth in commercial value of our ecosystem partners. Thank you. Operator: [Interpreted] The next question comes from Thomas Chong of Jefferies. Thomas Chong: [Interpreted] On e-commerce, how should we think about the growth strategies in 2026? How should we think about the trend this year and the growth opportunities? Unknown Executive: [Interpreted] Thanks for the question. Our broad focus for 2026 remains on returning to the essence of Kuaishou's content-based e-commerce and on maximizing our strengths as the content platform. Our growth strategy spans across 3 areas. First, we'll focus on the supply side reforms to continuously refine supply and consistently offer good products. As mentioned earlier, in Q4 2025, we launched a Voyage Initiative to provide a targeted support for top-tier brands. It's designed to help them quickly achieve strong start and sustained growth within the Kuaishou ecosystem. In 2026, we will also invest in more resources on the supply side, primarily across 4 areas: merchant traffic, product, operations and services. Our focus will extend beyond brands to include merchants in the key industrial zones. We already identified 100 priority industrial zones and we are actively managing them. Meanwhile, we are working closely with our e-commerce industry team, small- and medium-sized merchant team and service providers to empower our new merchants. As the e-commerce market matures and macroeconomic dynamics remain challenging, the relationship between platforms and the brand is being reshaped. Platforms are evolving from single transaction roles to collaborative partners that grow alongside merchants. As we empower merchants more effectively, we also plan to refine the platforms, the supply ecosystem and provide users with a wider variety of products. Second, we will continuously improve in paying user acquisition and penetration. Currently, there's still significant growth potential in a number of e-commerce monthly average paying users. In 2026, we'll focus on exploring and better understanding users' interest in e-commerce content. We will also optimize our traffic strategies and leverage effective subsidy mechanisms and across scenario synergies to boost paying user conversion and scaled growth within superior products. Third, we will further optimize resource integration. This quarter, we have seen some preliminary success in implementing traffic synergy. Moving forward, we aim to deepen the integration between e-commerce and commercialization, enhanced coupon synergy, improved subsidy efficiency and optimize the overall resource allocation and investment efficiency. We believe that the inherent conversion advantages of content-based e-commerce will continue to drive its penetration in the online retail market. Over the past year, categories such as men's and sportswear and fresh food grew rapidly. We expect these verticals to maintain their growth momentum this year. As we just mentioned about ramping supply in 2026 and leveraging intelligent operational tools to help merchants reduce costs and improve efficiency while offering them a clear, more certain path for growth. We expect even more structural growth opportunities in content-based e-commerce. In 2026, we expect Kuaishou e-commerce to achieve steady, high-quality growth. Under the promise of high-quality growth, we will further strengthen our e-commerce monetization capabilities and deepen the foundational capabilities of our omni platform marketing solution and smart placement products. We expect that the core incremental growth for e-commerce marketing service revenue will come from 3 areas. First, scale expansion. By focusing on key verticals and broadening industry supply, we aim to scale monetization through e-commerce marketing services in categories such as cosmetic sports and outdoors, fresh food and home furnishings. Second, efficiency improvement. We will actively bring in more brand clients, optimize client composition and integrate resources to drive aligned growth for both GMV and marketing spending. Women's apparel and health care will be a particular focus where we can enhance monetization efficiency. Third, sector expansion. We will expand into sectors where we lag our competitors, such as maternal and children pad and consumer electronics, identifying clear opportunities in driving breakthroughs. In addition, we are also looking to continuously improve monetization efficiency in shelf-based e-commerce. By expanding omni domain product supply, we can increase merchants' marketing budgets on product cards. In short, guided by the e-commerce growth strategy and monetization road map we outlined for 2026, we will take a steady, disciplined approach. We will focus on the right long-term initiatives while leveraging our content platform strengths to better meet the consumption needs of our users. Operator: [Interpreted] The next question comes from Felix Liu Lee of UBS. Felix Liu: [Interpreted] Sorry, just let me finish the English translation in addition to e-commerce, what are the main advertisement industry growth opportunities in 2026? And how do we plan to capture these opportunities? Unknown Executive: [Interpreted] Thank you for your question. From a sectoral perspective, we believe the key growth opportunities this year will mainly come from 3 sectors: lifestyle service, comic-style short plays and AI applications. In the lifestyle service sector, we have seen a continued shift in user behavior from traditional search platforms toward content platforms. Short videos and live streaming formats are more effective at building user trust, reducing decision-making friction and improving conversion efficiency. In addition, the lifestyle service sector continues to deepen its online penetration for merchants in sectors like agriculture, materials, education and automotive. Online platforms are gradually becoming key channels for our marketing and customer acquisition and the platform level will continue to upgrade our products to help merchants reach their potential customers more effectively, while enhancing our in-platform interaction capabilities to improve conversion rates. Moreover, clients in the lifestyle service sector are mostly small and medium-sized merchants that require strong customer service and operational support. Through our AIGC marketing material solutions, we help small- and medium-sized merchants generate marketing materials at a low cost. In addition, our AI-powered customer service solutions to enable merchants to provide 24/7 online support. In the content construction sector, as AI technology significantly improves content production efficiency and lowers production costs, the emerging content format, comic style short plays is advancing rapidly. As a top-tier player, Kuaishou has the dual advantage of our mature short-play ecosystem and the world-leading video generation model by deeply integrating content and technology, where building a comic-style short-play ecosystem that spans the entire value chain from tools and content to distribution. Additionally, we introduced a full-scale comic-style short-play support program covering computing power, traffic and other resources. These continuously enrich the platform's comic-style short-play content supply and boost online marketing spending in this category. Since the second half of last year, the total spending from online marketing services driven by Kuaishou's comic-style short-play has increased rapidly. In March this year, peak daily marketing spending exceeded RMB 15 million. The AI application sector is also what we view as another key growth driver for 2026. As the AI technology continues to advance and new applications emerge, the industry remains in a rapid growth phase. We expect depending on the relevant sectors to continue growing significantly in 2026. Against this backdrop, we will strengthen and refine our operations for our clients, continuously optimize short and long-term retention metrics, helping clients maximize the user lifetime value, all of which will prompt AI application clients to increase both their marketing spending scale and commitment on our platform. In summary, for 2026, harnessing our product upgrade content ecosystem development and refine our operations for our clients in priority sectors. We aim to better capture incremental growth opportunities in the lifestyle service sector, comic-style short-play and AI applications, driving solid growth in our online marketing services revenue. Huaxia Zhao: Operator, last question, please. Operator: [Interpreted] The next question comes from Yuan Liao from Citic. Yuan Liao: [Interpreted] You have repeatedly mentioned the construction of computing power centers. So my question is, could management share your plan scale of AI-related CapEx in 2026? And the key area of your investment? So how will this CapEx investment affect your overall profit margin? Bing Jin: [Interpreted] Thanks for the question. As Yixiao said, over the past year, we have fully deepened our AI strategy, our multimodal large leader generation model, Kling AI has achieved impressive results in technology and advancement, product duration and commercial monetization. At the same time, AI has delivered strong value empowering our content and commercial ecosystems, reinforcing our commitment and confidence to continue investing in AI. In 2026, we expected the group's total CapEx to reach approximately RMB 26 billion, an increase of about RMB 11 billion compared with 2025. This covers computing resources for Kling AI's large models and other foundational models as well as routine server procurements such as off-line data storage and processing and investments in data and computing center infrastructure. The increase in CapEx for Kling AI's large models is partly due to higher inference computing needs from our expanding user base and revenue scale. It also takes into consideration of our major Kling AI model upgrades scheduled for the year, which require additional investment in training computing power. With advancement of model iteration in the future, we will also flexibly allocate computing resources between inference and training to maximize the efficiency of computing resource utilization. I would also like to emphasize that we are highly focused on cash flow management and maintaining ample cash reserves in 2025 despite approximately RMB 15 billion in CapEx, the group delivered nearly RMB 12 billion in free cash inflow for the year. For 2026, even with increased CapEx, we aim to continue maintaining positive free cash flow at the group level for the full year. We believe that every investment today will efficiently translate into future profit drivers. As we stay focused on long-term technology investments, we will maintain disciplined financial management and ample cash reserves. Our robust balance sheet will empower the group's sustainable high-quality growth in the AI era. Thank you. Huaxia Zhao: That concludes the Q&A session. Thank you, operator. Operator: [Foreign Language] Huaxia Zhao: Thank you, operator. [Foreign Language] Operator: Thank you once again for joining us today. If you have any further questions, please contact our capital market and IR team at any time. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your host today. Sir, please go ahead. Unknown Executive: Thank you, operator, and hello, everyone, and thank you for joining us today. PDD Holdings earnings release was distributed earlier and is available on our website at investor.pddholdings.com as well as through the Globe Newswire services. Before we begin, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statements. This call also includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. Joining us today are Mr. Chen Lei, our Co-Chairman and Co-Chief Executive Officer; and Mr. Zhao Jiazhen, our Co-Chairman and Co-Chief Executive Officer. Our VP of Finance, Ms. Liu Jun, is unfortunately on medical leave. Delivering the prepared remarks today will be Mr. Li Jiong, our Finance Director. Jiazhen and Lei will make some general remarks on our performance for the past quarter and our strategic focus. Jiong will then walk us through our financial results for the fourth quarter and fiscal year ended December 31, 2025. During the Q&A session, Lei and Jiong will answer questions in Chinese and will help translate. Please kindly note that English translation is for reference only. In case of any discrepancy, statements in the original language should prevail. Now it's my pleasure to introduce our Co-Chairman and Co-Chief Executive Officer, Jiazhen. Jiazhen, please go ahead. Jiazhen Zhao: [Foreign Language] Unknown Executive: [Interpreted] Hello, everyone, and thank you for joining our earnings call for the fourth quarter and fiscal year 2025. In 2025, we celebrated the 10th anniversary of the company's founding, and it is also the year in which we made our largest investments in high-quality development. For the first time in the e-commerce industry, we launched a 100 billion support program to support merchants. The entire company joined efforts in stepping up our support to farmers and merchants. And during the shareholders' meeting at the end of last year, we improved our corporate governance structure by introducing the code share structure and further sharpened our strategic focus to investing deeply in the supply chain and concentrating on high-quality brand-oriented growth to drive the entire supply ecosystem to move up the value chain. In the past year, we delivered steady results. This quarter, the group's revenue reached RMB 123.9 billion, growing 12% year-on-year, while full year revenue reached RMB 431.8 billion, up 10% year-on-year. Both this quarter and the annual net income decreased year-on-year, which primarily reflects our sustained investments on both the supply side and demand side. As we have communicated in the past, we prioritize long-term value generation by nurturing our ecosystem rather than short-term financial results. And benefiting from long-term investments on both supply and demand side through initiatives like the RMB 100 billion support program, the platform and supply chain ecosystem have been moving steadily in the right direction. Key participants of the supply chain, such as agricultural regions and industrial belts have become core pillars supporting the platform and ecosystem, while also bringing consumers more affordable, high-quality products. With the continued investments under the RMB 100 billion support program, dedicated projects such as Duo Duo Local Specialties, new quality supply and logistics support for remote regions have gradually broadened our support from top merchants and SMEs to every segment of the supply chain, helping businesses across all categories pursue differentiated growth. This has enabled the transition from merely supplying products to pursuing quality and to brand building, greatly improving supply chain efficiency and overall industrial capabilities, while at the same time, create room for profit and innovation for agricultural regions and industrial belts. In the fourth quarter, the Duo Duo Local specialties team visited agricultural regions such as Anyue lemons, Pu'er coffee, Wuhan seeds, Meizhou pomelos, Wenshan blueberries, Fuzhou abalone and Lianyungang seaweed. Through customized One Product One Plan support programs, the team addressed issues such as the lack of product standardization and low value add. These efforts guided farmers and growers to adopt standardized planting, premiumization and deep processing, effectively increasing the added value of agricultural products and retaining more profits in the places of origin, thereby enable sustainable growth in specialty agriculture industries. In industrial belt, we accelerated the execution of new quality supply program by doubling down on our support efforts. Our dedicated teams visited manufacturing clusters such as Yiwu Accessories, Pinghu down jackets, Hunan Spicy Snacks, Anhui Roasted Seeds, Tianjin Potato Chips, Zhongshan Small Appliances and Shanghai Chocolate and delved deep into every segment of the supply chain from raw materials to components. Through a combination of fee reduction and support, we helped unlock the potential in the supply chain, driving an overall upgrade in supply chain operations and helping industrial belt transition from commoditized competition to brand building. While stepping up our investments in the supply chain, we also unlocked the consumption potential in remote regions through our logistics support program, driving new growth opportunities for merchants. In the fourth quarter, building on the success of this campaign, we continue to tackle the last mile of parcel delivery into villages across multiple provinces and cities, extending the benefits of new e-commerce from western provinces to vast rural areas. To date, we have deployed and built end-to-end delivery networks, including country-level transfer warehouses and village level pickup points in over 10 provinces and municipalities. We also covered the transshipping fees for orders delivered to villages, bringing more remote rural areas into the free shipping zones. In terms of trust and safety, we continue to improve the business environment and further enhance the service levels for both consumers and merchants. During the spring festival, we rolled out a series of food safety measures, including compliance checks on business qualifications, reviews of food advertisements, controls on full live streaming, protection of miners, IP protection and the development of a food database, all to safeguard the food safety for consumers during the festivities. In our global business, despite the drastic changes in external environment, we delivered steady growth over the past year, mainly reflecting the competitive advantages built through our long-term focus on the supply chain. At the last shareholders' meeting, we announced our all-out efforts in investing in the transformation of the supply chain and in building another Pinduoduo. This remains our duty and primary focus. Over the past few months, the 3-year strategy we committed to during the Annual General Meeting has been translated into concrete actions and fundamental changes are taking place within the business and our organizations. In the next phase of our journey, our strategic priority will not be business diversification, but rather concentrating on the high-quality development of the supply chain. Leveraging our strength in the supply chain accumulated over the years, we will reinvent the platform and propel the ecosystem of the value chain. 2026 marks PDD's 11th year and a new starting point as we head into our next decade. We are starting a refresh and moving forward with an all-in attitude and a persistent focus on execution. We will dedicate more talent and resources to deepen our investments in the supply chain, accelerating its upgrade and transformation. We believe that in the next 3 years, we will have the opportunity to build another Pinduoduo. Now I'll hand it over to Chen Lei for further remarks. Lei Chen: Thanks, Jiazhen, and hello, everyone. 2025 marked our 10th anniversary. As Jiazhen just mentioned, we took on greater responsibilities this past year and launched the RMB 100 billion support program to move back to the virtual ecosystem. We also established a co-chair structure to further improve our governance and firmly anchored our company's strategic focus on the high-quality development of supply chain. Through these efforts, we continue to create long-term value for consumers, for merchants, the industry and society has been nearly a year since we launched RMB 100 billion support program. During this time, we continue to reinvest in our ecosystem through measures such as fee reductions, merchant support, trust and safety initiatives. Our dedicated team has gone deep into agriculture regions and manufacturing hubs to have hundreds of regions establish standardized production system and to explore differentiated and brand-oriented growth models. This effort has significantly improved the efficiency and quality of supply chain operations, driving the supply chain transformation from scale driven to value driven. This also brings more high-quality affordable products to our consumers. Our consistent investment in the supply chain have unlocked strong consumer demand on Pinduoduo platform. The platform delivered strong performance during major promotions such as June 18, Double 11 as Spring Festival. [Quality products] from different regions flow through geographic boundaries and offering consumers more diverse selection and further enhancing their quality of life. Our global e-commerce business continued to deliver steady growth and has reached meaningful scale in most countries we serve, accomplished in 3 years was to build a Pinduoduo business 10 years to complete. However, over the past year, the global geopolitical landscape has grown more complex. Trade and regulatory policies across different countries and regions continue to evolve. This has introduced greater uncertainty to our global business and will impact and even reshape our development model. In this context, we need to rely more than ever on the collective capabilities of our supply chain ecosystem. Therefore, we will continue to anchor our strategy in investing deeply in supply chain capabilities and direct more efforts, capital and resources to its transformation. We aim to empower our merchants and manufacturers to become innovators with go-to-market capabilities, developing consumer insights, coming up product size and building brands. This will drive towards high-quality and brand-oriented growth, creating real value for consumers. Over the past few months, we have been making steady progress on the execution of 3-year strategy adopted at a shareholders' meeting, and we are pleased to see some results. In the fourth quarter, our long-term investment in agriculture research achieved new results. Last October, for the second consecutive year, we were invited to attend World Food Forum hosted by UN Food and Agriculture Organization, representing Asian enterprises. We shared our experience and achievements in supporting digital agriculture innovation, and we also sponsored 2 great agriculture research teams that took the stage at the forum, bringing new energy into agriculture research and development. Since the start of 2026, competition in e-commerce sector has continued to intensify around new business models and new technologies. At the same time, the global environment has become more complex than last year with increased uncertainty in the economic and trade climate as well as in regulatory policies across various countries and regions. This will inevitably bring more challenges and weigh on our future performance, putting pressures on our profitability in short term. However, we will continue to uphold our long-term philosophy and faithfully execute our strategy of investing deeply in the supply chain, dedicating more resources to give back to the industry and the society. And now I will turn the call over to Li Jiong, who will walk you through our financial performance for the fiscal year of 2025. Jiong Li: Well, thank you, Lei. Hello, everyone. This is Jiong. Now let me walk you through our financial performance in the fourth quarter and fiscal year ended December 31, 2025. In terms of income statement, in Q4, our total revenues increased 12% year-over-year to RMB 123.9 billion and 10% year-over-year to RMB 431.8 billion for full year 2025. This was mainly driven by the increase in revenues from both online marketing services and transaction services. Revenues from online marketing services and others were RMB 60 billion this quarter, up 5% compared to the same period 2024. Our transaction services revenues this quarter were RMB 63.9 billion, up 19% versus the same period of 2024. Moving on to costs and expenses. Our total cost of revenues increased 15% from RMB 47.8 billion in Q4 2024 to RMB 55.2 billion this quarter. For the full year, our total cost of revenues increased 23% to RMB 188.8 billion, mainly due to increased fulfillment fees, bandwidth and server costs and payment processing fees. On a GAAP basis, total operating expenses this quarter increased 10% to RMB 41 billion from RMB 37.2 billion in the same quarter of 2024. On a non-GAAP basis, our total operating expenses increased to RMB 39.3 billion this quarter from RMB 35.1 billion in Q4 2024. Our total non-GAAP operating expenses as a percentage of total revenues was 32% in Q4. For full year 2025, total non-GAAP operating expenses were RMB 140.7 billion, up from RMB 122 billion in 2024. Looking to specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB 34 billion, up 9% versus the same quarter of 2024. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenues this quarter was 27% compared to 28% in Q4 of 2024. For the full year, non-GAAP sales and marketing expenses increased from RMB 109.1 billion to RMB 123.3 billion in 2025. Our non-GAAP G&A expense were RMB 907 million in Q4 versus RMB 998 million in the same quarter of 2024. Our annual non-GAAP G&A expenses were RMB 3.2 billion in 2025 versus RMB 2.8 billion last year. Our research and development expenses were RMB 4.4 billion in the fourth quarter on a non-GAAP basis and RMB 5 billion on a GAAP basis. On a GAAP basis, operating profit for the quarter was RMB 27.7 billion versus RMB 25.6 billion in the same quarter 2024. Non-GAAP operating profit was RMB 29.5 billion versus RMB 28 billion in the same quarter 2024. Non-GAAP operating profit margin was 24% this quarter compared with 25% for the same quarter 2024. For the full year, non-GAAP operating profit was RMB 102.6 billion compared with RMB 18.3 billion in 2024. Net income attributable to ordinary shareholders was RMB 24.5 billion for the quarter and RMB 99.4 billion for the full year. In the fourth quarter, basic earnings per ADS was RMB 17.50 and diluted earnings per ADS was RMB 16.51 versus basic earnings per ADS of RMB 19.76 and diluted earnings per ADS of RMB 18.53 in the same quarter of 2024. Non-GAAP net income attributable to ordinary shareholders was RMB 26.3 billion for the quarter and RMB 107.3 billion for the full year. In the fourth quarter, non-GAAP diluted earnings per ADS was RMB 17.69 versus RMB 20.15 in the same quarter of 2024. That completes the income statement. Now let me move on to cash flow. Our net cash flow generated from operating activities was RMB 24.1 billion in Q4 and RMB 106.9 billion for the full year of 2025, compared with RMB 29.5 billion in the same quarter of 2024 and RMB 121.9 billion in 2024. As of December 31, 2025, the company had RMB 422.3 billion in cash, cash equivalents and short-term investments. Thank you, and this concludes my prepared remarks. Unknown Executive: Thank you, Jiong. Next, we'll move on to the Q&A session. Today's Q&A session, Lei and Jiazhen will take questions from analysts on the line. We could take a maximum of 2 questions from each analyst. Lei and Jiazhen will answer questions in Chinese, and we will help translate. Operator, we are open for questions. Operator: [Operator Instructions] Your first question comes from Alicia Yap with Citigroup. Alicis a Yap: [Foreign Language] I have 2 questions. First is that the company made some organization adjustment at the shareholder meeting at the end of last year. So currently, the company is operating in over 90 markets and at the same time, also face new challenges from the complex regulatory environment. So how does the company maintain the flexibility and also the quality of execution in such an environment? And then second question is, over the past quarter, we have seen a slowdown in the growth of e-commerce platform in China and the company's online marketing revenue growth also show a slowdown over the past 2 quarters. So could management share with us your view on the current state of China e-commerce market and where the next phase of growth for the industry might come from? Jiazhen Zhao: [Foreign Language] Unknown Executive: [Interpreted] This is Zhao Jiazhen. Let me take your first question. Over the past few years, our global business has indeed achieved some progress, now serving nearly 100 markets and achieving meaningful scale. And throughout this process, our corporate governance and the development of internal talent have lagged behind the business growth, and that leaves us difficult to keep up in many areas. At the same time, the international geopolitical landscape is evolving rapidly with trade and regulatory policies across regions changing quickly and becoming increasingly tightened. This places new demands on our company as a whole. And therefore, we believe there is both an opportunity and a necessity to undertake a systemic and structural transformation of our organization, culture and corporate governance. And of course, this will be a gradual process. The culture, structure and the appointment of new leaders that was announced at our shareholders' meeting last December is the beginning of this systematic transformation. In the period ahead, we will dedicate greater energy, capital and resources to upgrading and reinventing the supply chain and to achieve an overall transformation of our supply chain operations. I will also address the second question. As you mentioned, over the past few quarters, we have seen e-commerce industry enter a new phase of intensified competition and slowing growth. In this new stage, our strategy of investing deeply in the supply chain was formulated. It was formulated from the recognition that an e-commerce platform should not just be a simple transaction platform, rather, it can and should do more and creating greater value for all participants across the entire supply chain. Our deep investments in the supply chain covers multiple aspects and initiatives recently such as Duo Duo local specialties and logistics support for remote regions are all projects empowering the supply chain to be more inclusive. Here, I will also highlight 2 specific programs. The first program is free delivery to villages. This is a new project we piloted in the fourth quarter of last year, aimed at addressing the challenges of high logistics costs and merchants lack of incentives to shift to remote rural villages, bringing more villages into the free shipping zone. And currently, we have built last-mile logistics infrastructure, including transit warehouses at the country level and pickup points at the villages level across multiple regions in China and with the platform covering the transshipping fees for orders delivered to these villages. And under this new model, merchants only need to send their products to the transport warehouses and the transportation from the warehouse to the village level pickup points is then handled by the transit warehouse. And building on our existing experience, we applied the transshipping model to the last-mile delivery to the villages, improving the shopping experiences in remote areas and helping our merchants to tap into new market opportunities. The second example is new quality supply. For merchants willing to improve their product quality and services, the platform empowers them by providing industry insights and supply chain support. These measures support merchants to upgrade their operations across the entire product life cycle from R&D and production to manufacturing and sales and driving the transformation of the supply chain system. There is actually a lot the platform can do here. For instance, in product development, traditional approaches often rely on trial and error. However, within today's ecosystem, critical product information is compiled by our merchant development teams and promptly relate to the merchants. Together with traffic support for new product testing, these measures enable merchants to iterate their products with more success and improve the ROI of their R&D investments. And these are 2 examples of our efforts to upgrade the supply chain. Faced with slowing industry growth and heightened competition, we are proactively choosing to channel resources into building a high-quality supply chain. Our investments in foundational capabilities like new quality supply and delivery to villages will become the driving force behind the company's sustainable and healthy growth in the next decade. Operator, we are ready for the next analyst on the line. Operator: Your next question comes from Kenneth Fong with UBS. Kenneth Fong: [Foreign Language] The company global business has experienced some ups and downs. Since last year, we have seen high-profile regulatory inquiries in some key markets and significant changes in trade policy highly relevant to our operations. Could management share your thoughts on the current external environment and under such conditions, where is your global business strategic focus in the next phase? And my second question is about the profitability. The company profitability over the past 2 quarters has experienced some fluctuation. So could management share how different business model launch that might impact the profitability? And how should we think about the company long-term profit margin level? Lei Chen: [Foreign Language] Unknown Executive: [Interpreted] This is Chen Lei. I will take your first question. Over the past period, we have indeed received inquiries from regulatory authorities. As our global business grew rapidly and reached a meaningful scale in different countries, it is understandable that this has drawn surprise, concerns and closer scrutiny. However, our management believes that the current regulatory scrutiny will lay a solid foundation for our next stage of growth and will also provide direction for iterating our model amid the rapidly evolving international political and regulatory landscape. Since the launch of our global business, we have consistently focused on the long term. Building on our deep roots in the supply chain, we are committed to achieving sustainable development in each market and creating real value for consumers. As our business skills and regulatory environment across regions change rapidly, we deeply recognize that regulatory compliance is the baseline requirement. As a company operating within local communities, it is our fundamental responsibility as an e-commerce platform to meet local needs and stay true to our core mission, fulfill our duties and contribute meaningfully to the societies we operate in. Therefore, our management team invests significantly in business compliance. However, trade policies, taxation, data regulations, product compliance requirements and other regulatory frameworks are undergoing significant changes across different countries and regions. These requirements often vary considerably and can sometimes contradict one another, inevitably bringing greater challenges and uncertainty. We are actively learning, adapting to these changes and continuously enhancing our compliance capabilities to create sustainable value for society. You also mentioned changes in global trade policies. Since the beginning of last year, we have indeed seen some shifts in trade policies in many major markets. Ensuring business compliance, the team has quickly iterated our business model based on the regulatory environment and market conditions in different regions to deliver reliable services to consumers. This is closely tied to the supply chain capabilities we have accumulated over the years. Therefore, moving forward, the strategic focus of our company's global business will remain on investing in supply chain capability. Every aspect of this directly impacts the consumer shopping experience, and accordingly will be a key area of our investment. Thank you. Jiazhen Zhao: [Foreign Language] Unknown Executive: This is Zhao Jiazhen. Let me answer your second question. First, I want to emphasize that currently, the company is still in a strategic investment phase. The external environment and competitive landscape are changing rapidly. And to meet the consumers' evolving needs, we are working closely with our merchants to explore and launch new business models that is suited to the new conditions. Any new model from launching to a full rollout requires the platform to commit substantial resources in its early stages. Whether it is exploring the new business models or making strategic investments in the supply chain, these are fundamental and long-term initiatives. The timing difference between investment and return will inevitably have a direct impact on our performance in certain stages. As we have communicated on multiple occasions, between short-term financial performance and the long-term value of the platform ecosystem, we will resolutely choose the latter. And therefore, as we continue our strategic investments, coupled with a complex and volatile macro environment, it could be normal to see fluctuations in our profit margins from quarter-to-quarter. And over the past few months, the strategy we announced at the shareholders' meeting is being translated into concrete projects. The business and organization are undergoing deep transformation. And we suggest not to focus too much on the profitability of a single quarter, but rather pay more attention to the high-quality development of our platform ecosystem because only with a healthy platform ecosystem and a robust supply chain, can the platform achieve sustainable growth in the long-term intrinsic value. Operator, let's move on to the next analyst on the line. Hi Joyce, please go ahead. Unknown Analyst: [Foreign Language] I will translate myself. My first question is related to the profit margin as well. Since last year, the company launched several investment initiatives, including last year's RMB 100 billion support program and the management just mentioned heavy investment in the supply chain in the remarks. Could management elaborate a bit on how the company thinks about the investment and return cycles for these projects? And what will be the long-term impact on the company's financial performance? My second question is online retail sales showed very strong growth momentum in the first 2 months of the year. Could the management share the company's view on the consumer market like regarding categories with faster growth in the market? Does the company have targeted strategies to capture new opportunities in the fast-growing product categories? Jiazhen Zhao: [Foreign Language] Unknown Executive: [Interpreted] This is Zhao Jiazhen. I'll answer your question. About a year ago, we further recognized the importance of the long-term development of the ecosystem, and we launched a series of merchant support initiatives such as the RMB 10 billion fee reduction and RMB 100 billion support programs, committing tangible resources to help the merchants and the industries, creating more room for innovation. Our management unanimously agrees that as the platform grows into a public platform with social influence, we should consider the company's development from the broader perspective of public interest and the long-term health of the industry ecosystem. The strategy of focusing on core business and investing deeply in supply chain upgrades that was announced at the shareholders' meeting at the end of last year is an extension and reinforcement in this direction. And after years of development, the e-commerce industry's ecosystem is becoming more mature and merchants demand on the platform have also become more diverse. The platform's role has evolved from initially being a transaction platform to now becoming a comprehensive business partner. Accordingly, the support that merchants need the most from the platforms has also extended from traffic support to all aspects of their operations, including R&D, production and sales. This requires us to go deeper in our operations to come up with targeted support plans tailored to different industries and thereby building a more competitive supply chain. Such investments involve thousands of merchants and cannot be achieved overnight. We are prepared for long-term and patient investments and are very pleased to see that many of these investments have already yielded some results. For example, with the support of the new quality supply project I just mentioned, some merchants have chosen to reinvest the fee reductions provided by the platform into expanding their R&D teams and upgrading production lines. And together with the platform's digital solutions, they have started on a path of product differentiation and transformation. These long-term structural investments will not be immediately reflected in the financial performance in the short run, but they are a crucial part of the long-term sustainable growth of the platform and ecosystem. We will diligently implement these long-term projects by reinvesting concrete resources back into the ecosystem. We target to lower merchant costs, enhance supply chain quality and improve consumer experience. Through investing in the supply chain, we will seek to reinvent the platform and move the ecosystem up the value chain. And regarding your second question, we are also very pleased to see the improvement in the overall consumption market. However, at the same time, we also clearly recognize that in today's competitive landscape, we still face some challenges. The future performance of e-commerce platforms will increasingly be dependent on how much incremental value they can create for the entire supply chain rather than relying solely on traffic acquisition and allocation. And therefore, at this juncture, we have made a firm decision to invest deeply in the supply chain. And for different product categories, our merchant development teams will work closely with sellers. And based on industry insights, we will provide them with tailored industry solutions to help merchants achieve new quality transformation and driving the high-quality development of the supply chain. And we firmly believe that these investments are essential for the e-commerce high-quality development in the next stage, and we are committed to patiently furthering these efforts in the long run. Thank you. Thank you, Joyce. And thank you, Jiazhen. Thank you for joining us today. We look forward to speaking with you early again next quarter. Thank you, and have a great day. Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.
Operator: Welcome to the Winnebago Industries Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the call over to Joan Ondala, Vice President, Treasury and Investor Relations. Ms. Ondala, please go ahead. Joan Ondala: Thank you, operator. Good morning, everyone, and thank you for joining us to discuss our fiscal 2026 Second Quarter Results. This call is being broadcast live on our website at investor.wgo.net, and a replay of the call will be available on our website later today. The news release with our second quarter results was issued and posted to our website earlier this morning. Please note that the earnings slide deck that follows along with our prepared remarks is also available on the Investors section of our website under quarterly results. Turning to Slide 2. Certain statements made during today's call -- conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under securities laws. The company cautions you that forward-looking statements involve a number of risks and are inherently uncertain, and a number of factors, many of which are beyond the company's control, could cause the actual results to differ materially from these statements. These factors are identified in our SEC filings, which we encourage you to read. In addition, on today's call, management will refer to GAAP and non-GAAP financial measures. The reconciliation of the non-GAAP measures to the comparable GAAP measures are available in our earnings press release. Please turn to Slide 3. Hosting today's call are Michael Happe, President and Chief Executive Officer of Winnebago Industries; and Bryan Hughes, Senior Vice President and Chief Financial Officer. Mike will begin with an overview of our second quarter performance as well as a forward view of the market. Bryan will discuss the associated drivers of our financial results and our fiscal year 2026 guidance. Mike will conclude our prepared remarks, and then management will be happy to take your questions. And with that, please turn to Slide 4 as I hand the call over to Mike. Michael Happe: Thank you, Joan, and good morning, everyone. Winnebago Industries delivered a solid second quarter, reflecting focused execution on our overarching enterprise strategies and our fiscal year 2026 first half objectives. Despite a challenging market environment, our teams performed with discipline, protecting profitability, managing controllable costs and advancing the product and operational priorities that matter most to our long-term competitive positions in the RV and Marine industries. Across our portfolio of premium differentiated brands, we have built a broad and durable outdoor recreation platform that spans multiple customer segments, price points and lifestyle use cases. That breadth is increasingly valuable in a more selective demand environment and positions us well to compete for profitable share as demand conditions improve in the future. We are introducing meaningful new products across our business lineups, especially recently in the Motorhome RV segment within the traditional C category with technological differentiation and targeted focus on affordability and value accessibility to our premium brands. We are also being deliberate about where we invest and grow. Our emphasis on driving share in higher-value segments, such as Class A diesel, Class C diesel and the growing Super C category reflects our strategic focus on retail dollar and profit reach through resilient premium categories. That discipline is evident in our results, even as unit share has fluctuated in certain industry segments, our RV retail dollar share has remained resilient. On the Winnebago-branded Motorhome business, we have made considerable progress in the restoration of this flagship line through the first half of fiscal 2026. The team is on its plan through the first 6 months with much more traction planned in the back half of the year. While several initiatives are still in initial stages, and are expected to build and become more apparent over coming quarters. The prospects for this business in the future are definitely improving. The progress there really reflects the same Winnebago Industries enterprise strategies. We are applying every day across our portfolio, empowering best talent, building relevant premium brands and winning products, elevating the total customer experience, expanding digital capabilities and connections and driving portfolio synergy and excellence. On the Towable RV side, our wholesale share reflects deliberate efforts to reinvigorate our Winnebago Towables business with recent new products and revitalized several critical grand design products attacking the meat of the market. We have leaned into models like Access within the Winnebago brand and Grand Design's Transcend line, gaining important shelf space in supportive dealer showrooms, while also moderating some highly promotional product segments to support inventory health and overall channel stability. We will discuss our Marine businesses in a few minutes, but I would like to highlight a brand that does not receive enough attention at times and that is Lithionics, our mobile portable power line. This 2023 acquired platform continues to be an increasingly vital part of what differentiates our enterprise profile, focused on delivering professional-grade safe, portable, reliable battery power solutions. Lithionics strengthens our competitive differentiation today and supports future profitable growth as we expand the technology beyond RV into Marine and Work Vehicle applications. Our overall financial performance through the first half of fiscal 2026 reflects the strides we have made to deleverage our balance sheet, strengthen cash flow and reduce controllable costs. We have urgency in these areas to position ourselves as soon as possible to accelerate our capital allocation priorities for the future benefit of this company. Our teams have done an excellent job since last April of 2025, managing tariff headwinds and intentionally improving SG&A leverage. Bryan Hughes will walk through those numbers in more detail shortly. Turning to Slide 5. Retail activity across the second quarter remained aligned with a seasonally slower retail period of the year, but also reflected a challenged near-term consumer sentiment environment with comps lower than the same period a year ago. Additionally, retail both at the dealers, but also at certain consumer retail shows through the January, February months were impacted by adverse weather events in key regions. Dealers continue to manage inventory cautiously, keeping ordering and stocking closely aligned with retail conditions. Wholesale activity has remained disciplined with shipments also moderating throughout the seasonally slower period. The RV Industry Association's spring road signs outlook calls for modest industry shipment growth in calendar 2026, with total volumes forecast to increase by approximately 2% year-over-year. That outlook continues to assume a first half of calendar year 2026 weighted towards seasonal softness with improvement expected in the back half of the year as retail demand stabilizes. It also assumes mix performance across segments, including resilience in fifth wheels and a more gradual recovery in certain motorized categories. Our own internal RV wholesale planning remains intentionally more cautious than this outlook. With a focus on retail-driven ordering patterns and disciplined production pacing as conditions evolve. As we move into the critical spring and summer selling seasons, we expect retail activity to build and we are well positioned to respond with product as dealers desire. Inventory management remains a priority. During the second quarter, RV inventory turns reached approximately 1.5x, exhibiting normal seasonal shipping patterns as well as increased dealer demand tied to recent Winnebago Towables and Grand Design Motorized product introductions. Dealers are supporting these new business strategies and building inventory positions where they believe in future retail share attainment opportunities. While overall inventory turns at the end of Q2 versus backward retail, we're slightly lower than what we would like to see at this time of year. We are very much focused on continuing to be a good partner to our dealers going forward in pursuing a 2x inventory turn goal at some point in calendar 2026 as seasonal retail accelerates. Turning to Slide 6. At the Florida RV SuperShow in January, we showcased how our product portfolio is evolving around changing RV ownership and travel behaviors. Across Winnebago, Grand Design RV and Newmar, the products we featured from Winnebago Sunflyer Class C to Grand Design's Solitude fifth wheel and Lineage Motorhome platforms to our Newmar Freedom Aire Luxury C introduction. All these emphasize livability, ease of ownership and differentiated features, serving both first-time buyers and experienced owners. Strategically, the unveiling of new products just mentioned reinforce the direction of our product roadmap, a deliberate focus on products that remain relevant across market conditions, support dealer inventory discipline and contribute to brand strength over time. Our approach to innovation is intentional, emphasizing mix, execution and returns. On Slide 7, our Barletta Boats business continues to hold the #3 position in U.S. aluminum pontoons, with a 9.1% retail unit market share over the trailing 12 months through January. The 3-month SSI unit retail market share is running even higher in the lower double digits range. Barletta's brand positioning and product mix remains consistent, supporting even higher retail dollar share versus the #1 and #2 competitors. However, to serve an even wider audience across the recreational boating space, we have expanded the Barletta lineup with the introduction of the Sanza series of products. Starting at $49,995 for a tritoon model, well equipped with 150-horsepower engine, a cover and in-floor storage. The Sanza extends the Barletta experience to new buyers looking for affordable access to premium brands, while maintaining the trusted craftsmanship, comfort and industry-leading customer service support that define Barletta grade. Moving to Slide 8. Barletta also captured its fourth consecutive Discover Boating Minneapolis Boat Show Innovation Award, recognizing our leadership in bringing industry-first ride stabilization technology to the pontoon segment through our partnership with Seakeeper Ride. This recognition underscores the team's sustained focus on meaningful innovation that elevates the on-water experience for our owners. That same commitment on customer-centered innovation is evident within our Chris-Craft brand as well, where we recently introduced the all-new Launch 27. The Launch 27 is a reimagined premium Day Boat that blends the brand's timeless design and unparalleled fit and finish with modern technology, enhanced comfort in standard Seakeeper ride stabilization. In January, the Launch 27 earned a 2026 Innovation Award at the Discover Boating Miami Boat Show, highlighting its sleek hull design and advanced technology. Importantly, this award reinforces Chris-Craft's leadership in thoughtful, owner-focused innovation. Product quality and innovation remain core to our strategy. And these marine awards validate that conviction. Both Barletta and Chris-Craft have also been recognized with the National Marine Manufacturers Associations Customer Satisfaction Index Awards, reflecting consistently high owner satisfaction across our Marine portfolio. Moving to Slide 9. In January, we released our seventh annual corporate responsibility report, outlining how we continue to integrate sustainability, safety and governance into the way we run the business. Two highlights from our most recent report. One, we have made meaningful improvements in workplace safety in the last decade and, again, in fiscal 2025. And two, we have now reduced our absolute Scope 1 and Scope 2 emissions by about 15% versus our 2020 baseline. Both are clear indicators of disciplined execution embedded in our day-to-day operations across the organization. Now let me turn the call over to Bryan Hughes for the financial review. Bryan? Bryan Hughes: Thank you, Mike, and good morning, everyone. Starting with our consolidated results on Slide 11. As Mike noted, our results continue to demonstrate disciplined execution across a diversified portfolio. Even as retail demand across RV and Marine remains uneven. Consolidated net revenues increased 6% year-over-year as a strong performance in the Motorhome RV segment more than offset decreases in Towable RV and Marine. Growth in the Motorhome RV segment was driven by Grand Design RV's continued expansion with strong growth in Winnebago and Newmar brands contributing as well. Gross profit increased due to growth in the topline and when combined with SG&A reductions due to our cost savings initiatives, Operating income improved 51% from the second quarter of fiscal 2025, resulting in adjusted EPS of $0.27, 42% higher than last year. Turning to our segment results, beginning with Towable RV on Slide 12. Net revenues declined by 9%, primarily attributable to a shift in product mix toward lower price point models and lower unit volume, partially offset by selective price adjustments. Segment operating income margin of 4.2% for the second quarter of fiscal 2026 was down 20 basis points from prior year, primarily due to volume deleverage and product mix, largely offset by selective price adjustments and cost containment initiatives. Through the first half of fiscal 2026, segment operating income is up 3% and versus the same period last year on a roughly comparable 3% increase in net revenues. Our dealer inventory increase in the Towable RV segment, is related to the new Thrive in the Winnebago brand and the continued success of the Transcend in the Grand Design lineup. When combined, these 2 lines explain the entire increase in the Towable RV segment's dealer inventory when compared to the prior year. Moving to Slide 13. Our Motorhome RV segment reflected a net revenue increase of 29%, with volume momentum across our Newmar, Winnebago and Grand Design Motorized brands. Net revenues are running 21% ahead of fiscal 2025 through the first half of the year. Operating income performance in this segment primarily reflects improved volume leverage, with additional support from targeted cost and operating efficiency initiatives. Segment operating income margin improved 270 basis points year-over-year to 2.4% in Q2. The same step change in profitability is evident in our first half segment performance, resulting in an operating income margin of 2.6% compared with negative 0.8% in the first half of fiscal 2025. Turning to Slide 14. Our Marine segment results reflect the industry operating environment we anticipated with retail demand remaining muted and dealers maintaining a cautious approach to inventory and wholesale activity. Segment net revenues decreased by 3%, primarily due to lower unit volume and product mix, partially offset by selective price adjustments. Operating income margin of 3.7% was down 300 basis points from last year's fiscal second quarter due to higher warranty expense and volume deleverage. Through the first half of fiscal 2026, Marine segment operating income margin was 5.3% versus 6.7% in the same period last year. Revenue was flat year-over-year. Turning to Slide 15. We continue to make tangible progress on deleveraging actions consistent with the priorities we've outlined over the past several quarters. A key proof point with our February redemption of $100 million of 6.25% senior secured notes due 2028, funded through cash generation over the past several quarters. This action demonstrates our confidence in the durability of our cash flow even as market conditions remain inconsistent. The redemption meaningfully reduces gross debt and contributes to reduced interest expense, reinforcing the discipline underlying our capital allocation framework. Importantly, it also preserves financial flexibility as we enter the seasonally stronger back half of the fiscal year. We continue to maintain healthy cash balances, and cash flow from operations improved year-over-year through the first half of 2026, driven primarily by improved earnings with working capital performance providing additional favorability. Turning to guidance on Slide 17. For fiscal 2026, we are maintaining our full year revenue and adjusted EPS outlook, while updating reported EPS with the details as follows: consolidated net revenues in the range of $2.8 billion to $3.0 billion; reported earnings per diluted share in the range of $1.50 to $2.20 compared with $1.40 to $2.10 previously. The increase versus the prior range reflects updated assumptions related to items excluded from adjusted EPS; and finally, we continue to expect adjusted earnings per diluted share in the range of $2.10 to $2.80. Segment performance continues to reflect a mixed demand environment. In Towable RVs, we expect revenue to be softer than fiscal 2025, while remaining focused on maintaining operating margins. In Motorhome RV, we expect both revenue growth and improved operating margins compared to the prior year. In Marine, Retail demand remains soft and as a result, we expect full year net revenues to be below fiscal 2025 levels. Looking to the third quarter, we expect continued strength in Motorhome RV to be offset by softer conditions in Towable RV and Marine, resulting in consolidated revenue that is flat to down versus prior year levels. On that revenue base, we expect adjusted EBITDA and adjusted earnings per diluted share to be roughly in line with the prior year. Our outlook remains subject to macroeconomic conditions, including the direction and severity of recent geopolitical developments and their potential impact on commodity prices. With that context in mind, our fiscal 2026 outlook remains grounded in actions within our control. We continue to focus on disciplined execution and advancing our strategic initiatives which we believe position us well to deliver on our financial objectives. Now please turn to Slide 19 as I hand the call back to Mike for closing comments. Mike? Michael Happe: Thank you, Bryan. Winnebago Industries begins the second half of fiscal 2026 on solid footing to drive sustained earnings improvement, a view that holds even if the industry recovery continues to be stubborn. Over the last several quarters, going back to the second half of fiscal 2025, we have been quite intentional about the business improvement changes we are making. We have broadened our portfolio across key segments and price points. We have strengthened the balance sheet and improved financial flexibility. We have made deliberate decisions to better align our fixed cost base and variable expenses, especially within our RV segments to reflect the reality of today's demand environment. Our teams have proactively navigated tariff headwinds and unexpected cost pressures with agility and diligence. And I am especially pleased in our ability to continue executing the controllables and mitigating risk effectively as conditions evolve. We are, again, doing what we said we would do. As we move through fiscal 2026, our focus is clear: execute what we can control; protect profitability, while balancing retail share in our target segments; strengthen our financial flexibility and protect and bolster our ability to invest in our people, brands, products and operational excellence initiatives that we believe will drive sustainable and superior returns in better days ahead. It is worth stepping back and recognizing the broader context. Outdoor recreation remains a large, resilient and economically meaningful sector, contributing more than $1 trillion in direct and indirect economic output and supporting millions of jobs here in the United States, according to the newly released data from the Department of Commerce. Participation in outdoor recreation remains strong and is an integral part of our customers' physical and mental wellness. While our specific industries are operating in a more measured demand environment, amid a dynamic macroeconomic and geopolitical backdrop. The long-term fundamentals of the category and candidly Winnebago Industries continue to support sustained engagement and investment over time. Our lifestyle is strong and Winnebago Industries is strong as well. We are mindful of the evolving situation in the Middle East. And while it is too early to assess any direct impact on our businesses, we are monitoring developments closely and their potential impact on consumer demand and input costs. Notwithstanding that backdrop, our confidence for the future comes from the progress we have already demonstrated and from our team's continued focus on our 5 core enterprise strategies that define how we operate and compete. Now Bryan and I are happy to answer your questions this morning. Operator, please open the line for the Q&A session. Operator: [Operator Instructions] Our first question comes from Joseph Altobello with Raymond James. Joseph Altobello: First question on inventory. Obviously, you ended this quarter at 1.5 turns. The target is 2 turns by the end of this calendar year. So how much of that is coming from you guys undershipping demand over the balance of the year? And how much of that is what you believe will be improved retail? Michael Happe: Joe, this is Mike. It will be a combination of several factors. Certainly, we anticipate seasonal retail momentum to take place as it does every spring and summer. From an industry wholesale estimate standpoint as you probably are aware from our comments. We are a little bit on the conservative side. And so our assumptions on both industry wholesale shipments for the remainder of our fiscal year and the calendar year and embedded in our guidance is in line with us improving turns to the level that you just cited. Bryan Hughes, in his prepared comments, also mentioned in the Towables RV segment that the significant majority, if not the entire driver behind Towable RV turns at the present time, is the support of the Winnebago-branded Towable line that we're revamping, primarily the Thrive and Access product that is shipping into dealers, many of whom are new to that brand as well as support for Grand Design's Transcend model. And so we anticipate that, that pre-prime retail season load-in will diminish a bit from a shipment standpoint and the natural course of retail and unit replenishment will take over. So we do anticipate our inventory turns on the RV side to improve in both quarter 3 and quarter 4 and throughout the rest of calendar '26. Joseph Altobello: Got it. Very helpful. And then to follow up on that, you mentioned obviously the geopolitical events. And I know it is early, but any sort of discernible impact on consumer demand here in March from the conflict with Iran? Michael Happe: Joe, we could not draw any straight line to any short-term market performance factors or even input operational costs into our business quite yet from the conflict overseas. We are monitoring that situation very carefully. We certainly understand that, that is weighing on the minds of consumers and dealers as they contemplate obviously, investments in the lifestyle for consumers and in inventory from a dealer standpoint but we have not seen any adverse effects quite yet from the conflict. . Operator: Our next question comes from Alice Wycklendt with Baird. Alice Wycklendt: Maybe I want to dig in a little bit more and see if you can share on the impact of weather, the cadence of trends over the course of the quarter and maybe what you've seen since quarter end some of those weather impacts have eased? Michael Happe: Yes. Well, let me talk about the second quarter retail environment that we witnessed. We did have some good retail shows both on the RV and Marine side. In fact, our largest retail shows happen to be some of our best shows. But apart from those large shows, the rest of the retail show season was candidly in line with general industry retail conditions throughout that particular period for us, the months of December, January and February. We did see some weather events in the months of January and February that did have an impact on specifically some of the retail shows, but in some cases, good portions geographically of the U.S. that hampered retail for a week at a time. These are generally our lowest retail selling months of the calendar year. So we don't anticipate that weather will continue to be a theme for the remainder of our fiscal year or calendar year '26. We'll see how that goes. Concerning retail in the month of March, I would say we are generally seeing a retail environment in March that is healthier than what we saw in the months of January and February. Internally, we have 3 weeks of retail collected already from this particular month. And I would say 2 of those 3 weeks were certainly better. And the third week of those 3 weeks was similar. So net positive in terms of the general direction of retail in March versus what we had seen in January and February. But we're obviously monitoring that every day, every week and hope we continue to see that mini trend continue here in the near future. Alice Wycklendt: Great. And then obviously, a lot to unpack with the Iran conflict, but maybe we can just isolate gas prices and talk about how the RV market has typically reacted to higher prices, at least in the past and maybe what you'd expect here? Michael Happe: Yes. I think you would want to break that topic or question down in 2 ways. One, how does it impact people who are already in the lifestyle and own RVs. And generally, the manner in which we see an impact there is that people don't necessarily take less trips. They just travel less distance to experience the RV lifestyle. And so we believe that the lifestyle itself is healthy from an engagement standpoint and we do not anticipate people doing less camping, but they may go less far to do that camping. Certainly, from a new product purchase standpoint for customers that are in the marketplace. The concern there is that the perceived affordability of the lifestyle is elevated because it costs more to fill up that fuel tank on either your towing vehicle, if you're buying the Towable or that Motorhome coach. But we generally don't see as big of an impact on new purchases as you might expect when gas prices are elevated at the pump. These are generally planned purchases, often associated with life-changing events like retirements or kids getting older, bucket list that need to be checked off. So we're not yet factoring in a significant decline on new product purchases yet. We'll want to see how long gas prices are elevated directly related to the Middle East conflict and discern whether the impact to consumers last. The last topic I do want to mention is that there are some positives when some of these geopolitical events happen historically. There are times when Americans choose to travel differently. They may take less trips to Europe. They may take less cruises across international waters. And instead, they turn to domestic road trips, which actually turns out to be a tailwind for us at times historically. So again, it's too early to come to a conclusion on any of the comments I just made. We are monitoring the situation carefully, but those are some of the opinions we have on possible dynamics and impact. Operator: Our next question comes from James Hardiman with Citigroup. Sean Wagner: This is Sean Wagner on for James. I guess, just following up on the inventory. If you're targeting 2x turns at some point in calendar year '26. Is there any color you can give on where you expect Towable and Motorhome turns to finish the fiscal year? Will you get close to 2x this fiscal year? Michael Happe: Sean, thank you for the question. We won't share specifically the future projected breakdown by category. I can just tell you, our business leaders have the same goals in mind. The turns performance of our portfolio varies by brand and business. And it also varies at times, as I mentioned earlier, by the introduction of new products or new strategies. But in macro, our intention and plan for the rest of the year, again, as included in our guidance assumptions, is to drive those field inventory turns back very close to 2.0 by the end of our fiscal year and certainly by the end of our calendar year. There can be things that aid or disrupt that, but that is certainly our intentions at the time. I will take this opportunity to mention the quality of the inventory in the field as well. We track very carefully how much of our inventory is current model year, prior model year and prior 2 model years. And I can tell you from a positive standpoint that we have seen a significant improvement in aged inventory across our RV and Marine portfolio at the end of quarter 2 fiscal '26 versus the end of quarter 2 fiscal '25. The number of units on prior model year and prior 2 model years are meaningfully down as we sit here today. And the number of current model year units as a percentage of the whole is increased which is a good thing because we want consumers looking at the very latest. And often, our sales allowance or sales support dollars for dealers are very targeted at aging inventory. And so the less aging inventory we have, we think we're in a better competitive position in the market, but we're also spending less dollars from an inefficiency standpoint to clear out that old inventory. So our teams are focused on it, and that will be part of the story as we talk about the quantity and the quality of field inventory going forward. Sean Wagner: Okay. And I guess on the topic of your unchanged guidance. Have your -- I know you said it's too early to sort of draw any conclusions from the geopolitical events, but have your underlying interest rate assumptions within your guide changed at all based on the current macro environment? And can you remind us what those were? Bryan Hughes: Yes, this is Bryan. I think as we all know, some of the interest rate expectations, including the reductions that we're pricing in the market previously are easing and are turning the other direction. A lot of it -- it's too early to tell what the impact of the geopolitical events right now will be on oil prices, interest rates, labor market and things of that nature. So I would not say that we made a significant adjustment of any kind underneath our guidance that is anticipating at an extremely different interest rate environment right now. It's just too early to tell on what direction things will go. Sean Wagner: Okay. But I guess if interest rates aren't cut this year or are even raised, let's say, does that drastically change your thinking for the industry and for the year? Bryan Hughes: No, I mean that's one of the factors we would consider as we come forward with our range on the industry. And so that would impact ultimately the outcome in all likelihood. But that's why we have the range that we do from 315,000 to 345,000 units of wholesale shipments. . Operator: Our next question comes from Patrick Scholes with Truist. Charles Scholes: With elevated gas and oil prices in the news, could you just give us an update on where you stand with progress with your eRV 2 electric prototype? Michael Happe: Patrick, thank you for the question. We do not have a commercial strategy in place currently for an all-electric Motorhome vehicle. As you recall, by your question, several years ago, we were active with, first, the pilot of all-electric Ford platform. And we did, in fact, produce a very small number of those and engage a few dealers on consumer engagement around those. We have made the decision more than a year ago now to not proceed Ford in the present environment with an all-electric Motorhome platform at this time. And that was a combination of, candidly, chassis partner feasibility on the right platform, combined with learnings from consumers about what was acceptable from a functional standpoint, but also a value standpoint in the market. So at this time, we are not competing with any alternate power technologies from a propulsion standpoint, but as you know, we are very focused through our Lithionics brand on doing everything we can to play our part in the electrification of house power that is oftentimes the removal of the generators from the house platforms on an RV or a boat and substitute that with the lithium battery power package. So that really is our electrification strategy right now, the House power platform that we have through -- in Lithionics. Operator: Our next question comes from Tristan Thomas with BMO Capital Markets. Tristan Thomas-Martin: Mike, just a clarification question. When you said 2 or 3 weeks so far in March were better. Is that relative to year-over-year or better than January and February? Michael Happe: From our perception standpoint, the months of January and February were actually quite similar from a retail standpoint. I know the industry has not released February retail yet for RVs. But we anticipate that when that information is released, that you'll see retail be very similar at the industry level to January. My comments around our internal Winnebago Industries RV and Marine retail for the month of March is that we have seen a net positive 3-week trend as compared to the months of January and February, meaning March is better, not quite where we'd like it to be ultimately, but certainly a better start to the early spring period than what we were seeing earlier. And I will tell you there are some bright spots in some of those early results, including our Winnebago Towables brand, which we're very energized about. We've seen very strong early results on Winnebago Towables in March that validates some of the dealer support we're getting and some of the new products that we've launched. So very early signs. Things can change from a volatility standpoint week-to-week based on our reporting processes and the way that we capture retail. But I think what I'm mentioning this morning is in line with a few of the RV dealer surveys that have happened by some of the sell side here within the last couple of weeks. So let's cross our fingers and hope that trend continues. Bryan Hughes: Tristan, just I'll add to that. This is Bryan. I think you're inquiring not about the absolute so much as the growth rates year-over-year. And that's what Mike is referring to in March that the year-over-year comps are showing some stability for those first 3 weeks. Tristan Thomas-Martin: Okay. But not up year-over-year. Is that accurate based on your comments? Michael Happe: We won't share specific numbers, Tristan. They are improved versus January and February. Tristan Thomas-Martin: Okay. And then just a question around Grand Design share trends in the quarter, a little bit under some pressure. What's driving that? And then kind of how do you reverse that, specifically the Towable side? Michael Happe: Yes. We have seen some Grand Design unit retail share pressure in the last year, a good chunk of that comes from the intense competition we're seeing on fifth wheels in the market with several good competitors, both from a legacy standpoint, but also some of the newer competitors in the last 4 or 5 years. The team at Grand Design is very engaged in the fifth wheel segment. We've introduced the Omega Frame, which we believe is one of the most durable, strongest frames now in the market. We recently came out with a composite leakproof roof that is beginning to be rolled out across the Grand Design line, but beginning with, I believe, the Solitude line on the fifth wheel side. We have partnered closely with many of our dealers on rightsizing the programmatic and promotional support around those fifth wheel models in the retail environment. We have seen less degradation of share on the travel trailer side. And in fact, Grand Design over the last 5 years has generally been gaining share on travel trailers over an extended period of time, but we've seen a little bit of share dilution there as well, primarily due to the emphasis on affordability and some of our competitors who have much higher capability in high-volume, load differentiation mix products. So we're probably battling affordability, primarily on travel trailers. We're battling some competitive intensity on fifth wheels. And so the team is working on brand strength, product strength, dealer improvements in terms of support just across the line. I will tell you that we do have plans in the future to expand the Winnebago Towables line into fifth wheel products at some point. We have not announced what that first product would be, nor the timing of that, but that is on the roadmap. So we'll compete even differently in the future with 2 Towable brands in some of these spaces, not just one primary large one. So thanks for the question. Operator: Our next question comes from Bret Jordan with Jefferies. Bret Jordan: On the fifth wheel category, and obviously, it's a tough market from a share competition standpoint, is that -- is the broader category under similar pressure in the sense that you're talking about people looking for a lower price point access to RV? Michael Happe: Well, I think that theme, Bret, exists candidly probably across the whole of the RV industry, value affordability. People certainly are still shopping for premium brands, but looking for a sharper accessibility from a value standpoint to those brands. We are seeing some activity on fifth wheels around private labels with some of the larger retailers in the RV space. That is a strategy that is a little less mature than you see on the travel trailer side, but that is ramping up a bit. So it's a combination of factors. I believe consumers looking for value, really good competition. Dealers thinking about the category in the evolving way as well. And our teams will have to continue to adapt. I want to make this point, though. Winnebago Industries is not the Grand Design fifth wheel company. And our share and opportunities to drive our business forward come from 9 different revenue streams within the company. And fifth wheels right now is just one of those 9. And so I am very pleased with the diversification and the breadth of Winnebago Industries and our ability to use certain parts of our portfolio that do have momentum like Newmar, like Barletta, lately here like Winnebago Towables to offset some of the softness we see from time to time in different parts of the portfolio. We've also been doing some work recently on unit share versus retail dollar share. At our quarter 3 earnings call in June, we will unveil some of the data from some of that analysis. But our retail dollar share at an enterprise level, particularly for the RV industry is very competitive, and in fact, is much more resilient than our recent unit share. And that comes from some of the great work that's happening in the Motorhome segment, specifically, with new business launches like Grand Design Motorhome racing to 4% plus share here recently after 2 years of being in the market. So we're going to be very focused. Don't get me wrong. We're going to be very focused on addressing some of the share pressure that we're seeing on fifth wheels, but I can also assure our investors that we are going to be very focused on driving good news and positive momentum across the other 8 revenue streams that we have in our portfolio as well. And that is, I think, part of the secret sauce as to why we are maintaining our guidance for the back half of the year because we believe that the whole is healthy enough to maintain a statement of confidence here this morning. Bret Jordan: Okay. And then in Marine, I think you called out warranty and volume deleverage as impacting margin. Could you sort of parse those 2 out? Is there anything that's extraordinary going on the warranty side of Barletta? Bryan Hughes: No, nothing extraordinary, but not like a larger single event that caused us to do a recall or anything. It was just a few that aggregated into a higher current quarter warranty expense recognition. So that's really the driver there. Operator: Our next question comes from Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: I guess, first, could you kind of comment on the margin improvement initiatives in Motorhome and provide an update there? Bryan Hughes: We've talked about this in the past, Noah, that there are several things underway. And brand by brand, we are undertaking those initiatives. I'd say, as we've said in past quarters, the Winnebago Motorhome transition to profitability is probably longer in nature and did not have a significant impact in the current quarter, but we expect it to have improving impacts in the several quarters ahead of us. We are still enjoying the ramp-up of the Grand Design Motorhome entry, and that entry has gone very well. And then similarly, on the Newmar side, the margin enhancement in that business over the past several years and in the more recent quarters have continued to bear fruit. So we're very pleased with that. I would say, in general, that's the storyline. We have further improvements we're expecting in the Winnebago Motorhome business as it relates to margins, specifically. Some actions have already been taken. Others are underway. Certainly, important in that evolution on margins in the Winnebago brand is continued product introductions that demonstrate innovation, differentiation in the marketplace, and we look forward to those in coming quarters. Noah Zatzkin: And then just maybe any updated thoughts on tariffs and maybe the expected impact versus prior? I know everything is still fluid. Bryan Hughes: Yes, pretty fluid environment, as you suggested there. I think the teams have done a very good job, I'll say, specific to the margin conversation. The teams have done a very good job of assessing the impact of tariffs, monitoring them very closely quarter by quarter, month by month, mitigating the impacts with vendors, as partners, and doing a very good job of minimizing the impact of tariffs and then where necessary pricing for those tariffs and making sure that the pricing matches the overall inflationary impacts. So that is ongoing work. I'd say the recent decision by the Supreme Court on IEEPA to be offset in many respects by new tariffs in the 122 category. Our still being evaluated. I do not expect that transition from IEEPA to 122 to have a material impact on our margin story or on pricing. I think that they will largely offset each other if not even be a little bit favorable, but that too is something that we're monitoring very closely. Operator: And our final question comes from Mike Albanese with StoneX. Unknown Analyst: I know it can be difficult to discern amongst various macro factors, but any implications you're seeing from expected tax refunds within dealer traffic or lead generation essentially setting the table for higher conversion, into Q3, particularly in regions where the SALT cap was increased or really, is that just too difficult to parse out from typical seasonality? Michael Happe: Yes. Good question, Mike, and thanks for that question. We do track through various sources, some of the tax refund trends that are happening in that particular sort of season. And it does appear that the size of tax refunds are in a positive way elevated for citizens and possible consumers versus a year ago. It is probably too early as those checks or deposits are arriving from a refund standpoint to understand if that will impact us materially. It certainly can't hurt as consumers claw back a few more dollars and decide what to do with that. So there's -- as you know, there's a lot of noise in the environment in terms of elements weighing on consumers' mind from a sentiment standpoint, but also some of the inflationary pressures some of which were mentioned on the call with possible gas price elevation. So we'll see how that goes. We'll have a better idea here probably in the next 60 to 90 days. There have been times, though in -- with past policy legislation that has been tax friendly to consumers where dealers have cited that consumers do have a little bit more breathing room to be able to throw at a down payment on a new RV or boat. But a little early to tell, but early signs in the tax season are positive from a refund size standpoint. So we'll continue to monitor. Unknown Analyst: That's good context. And then hopefully, a good one to end it on here, but since you decided to highlight Lithionics this morning, can you just provide more color on it as a competitive differentiator? What's out there? Why is it better, I guess? And then are you seeing that translate or can you attribute any share gains directly to that, whether that be a lot wins with dealers or resonating with the consumer, et cetera? Michael Happe: Yes. Thank you for the question, and it's a good topic to end on. We acquired Lithionics in the middle of 2023. And the reason we acquired Lithionics, there were multiple reasons, but one of which was that they were really and are really the gold standard in lithium battery packs, battery management systems. Since 2023, their penetration into the RV market has expanded. We have picked up new customers, including several of our OEM competitors, and we have very good working relationships between Lithionics and several RV OEM. We've expanded our product line significantly from primarily battery pack systems and BMS to include other types of mobile power products. battery starter generators, alternators, inverters and the like. We have also begun to certify some of our product catalog for use in the Marine industry. There are similar applications for these types of products in the Marine industry, and we've begun to accelerate expansion of Lithionics business development into other categories, including work trucks and other specialty applications. There's also an aftermarket element to the Lithionics business. If you either have a different battery system or no battery system at all, you can work through a qualified installer to install a Lithionics system. They are safe. They are reliable, they are durable. They are constructed like very few other battery packs in the market are. And the team just does business the right way. The last thing I'll mention that should be of note to the investor community is the profitability on this small business from a yield standpoint is significantly higher than our Finished Goods business. It is a strategic technology vertical. Certainly, some of the business we do is captive to our own brands. But the business we do on the outside comes at a fair healthy margin that allows us to contribute back to enterprise profitability, but also reinvest in the Lithionics business. So we view the blue ocean for Lithionics products as significant in the future. And we'll stay very focused on being the quality supplier in that space and not the low-cost supplier. Reliability and safety are very valued by consumers around battery products. So thank you for the question. Operator: Thank you. This concludes the question-and-answer session. I would now like to turn it back to Joan Ondala for closing remarks. Joan Ondala: Thank you all for joining us this morning. We look forward to keeping you all updated on our progress. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Chewy Fourth Quarter 2025 Earnings Call. [Operator Instructions] I will now hand the call over to Natalie Nowak, Head of Investor Relations. Natalie, please go ahead. Natalie Nowak: Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh; and CFO, Chris Deppe. Our earnings release, which was filed with the SEC earlier today, has been posted to the Investor Relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program and the environment in which we operate. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our SEC filings including the section titled Risk Factors in our Form 10-K filed earlier today for a discussion of these risks. Reported results should not be considered an indication of future performance. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2024. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will also be available on our Investor Relations website shortly. And with that, I'd like to turn the call over to Sumit. Sumit Singh: Thank you, Natalie, and good morning, everyone. I'm thrilled to be joined today by our newly appointed CFO, Chris Deppe. Chris has been with Chewy since 2022 and brings valuable continuity and deep institutional knowledge, enabling a particularly seamless transition. He has a strong understanding of our business and the opportunities ahead for Chewy. I look forward to having many of you engage with Chris as he steps into his new role as CFO. I want to start by thanking our Chewy team members for executing a strong finish to the year. Once again, we delivered strong net sales growth, significant margin expansion and record free cash flow in 2025. As we enter 2026, we are focused on repeating this formula for success, disciplined execution, profitable growth, continued margin expansion and strong free cash flow generation, all in support of sustained long-term shareholder value. Instead of taking the traditional approach of diving straight into our results, I'd like to share my perspective on what we are seeing in the pet industry and Chewy's place in it in 2026 and beyond. So let's begin. Pet is a uniquely attractive industry, fueled by increasing pet humanization, premium product adoption and expanding lifetime value per household. Spending in this category is driven by an emotional attachment and recurring nondiscretionary needs which translates into resilient demand across economic cycles. We expect 2026 pet industry dynamics to largely mirror 2025, steady and resilient to macro trends, but without cyclical acceleration. Pet household formation appears stable with no evidence of deterioration. However, we are not underwriting a meaningful rebound in that variable. Current estimates suggest low single-digit industry growth with dog at the lower end of that range and cat at the higher end. Further, we expect industry growth to be predominantly volume driven, with little or no contribution from pricing. Importantly, we expect a secular shift towards e-commerce penetration to continue as consumers increasingly prioritize convenience, transparency and auto replenishment, structural advantages that persist across economic environments and benefit scaled digital platforms like Chewy. Against this backdrop, we once again expect to deliver share gaining growth. We believe that Chewy is unique with a differentiated flywheel-like operating model, powered by a leading sales engine with over 80% of net sales on Autoship, supported by a world-class fulfillment network, delivering best-in-class consumer satisfaction. The algorithm supporting our underlying growth remains balanced and durable, driven both by active customer growth and NSPAC expansion. We reached an inflection point in net adds in 2024 and built on that progress throughout 2025, adding approximately 150,000 to 250,000 net adds per quarter. In the current environment, we believe we can continue to deliver quarterly sequential net adds within that range. At the same time, we see a long runway to grow NSPAC through premium and health mix shift, private brand expansion and deeper engagement. Now shifting to margins. On margin expansion, including its trajectory and durability, we remain equally bullish. As I noted during our last earnings call, our long-term margin framework is unchanged. And the underlying drivers of margin expansion are strengthening. In 2026, we expect to further expand profitability with the rate of expansion expected to build relative to 2025. SG&A leverage will further strengthen as we move through the year supported by the continued ramp of our next-generation Houston Fulfillment Center and efficiencies from the use of AI that helps structurally lower our cost to serve. I will talk about these shortly. And finally, we believe Chewy remains well positioned to compound growth, expand share and drive sustained margin and free cash flow expansion in 2026 and beyond, independent of a macro reacceleration. Said simply, as we look to 2026, our model does not depend on a minimum net sales growth threshold to expand profitability. Now an update on some of our strategic priorities, and then Chris will take you through our financial results and 2026 guidance. Starting with Chewy Vet Care, we opened 10 new practices in 2025, reaching the high end of our target range, bringing our CVC footprint to 18 locations across 5 states. Performance continues to exceed expectations, supported by strong utilization and consistently high customer and veterinarian satisfaction scores. CVC is also driving compelling ecosystem-wide value, serving as both a customer acquisition engine and an engagement flywheel that deepens relationships with high-value health customers. And the results are compelling. CVC is the fastest NSPAC compounder in the business. We believe veterinary care is a powerful growth vector and a key pillar of value creation for Chewy. We are confident in the path ahead as we continue to execute and scale this platform. Turning to AI. For those of you familiar with Chewy, it will come as no surprise that our ability to adopt technology and drive rapid innovation is a core strength. We operate on a modern, nimble and scalable tech stack supported by a world-class team of designers, product managers, marketers and technologists who excel at building applications that enhance the customer experience while lowering costs. The arrival of AI only amplifies this advantage, enabling us to innovate faster, operate more efficiently and unlock entirely new capabilities, and that is exactly what we're focused on. Over the past several quarters, we have focused on building the foundation required to deploy AI at scale across Chewy. Today, with our unified enterprise data platform and central AI tooling in place, we are embedding AI across key layers of the business, specifically, the purchase experience our service and operations layer and our supply chain and fulfillment network. Let me elaborate. Within the purchase experience, we are progressing quickly to apply AI across our platforms to improve search relevance, product discoverability and personalization. Externally, we are closely following the emergence of Agentic Commerce models and view it as a future incremental demand and distribution channel for Chewy. Pet remains a deeply emotional category where trust, relationships and empathy matter. And these are enduring strengths of the Chewy brand. Combined with our leadership in price selection and recurring convenience, both purchase and delivery, we believe our competitive position remains strong. Across the broader organization, we are already deploying AI to drive greater structural efficiency. Functions such as customer service, fulfillment pharmacy and marketing operations are leveraging internally developed AI tools to streamline workflows and improve productivity. As we move through 2026, these efforts will translate into measurable financial impact. Based on our current road map, we expect AI-driven efficiencies to contribute a low tens of millions of dollars benefit in 2026 with a meaningful step-up in 2027, where we see a path to approximately $50 million or more in annualized savings as these capabilities scale. Moving on from AI, let me briefly talk about Chewy private brands. After the launch of our fresh brand, Get Real, in Q2 last year, we are entering an exciting new chapter for Chewy private brands with the launch of Chewy Made. Chewy Made is our unified owned brand platform designed to deliver trusted high-quality products while driving durable profitable growth for Chewy. Starting in April and throughout 2026, we will expand our presence across both dog and cat consumables. This includes a balanced offering of dog food positioned at more accessible price points to broaden our reach into everyday nutrition, a broader assortment in every day and gourmet cat nutrition as well as entry into high-demand formats where we currently have low penetration. In addition to the expanded assortment, we are consolidating some existing brands under this platform, creating a more cohesive and streamlined experience for customers. We look forward to keeping you updated on the progress of Chewy Made. In closing, we continue to execute from a position of strength. We are delivering share gains, expanding margins through structural efficiencies and generating growing free cash flow. Looking ahead to 2026, we are well positioned to further build on this momentum and drive sustained earnings growth. With that, I will turn it over to Chris. Chris Deppe: Thank you, Sumit, and thank you all for joining us today. Having been part of Chewy's journey for nearly 4 years, I'm excited to step into the CFO role and continue building on the strong foundation our team has established. I look forward to engaging with many of you in the quarters ahead. Let's start with a review of our financial results. As we get into the details, a reminder, fiscal year 2024 included a 53rd week and comparisons for Q4 and full year 2025 are discussed on a comparable 52-week basis where applicable. Fourth quarter net sales reached over $3.26 billion bringing our total fiscal year 2025 net sales to over $12.6 billion, delivering year-over-year net sales growth of 8.1% in Q4 and 8.3% for the full year 2025, reflecting strong execution, continued share gains in a stable category environment and consistent performance across both customer growth and spend per customer. We continue to grow active customers ending the year with 21.3 million, increasing by approximately 4% year-over-year and net additions up by more than 810,000 year-over-year in fiscal 2025. We once again saw year-over-year improvement across all elements of the active customer equation. We also continue to grow with a high-quality revenue base. Autoship customer sales reached over $2.7 billion in Q4 and $10.5 billion for the year, representing 84% of total net sales in Q4 and 83.3% for the full year 2025. Growth in Autoship customer sales outpaced overall top line growth, increasing by nearly 13% in the fourth quarter and 14% for the full year 2025 on a comparable basis, reinforcing the strength of our recurring revenue model. NSPAC reached $591 in Q4 2025, increasing by approximately 4% year-over-year on a comparable basis. Moving to profitability. We reported fourth quarter gross margin of 29.4% and full year 2025 gross margin of 29.8% representing approximately 90 basis points of year-on-year margin expansion in Q4 and 60 basis points of expansion for the full year. Strong gross margin performance was driven by sponsored ads growth, premium mix into high-margin categories, including health and wellness verticals and a rational promotional environment. Shifting to operating expenses, please note that my discussion of SG&A excludes share-based compensation expense and related taxes. Fourth quarter SG&A was $607 million or 18.6% of net sales and full year 2025 came in at $2.4 billion or 18.8% of net sales. Q4 and 2025 SG&A include approximately $10 million of onetime transaction costs primarily related to the SmartEquine acquisition. Excluding SBC and these onetime costs, we delivered SG&A leverage of approximately 20 basis points in Q4 and full year SG&A as a percentage of net sales came in flat year-over-year. Fourth quarter advertising and marketing expense was $233 million, bringing full year 2025 A&M expense to $825 million or 6.5% of 2025 net sales reflecting approximately 30 basis points of leverage year-over-year. Fourth quarter adjusted net income was $115 million and full year 2025 came in at $541 million, which translated into $0.27 adjusted earnings per share in Q4 and $1.27 in full year 2025. Fourth quarter adjusted EBITDA came in at $162 million representing a 5.0% adjusted EBITDA margin, up 120 basis points year-over-year and adjusted EBITDA flow-through of approximately 19%. The Full year 2025 adjusted EBITDA came in at $719 million or 5.7% adjusted EBITDA margin, growing approximately 26% year-over-year reflecting 90 basis points of year-over-year margin expansion and flow-through of over 16%. This level of profitability expansion at our scale reflects the structural strength of our model and continued operating discipline across the business. We are consistently expanding earnings at a rate meaningfully above net sales growth, demonstrating the operating leverage embedded in the model. The results we are delivering today are a clear reflection of the underlying strength of the business and where it is going. In the fourth quarter, we reported free cash flow of $232 million. And in fiscal year 2025, we generated $562.4 million of free cash flow, both record highs for the company, highlighting the continued improvement in earnings quality and capital efficiency. The consistency, scale and continued growth of our free cash flow underscore the quality and resilience of our model. Our full year 2025 free cash flow reflects $691.6 million of net cash provided by operating activities at $129.2 million of capital expenditures. We ended the year with approximately $879 million in cash, cash equivalents and marketable securities, and we remain debt-free with an overall liquidity position of approximately $1.7 billion. Over the course of the year, we repurchased and retired approximately 6.8 million shares, spending approximately $257 million on share repurchases in 2025. Overall, our capital allocation priorities are unchanged, advance the strategic priorities of the business where returns are attractive, maintain a strong balance sheet and return excess cash to shareholders. Share repurchases will remain a key part of our capital allocation strategy and we expect our level of activity to increase relative to 2025, reflecting both the strength of our cash generation and our view of the current valuation. Now turning to forward-looking guidance. As we enter fiscal 2026, I want to clearly frame how we expect the year to progress both from a full year standpoint and in terms of quarterly cadence. In addition to our guidance ranges, I will provide perspective on pacing so that our expectations for growth and profitability are well understood and appropriately reflected in how you model the year. Our 2026 outlook is built around three consistent priorities. First, continued share gains supported by stable demand and balanced growth across active customers in NSPAC. Second, ongoing margin expansion driven by a combination of mix improvement and increasing operating leverage. And third, improved incremental flow-through relative to 2025, reflecting strengthening cost discipline and the scaling benefits embedded in our model. Let me now walk through the specifics of our 2026 outlook. For the full year 2026, we expect net sales of between $13.6 billion and $13.75 billion or approximately 8% to 9% year-over-year growth with the recently closed SmartEquine acquisition expected to contribute approximately $80 million of net sales for the total company in 2026. Overall net sales growth will continue to be driven by a combination of active customer growth and NSPAC expansion. Our forecast assumes no price inflation in 2026 and we remain confident in delivering low single-digit active customer growth with net additions broadly consistent throughout the year. As you think about the quarterly progression of net sales, Q1 is expected to represent the low point of the year from a growth perspective, largely reflecting timing and lapping dynamics. We expect net sales growth to build in Q2 and continue to strengthen through Q3. From a profitability standpoint, we expect to deliver another year of meaningful expansion in 2026. We anticipate full year 2026 adjusted EBITDA margin in the range of 6.6% to 6.8% or approximately 100 basis points of year-over-year expansion at the midpoint. Based on our guidance ranges, we expect to deliver adjusted EBITDA of approximately $900 million to over $930 million with growth to once again outpace net sales growth by approximately 3x in 2026. Let me provide some perspective on how margins are expected to progress through the year. The composition of adjusted EBITDA margin expansion in fiscal year 2026 is expected to shift relative to 2025. We expect a larger share of our EBITDA margin expansion to come from operating leverage, reflecting structural improvements within SG&A and modest leverage in A&M with gross margin continuing to expand year-over-year, though at a more moderate pace than in 2025. Turning to gross margin. As a reminder, in 2025, gross margin peaked in the second quarter due to the timing of certain initiatives in the business. In 2026, we expect quarter-over-quarter gross margin pacing to be more in line with our historical performance as observed in prior years. Turning to SG&A and advertising and marketing, we expect to deliver SG&A leverage in 2026 with SG&A as a percentage of net sales broadly consistent throughout the year. We also expect advertising and marketing expense to follow a similar sequential quarterly progression as what you observed in 2025. And finally, we anticipate a sequential moderation in Q4 margins consistent with typical seasonality and the timing of promotional activity as observed in prior years. Now turning to the first quarter. We expect Q1 2026 net sales of between $3.33 billion and $3.36 billion or approximately 7% to 8% year-over-year growth, which as previously mentioned, we expect to represent the low point of the year. Additionally, quarterly net sales contribution from SmartEquine is expected to be broadly consistent throughout the year. We also expect first quarter adjusted diluted earnings per share in the range of $0.40 to $0.45. And finally, to provide additional color on other line items for the full year 2026, we expect share-based compensation expense, including related taxes, to be broadly flat compared to 2025. Weighted average diluted shares outstanding of approximately 425 million. We also expect 2026 net interest income of approximately $10 million to $15 million and our effective tax rate to be in the range of 20% to 22%. In closing, I'd like to thank all of our Chewy team members for their disciplined execution in 2025. As we look ahead, we remain confident in our strategy and in our ability to deliver continued share gaining growth, expanding margins and strong cash generation. We believe the momentum in the business positions us well to deliver another successful year of profitable growth in 2026. We look forward to updating you on our progress in the quarters ahead. With that, I will turn the call over to the operator for questions. Operator: [Operator Instructions] Your first question comes from the line of Mark Mahaney with Evercore ISI. Mark Stephen Mahaney: Two questions, please. One on this A&M leverage going forward. Just talk about where you think that can go. The biggest drivers of that going forward? Is your such a heavily subscription Autoship type model, you think that you're showing leverage, you should be able to continue to show leverage, I would imagine, for the next couple of years, any thoughts on when we could break below 6%? And then, Sumit, could you talk a little bit about the Chewy Made strategy a little bit more, the impetus behind that? And what do you think the financial so what of that will be? Do you think that -- is that more of a kind of a -- with lower -- you mentioned some lower price points. Is that kind of more of a TAM expander? Or is it something that could just expand NSPAC per customer? Sumit Singh: I'll take them one by one. So on the first one, yes, we expect to show A&M leverage going forward. I will refrain from commenting as to what the extent will be on an annual basis. I'll take you back to our long-range plan that we communicated or the targets that we communicated at December 2023. If you recall from that point, we're essentially running ahead of our profit targets at this point. So we've got roughly 350 basis points to go to hit the 10%, and then we start the journey of moving beyond the 10% EBITDA. If you look at the remaining left to go, we believe roughly half or a little bit less than half will come from gross margin and the rest will come from SG&A and marketing. And so we believe at our levels, spending somewhere in the 6%, 6.5% is reasonable in the near term. And then as our brand continues to build even further with the CVCs that we're putting in ground or the upper funnel connections that we're making that is giving us really good leverage, plus the way that the app, the mobile app strategy is essentially progressing. We do believe we're shifting the mix from third-party mixes to direct mixes quite effectively and that strategy should essentially continue to fuel the leverage that we're talking about. Now the second question, Chewy Made strategy. So if you -- again, I'll take you back to the high-level view of the forest first. So we believe private brands should be mid-teens level -- low to mid-teens level penetration of net sales for Chewy. At that scale, we expect private brands to be roughly 500 basis points higher gross margin than the base business. And so this essentially is a step in that direction because today, we're sitting at, I would say, low to mid-single digits of penetration of net sales. And especially when you look at our penetration, we are penetrated quite reasonably well on the hard goods side. So on supplies, we're mid-teens to high teens level penetration. And therefore, the opportunity staring us in the face is on the consumables side. Now it also happens that consumables is the largest TAM. Of the $90 billion food and supplies TAM, consumables is about $50 billion to $60 billion of that. So for us, the way that we are bringing forward assortment, it allows us to fill in gaps in assortment at the high end. So you saw that with the launch of Fresh Food that is a very high NSPAC compounder. We're also looking at value offerings across the surface and going, okay, where can we inject strategically utilize the power of a scaled e-com network to be able to lower our cost to serve and deliver those price points effectively without really sacrificing margins along the way. And so in that way, it becomes a margin boost for us. So for us, this will ebb and flow relative to the assortment that we bring to life, but we're filling in assortment, both in dog. In cat, we've been, I would say, anemic in the past. And so you've seen me talk about two new assortment categories in cat this time around. We'll continue to keep you updated, but we're excited about where we go from here. Operator: Your next question comes from the line of Eric Sheridan with Goldman Sachs. Eric Sheridan: Maybe building on Mark's question and, Sumit, some of your earlier comments on the call on AI. Can you identify some of the key areas in the cost structure of the business where you believe the application of AI can earn outsized returns in terms of efficiency gains? And then the second part of the question would be philosophically, how do you think about letting some of those efficiency gains continue to drop to the bottom line and accelerate your pathway to a higher margin framework or the philosophical balance would be reinvesting some of those back into the business to [ incent ] growth and producing a more sort of linear or managed margin progression for the business? Sumit Singh: Eric, there's a lot in that second question. Let's start from the first one, which is a really good one. So as mentioned in the prepared remarks, we're applying AI across a number of areas in the business, right? And so I'll stay away from the future applications that we're developing that will increase search relevance and discoverability. So we'll talk about that as 2026 moves forward. What we are already deploying in the business is applications and agents that we are starting to use across customer service, across fulfillment, across pharmacy, marketing operations and general marketing areas for campaign optimization, creative optimization, so forth and so on. So if you start from customer care, I'll stay away from specific road maps and specific projects for sake of kind of competitive outlays. But you should think about these applications that allows us to essentially reduce handle times, improve on the ability for us to self-serve customers that then drives reduced contact rates, which then directly leads to lowering of costs. So an example would be earlier, roughly 8 weeks ago, we've essentially launched refunds and returns in a self-service manner and the engagement and the success rate that we are viewing in that particular launch is quite impressive. And so that becomes very encouraging for us. We also recognize that there is a cohort of customers out there that will continue to grow that are much more propense towards self-service and digitize use of platforms in the way that they demand service from platforms. And so we will extend ourselves in the use cases that we go offer to them. Internally, we're developing applications for agents that allows them to extract information and deliver coherent consistent level of service with a reduced amount of effort but also then improves the agent experience. So it improves our retention and quality that the agents essentially provide to customers but it also concurrently reduces our cost structure given that input metrics like average handle times and contact rates essentially decrease as a combination of those two, right? On the health spectrum, we're using a lot of computer vision in our FCs. We're using AI to be able to be able to codify our -- the way the scripts are being read, the scripts are being processed, et cetera, et cetera. Happy to go into details when we do a one-on-one. But essentially, we're quite bullish in the way that we're going to use these applications in the near to medium term. Now over the long term, we believe we're a pretty good case for when humanoids essentially come to life, right? So today, we're not going to talk about that. But if you look at the fulfillment space in the world, 60% of your variable cost essentially is spent in picking and packing. And so if you can build relevant solutions in the future to bring to life in these fulfillment areas, you can drive dramatic productivity alongside kind of the human -- without losing the human element that we're so good at delivering to the market. So that's sort of our medium -- near, medium and long-term thinking. Now your second question is how do we manage this? I will take you back to our broad aspirations of how we manage growth, profitability and free cash flow. We want to grow revenue to be between high single-digit and low double-digit percentage points. The composition of that revenue will remain with net adds growing and NSPAC growing. We want to also deliver 100 basis points of margin expansion on an average and so you can see that this print sets us up for a high-quality durable performance, not just in '26, but also '27, right? At midpoint, we're delivering 100 and we're set up to perhaps exceed that relative to how the performance comes in for the rest of the year. Now we also want to convert at least 80% of that profitability into free cash flow. And so we're not just going for one or the other. I think we want to deliver a trifecta of growth, increased profitability that builds durably on top of previous year's performance and then accumulating or compounding free cash flow that we can deploy to reinvest in high ROI opportunities but also to return cash to shareholders. Operator: Your next question comes from the line of Doug Anmuth with JPMorgan. Douglas Anmuth: One for Sumit and one for Chris. Sumit, you talked about Agentic as incremental demand and distribution channel. I just want to get your latest views here and how you'll implement Agentic on your own platform for customers. And I think you're more insulated just given the 84% of the revenue coming from Autoship customers. And then, Chris, can you just talk about fuel costs, some of the impact that you may be seeing in real time and how we should think about that in context of the '26 outlook? Sumit Singh: So I agree with your thoughts. If you're selling a commodity, I think the disintermediation issue is likely one that needs paying attention. But from that point of view, we believe Chewy is quite well insulated, given our value proposition is not primarily search aggregation and because our customer relationship is not primarily built around onetime discovery. So we have continued to view ourselves and are more and more seen as a trusted recurring service-rich pet care platform. So in categories like food, pharmacy, broader health care, the customer is often not asking where to buy, they're asking for a seamless dependable experience that consistently meets their needs and that essentially plays to our strengths. So now in terms of how we think about Agentic developments, we essentially believe that these developments may over time, perhaps shape the interface of where the consumer is interacting, but it doesn't necessarily change who wins the order. And that's where our focus is, right, in making sure that Chewy remains the most trusted and convenient platform behind that transaction, whether it's through an owned experience or through future integrations, right, that we are also pursuing amongst others, and we are leading with many of these partners out there, right, that make our assortment, service and capabilities easy to access. So in that way, we see it as an opportunity. So broadly, we think the right strategy is to be present wherever pet parents choose to engage, including emerging Agentic Commerce interfaces because those platforms in our opinion can expand discovery and put Chewy in front of a much larger pool of high-intent users. And so for us, success is not just showing up. It's to make sure that behind the transaction, our assortment, service, health care capabilities and recurring relationships are durably integrated. And we have quite high confidence in being able to do that. Now another thing that I've heard is, will that impact sponsored ads business? Like that's another question that I've gotten, so I'll just kind of proactively hit that. And there, again, I believe that Chewy's retail media proposition is differentiated, because it is highly tied to an engaged pet audience, strong first-party data, recurring purchase behavior and closed-loop conversation. So said otherwise, right, our ad proposition is not just we have page views, it is that we have a very high intentful pet audience, strong first-party data, recurring behavior and the closed-loop attribution that I talked about right? So if you look at us, we convert a large portion of ad attributed purchases directly to Autoship orders because that's how our ad model is built. And so then we combine that with on-site and off-site formats increasingly tied together through Chewy data. So it continues to give suppliers a very strong reason to advertise with Chewy even if Agentic interfaces grow because we sit close to that conversion repeat behavior, right? So that's kind of my point of view externally. Internally, I've talked about sponsored ads and AI. I talked about creating applications that will allow consumers not only to self-serve, so post-purchase support but also in purchase discoverability and conversion, right, with the use of AI that drives personalization driven by memory we call injection of pet profile data, type to order data that then delivers, right, a highly curated and personalized in-app experience to you as the customer. That's the future that we're headed into. And in our opinion, we're not that far off. Chris Deppe: And Doug, on fuel. In the near term, we're relatively well insulated. Given the scale of our Autoship business and the strength of our relationships with key partners, and so our guidance for both Q1 and the full year stands and is what we expect. Operator: Your next question comes from the line of David Bellinger with Mizuho. David Bellinger: Congrats to Chris on the new seat. On the guidance, looking at revenue growth on an organic basis, it's implied about 8% growth at the midpoint and very consistent with 2025. You've got revenue guidance for Q1 a bit lighter than the full year. The organic range may be a full percentage point lower. Can you give us some additional detail on why revenue growth should pick up through the balance of the year? Is there anything unique that's hitting Q1 or something else planned throughout the year that gives you added conviction in this reacceleration? Chris Deppe: David, I appreciate that. In Q1, we're not seeing material change in our underlying demand trends. When we look across the business, across customer engagement, retention, overall spend behavior, the trends we see remain stable and consistent with what we've seen over the past several quarters. From a quarterly perspective, Q1 is simply the lowest point to the growth profile for the year. And we move through the year, we do expect growth to build supported by continued share gains and consistent execution across the business. We have a high level of confidence there because it's really all driven by the core components of our model, which are stable and consistent, right? We're seeing strong customer adds, steady customer adds, strong retention, customers continue to engage more deeply. And third, we continue to take share in the category, which is growing at a low single-digit rate. So when you put all those together, the stable customer growth, the consistent spend expansion and our ongoing share gains, you get a model that builds in a predictable way. And so we're not relying here on any one driver for the Q2 to Q3 growth. It's really broad-based execution across the business and so that's what gives us the confidence in that ramp and delivering on our full year outlook. David Bellinger: Got it. And then just one follow-up on the EBITDA margin guidance, about 100 basis points of expansion. Can you help us understand the lapping of any onetime like or non-repeatable items that hit the P&L in 2025? You had the Chewy+ investments in the back half, also the Get Real launch, some front-loaded SG&A costs ahead of the tariffs. So how much of a benefit on EBITDA or EBITDA margin is assumed in 2026 as you lap these? And are there any other offsets we should consider any flexibility around further reinvestment in the business? Chris Deppe: Yes. If you remember correctly, David, we talked about particularly in the back half of the year last year, it was a low single-digit million investment number. And so they're not material onetime impacts that we're lapping there that drive that 100 basis points. That 100 basis points really is driven by leverage in the model and improvements in the business. And so that's kind of where I would guide you there. Sumit Singh: David, just to elaborate on that, if you recall the number, we've given a guidance of somewhere around $18 million to $20 million as what we had expected to spend. And on the Q3 call, we said we're on track to spending roughly half of that. So that was about $10 million or so. And ultimately, as Chris said, we spent kind of mid -- low to mid-single digits in revenue because we were keeping some to see if we want to invest in pricing as Q4 played through. So that -- we gave that we were keeping some to see if we wanted to accelerate the fresh demand if the demand didn't come in as per our expectations. And then the third one was we were sort of navigating Chewy+. But we were pleased with the level of efficiency that we saw there. So it's low to mid-single-digit millions. And then on the SG&A, the [ Dallas ] and the inventory impact was also $2 million to $4 million. So that's how you should size it. Operator: Your next question comes from the line of Steve Forbes with Guggenheim. Steven Forbes: Sumit, given the growth in net adds the last couple of years and I think your initial comments in the prepared remarks about expanding lifetime value, I was wondering if you can maybe revisit and update us on spending trends by cohort, maybe some of those newer customer cohorts? And then what type of growth are you still seeing within your most mature cohorts as we think about building conviction around NSPAC? Sumit Singh: So both good questions. So overall, our newer cohorts, '24 and '25 are stronger than '22 and '23 cohorts. They are much more in line with our legacy cohorts. There was this kind of 3-year period where we were sort of staring at the pandemic cohorts sideways to go, really trying to interpret the quality of customers there. But we're cleanly past that. The quality of cohorts that we've been picking up is really good. Repeatable purchase rate remains high. The order rate remains high and NSPAC trending trends to the higher end of the $150 to $200 that we expect customers to spend in the first year. Now in terms of the oldest cohorts, it's less older cohorts, oldest cohorts. I think we're seeing this across a bunch of cohorts that are interfacing with our value-added services. So whether it's cohorts that are native to the app, cohorts that are native to health, particularly cohorts that are native to CVC, these cohorts are the fastest compounders of NSPAC in the company. That remains true for the fresh platform also when we get customers settled into our Get Real fresh platform, we see NSPAC compounding immediately. And so our goal is to essentially push customers more and more into these closed-loop ecosystems and accelerate their NSPAC, which we are seeing us do quite successfully. So the larger the number of customers we push into this, the faster NSPAC compounds. The oldest cohorts have continued to progress well and sound, but I felt I would give you a bit of a broader context as to why we should be excited about the durability of this in the future. Steven Forbes: That's helpful. And then maybe just a quick follow-up regarding Chewy+ penetration. I think you commented on low single-digit penetration by year-end 2025. Any sort of initial thoughts on what the guidance implies or the expectation around penetration to end 2026, again, once to build conviction. Sumit Singh: Yes, yes. So we like Chewy+. We are, I would say, still in a test-and-learn phase. We did achieve the low single-digit penetration that we talked about. Specifically Chewy+ exited at about 4% penetration for 2025. And the reason we're not giving you guidances for Chewy+ is because we want to retain the flexibility to ebb and flow the program to land the incrementality and the spend in the right order, right? So we like what we are seeing so far. It is compounding NSPAC in the order that we want to. The incrementality ranges that we're observing, we'd like them to be tighter, right? So we're seeing incrementality ranges in a really healthy range, but we would like to see kind of the variability around those incrementality tighten even more around the mean. And then three, there are a few metrics or KPIs that we need a little more time to accrue before we come share that with you. So one is the retentive nature of Chewy+ cohorts, right? Because Chewy+ cohorts have been developing over the last year or so, [ here in ] the quarter, each sample size is not yet wide enough or large enough for us to be able to study retentive capability independent. So what I want to be able to come say is that, hey, if we get 10% of Chewy customers into Chewy+, it should have a wide impact on our retention, which should then directly impact our NSPAC. And so that particular equation, the inputs and outputs is what we want to study a bit longer. Number two, we're also studying the impact of Chewy+ in terms of the efficiency it drives both in terms of promotion, promotional intensity as well as in terms of marketing spend or retargeting spend. And so there's enough out there for us to continue to learn. And then finally, the program value prop continues to evolve. I mean remember, today, the program has primarily product merchandise tied into it, right? And so we're sort of ebbing and flowing back and forth to go great. Like how are customers perceiving that value? Are we giving too much value? Are we extracting how much value, et cetera, et cetera. So it is natural for us particularly given how impactful this program can be to be optimistic yet prudent in our approach in the way that we progress. So we'll continue to be transparent. At the same time, we'll stay away from providing immediate targets right away. Operator: Your next question comes from the line of Shweta Khajuria with Wolfe Research. Andrew Northcutt: This is Andrew on for Shweta. I want to be click on that customer adds. So look... Sumit Singh: Can you speak up a bit? We're having a hard time hearing you. Andrew Northcutt: So I want to double-click on net customer adds. It looks like they came in above expectations in Q4. Basically, to what extent is this being driven by a broader refresh in the pet adoption cycle versus maybe your own efficiency in performance marketing? And then as we look into 2026 guidance and really the cadence, does that sort of embed a slight improvement in household formation over time? Or is it just largely based on getting wallet share through your key initiatives? Sumit Singh: So just interpreting your question, I think you had two parts there. It's a little bit hard to hear you, so I'm going to rephrase it back to you. So I think you're asking if there is any pet household formation improvement built into our forecast. The answer is no. We said in our prepared remarks today, we're interpreting the industry as quite stable, and we're not underwriting a rebound or an acceleration in pet household formation metrics. I think that was one part of the answer. And then the second question you asked was around customer adds came in above expectations in Q4. That was primarily seasonality and primarily the go-to-market that we deploy. It was well within our forecast. So Chris, anything else to comment there? Chris Deppe: No, I think that's right. If we missed some of the questions, you were just a bit hard to hear. Happy to follow up in the callbacks and double click. Operator: Your next question is from Anna Andreeva with Piper Sandler. Anna Andreeva: First, to Sumit on Equine and congrats on closing the acquisition. And recognizing it's still pretty early, but how are you thinking about the growth there for this year? And are you seeing more of an incremental consumer to Chewy? And how is that behavior on the Chewy platform? And then secondly, on gross margin to Chris, can you talk a little more about the puts and takes? Should we think sponsored ads still the biggest driver for the year followed by the mix shift? And should we think gross margin expansion more levered in the first half? 1Q, I believe, will be lapping, I think, 60 basis points of one-timers from last year. Sumit Singh: Anna, I will start with your first question, which was pertaining to the SmartEquine category, I believe, or the SmartEquine acquisition. So overall, this acquisition as we've sized it to about $80 million of top line in our forecast this year. And we like the business. It is a high-quality business of pet health nutraceuticals that essentially the category gross margins are really high. We expect to run this in the plus 35% gross margin ranges in the near future. But in 2026, what we're focused on is essentially stabilizing the business. So -- and so we don't expect a material contribution from this particular line into the P&L. In fact, we're going to ensure that we take the time to get the business to a high-quality -- I'll say this, we like the high-quality nature of the business in the category, but the business that we've picked up requires a little bit of fixing. And so 2026 is that year. We don't expect it to take any investments from us, right? But we don't expect it to be materially contributive to the P&L. So our guidance that we provided fully incorporates our excitement and the work that it will take to get this business to its future aspiration. Where do we see it in the future? We feel or we believe that we can add -- grow this to become a few hundred million dollar category at 35% to 45% gross margin. And so we're quite excited in the way that this plays in the larger health and supplement space, very much synchronous with our overall health strategy. We like the quality of the customers that are engaging with it. We really like the team that essentially has come over with it. They're passionate people, and they're happy at Chewy. Chris Deppe: On margin expansion, we remain bullish. As we noted in the call, our long-term margin framework is unchanged. And in 2026, we're going to further expand profitability with the rate of expansion higher than 2025. We also shared we do expect the composition of EBITDA margin to shift with a larger share from operating leverage. The gross margin will continue to expand year-over-year albeit at a more moderate pace than in 2025. We will continue to see improvement from premium mix and sponsored ads. We do expect sponsored ads impact to taper a bit in 2026. But SG&A leverage further strengthens to deliver the total 100 basis points of your expansion at the midpoint of our adjusted EBITDA guidance. Sumit Singh: And on sponsored ads, Anna, the rate of growth of sponsored ads will continue at a really healthy pace. So this is less to do with growth moderation. It is to do with the natural phenomenon that we've been talking about which is as more shifts or mixes into offsite advertisement, right, we would expect a different margin mix to essentially flow through. And so you'll see -- so that is baked into our 2026 guidance. Operator: We have time for one more question, and this question will be coming from the line of Michael McGovern with Bank of America. Michael McGovern: Could you just characterize kind of the industry growth backdrop in the low single-digit range relative to where you would kind of expect it on a normalized basis? And if you saw the industry backdrop improve, do you expect that your share gains would also improve and accelerate a bit? Sumit Singh: The second part of the question is very easy. The answer is yes. We are not baking in any benefit that we get from the industry. So we're baking in a stable environment, not an accelerating environment. When the industry -- we've continued to say when the industry normalizes, we expect to also improve every metric that we are currently talking about, top line profitability and free cash flow. On the first one, industry growth backdrop in the low single-digit range versus what is normalized. We would like to see that household formation return to the 1% to 2% level. We would like to see pricing return to roughly 1.5% to 2% normalized in an industry, and we'd like to see overall growth rates get into the mid-single-digit growth rates that essentially are in the forecast for long-term growth of the pet category. That's what we consider normalized. Michael McGovern: And can you also just double-click on your health category expectations for 2026. I think in the past, you've talked about your health category is kind of accretive to both growth and margins and close to about 30% of revenue. How is that tracking into 2026? Sumit Singh: We continue to be bullish about our place in health, Mike. And the question is sort of really broad, so trying to sort of interpret what might be helpful. But we remain highly bullish. We run at this point a really high-quality ecosystem of products, consumer services as well as B2B services. That has now been complemented with an expanding and high-quality clinic footprint that essentially is providing us layered ecosystem benefits, both to chewy.com and is the highest compounder of NSPAC. So broadly speaking, for health, it is a high-growth, high-margin category, and we expect it to continue to contribute to Chewy for long periods of time to come. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the York Space Systems Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] I will now hand the call over to Christopher Evenden, Vice President of Investor Relations. Please go ahead. Christopher Evenden: Hello, everyone, and welcome to York Space Systems Fourth Quarter and Full Year 2025 Earnings Call. With me on the line are Dirk Wallinger, our CEO; and Kevin Messerle, our CFO. Please note that our earnings press release is available at ir.yorkspacesystems.com. In addition, we have posted an earnings presentation to accompany our prepared remarks on the same website. Lastly, after the call we will post a transcript of our prepared remarks and an audio replay of this call. For those listening to rebroadcast of this call, we remind you that the remarks made herein are as of today, Thursday, March 19, 2026 and have not been updated subsequent to this call. During this call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release. We will also make statements that are considered forward looking, including those related to our 2026 outlook, future growth prospects, backlog, growth of market share, growth strategy and capabilities and future health of our spacecraft. Listeners are cautioned that our forward looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our prospectus filed with the SEC on January 30th, 2026 and in our subsequent reports filed with the SEC including our upcoming annual report on Form 10-K for the year 2025. After the completion of prepared remarks we will open the call for questions. Now I will turn the call over to Dirk. Dirk Wallinger: Thanks, Chris. Hello, and welcome to York's Fourth Quarter and Full Year 2025 Earnings Call. I appreciate you all taking the time, and I'm happy to be speaking with you. 2025 marked an inflection point in our business. We grew revenue by 52% year-over-year, and we exited the year with clear line of sight to profitability in 2026. Kevin will get to the details of that in a moment. Our financial results are a reflection of the business milestones we reached during the year. Given this is our first earnings call, I'll provide some context on how we got here. I founded York in 2012 with one purpose, to disrupt the traditional space industry. At that time, it was an era of multibillion-dollar satellites built over decade-long time lines. And it was clear to me that if the United States continued on this path, we'd lose the second space race to our adversaries. We needed the ability to design, build and deploy large constellations of satellites on significantly accelerated time lines. That meant transforming how we manufacture, launch and operate satellites, shifting from bespoke programs to a fully industrialized model. That's exactly what York was built to do and what we've been executing on since 2012. As the mission prime, we own the full satellite life cycle from design and manufacturing through launch, operations and sustainment. Our multi-platform approach is built around a standardized modular family of spacecraft that range from 200 to more than 2,000 kilograms. We architect our platforms as integrated systems, combining flight-proven hardware with proprietary flight and mission operations software. That integrated software-hardware approach is designed to allow us to seamlessly coordinate across 3 different operation centers, task across our global network of close to 50 antennas and procure and integrate launch services. Executing as the mission prime enables us to monetize the full mission life cycle and maintain control over most of the aspects required to execute our vision. That integrated approach is what has set York apart and what has enabled us to deliver reliably at speed and scale. 2025 saw us deliver on that founding vision. We launched 23 satellites into orbit in 2025 alone. We emerged as a leading provider of the Department of Defense's Proliferated Warfighter Space Architecture, measured by spacecraft on orbit, number of contracts and mission types. We acquired a global ground station network and software-defined operations platform, effectively eliminating ground communication bottlenecks to support our end-to-end mission architecture. And we fine-tuned our industrialized production process with every satellite we build. We've achieved multiple technical feats, including in-plane, cross-vendor and space-to-ground optical laser communications. York demonstrated K-band connectivity, orbit maneuvering and remains the only provider ever to demonstrate Link 16 from space to ground. Together, these demonstrations validate our ability to integrate advanced capabilities into cohesive, secure architectures designed to meet the evolving needs of the warfighter. These milestones reflect years of deliberate execution and sustained intentional investment. From the outset, we've aligned every major decision around enabling the rapid cost-effective production and operation of satellite constellations critical to U.S. mission success. With U.S. government demand accelerating rapidly, we are positioned to deliver at scale. Our IPO strengthened our capital base and operational flexibility, enabling us to accelerate execution and further extend our lead over competitors. Now I'd like to highlight the 2025 achievements that we expect to have the biggest impact on our future. Most significantly, on September 10, we launched 21 satellites for the Department of Defense. This low earth orbit constellation is designed to provide secure, resilient communications and data transport for U.S. and allied warfighters. We delivered our satellites to orbit 1 month ahead of our nearest competitor, and we confirm the health of all spacecraft within hours of launch separation through our own classified mission operations center here in Denver. We are excited about the launch of our second plane of satellites for Tranche 1. These spacecraft were the first operational communication satellites in orbit for the PWSA, and we understand they will play a key role in communications infrastructure, underpinning America's next generation of space-based defense systems. Our multi-platform approach enables us to execute across nearly every Golden Dome mission set, including communications, signals intelligence, remote proximity operations, earth observation, synthetic aperture radar and visible imaging. Our S-CLASS platform launched in 2018 and has flown across multiple missions and constellations, establishing a repeatable flight-proven foundation. We expanded that architecture with our LX-CLASS platform, which shares approximately 80% of its hardware and nearly all of its software with the S-CLASS. That design commonality validated our manufacturing model and reinforces the strength of our integrated hardware and software ecosystem. Building on that foundation, we introduced our largest M-CLASS platform in 2025, extending the same core architecture to support payloads in excess of 8 kilowatts of power. By leveraging the same flight-proven hardware and software stack, M-CLASS enables us to scale into higher power mission sets without redesigning the underlying system. This significantly broadens our addressable market across national security, civil and commercial markets. As part of our plan to continue expanding our share of the market, I am happy to share that we recently finalized $187 million commercial contract for a 20-plus satellite constellation built on the M-CLASS platform. This is our fifth commercial contract and the first constellation of a series of constellations for this customer. Our platform and turnkey ecosystem approach is designed to lower cost, streamline and derisk procurement, accelerate build times and significantly reduce capital intensity. Recognizing that ground infrastructure is foundational to proliferated architectures, we acquired ATLAS Space Operations in the third quarter of 2025. As proliferated constellations scale, ground infrastructure becomes a critical constraint. The pressure is particularly acute when dozens of satellites are deployed simultaneously at launch and require rapid checkout and orbital phasing, as was the case with our numerous constellation launches. By bringing ATLAS into our ecosystem, we expanded our global ground network, reduced dependency on constrained third-party capacity and reinforced our integrated end-to-end mission model, enhancing space-to-ground resilience. ATLAS was essential in enabling us to confirm the health of 21 satellites launched in September quickly. As a wholly owned subsidiary, ATLAS will continue to operate independently under its existing brand, serving its diverse portfolio of customers across the industry. Another key mission in 2025 was Dragoon. Launched in June, Dragoon is notable because we went from contract execution to orbit in just 7 months, a 75% reduction in delivery time line versus a typical 30-month program. York was approached with an identified agency need, and we then reallocated a satellite in production to this mission. We integrated a completely new capability and delivered the spacecraft in orbit successfully. York is probably 1 of maybe 2 providers, which have demonstrated this ability. Another milestone in 2025 was our commercially procured communications mission for NASA, the BARD mission, developed in collaboration with NASA's Space Communications and Navigations Program and the Johns Hopkins Applied Physics Laboratory executed more than 100 on-orbit communication activities. BARD successfully demonstrated forward and return link connectivity to NASA's tracking and data relay satellite system, validating interoperability across multiple commercial K-band relay networks. These demonstrations confirmed the feasibility of seamless roaming between government and commercial communication services. BARD is an important opportunity as a potential pathfinder for modernizing NASA's legacy TDRS architecture into a proliferated LEO network. Such a transition would expand connectivity, reduce latency and enable faster commercial pace technology refresh cycles while preserving compatibility for existing users and unlocking new mission capabilities. We anticipate the BARD mission to be extended to address an expanded series of demonstrations, further showcasing our large customer base and wide mission capabilities. In addition to our mission execution, we also strengthened our strategic position in January by going public. Our decision to go public was grounded in long-term strategy and informed by a clear assessment of market timing and growth trajectory. The capital we've raised provides us flexibility to seek opportunities to grow our TAM through M&A and adjacent market products, grow inventory to provide unmatched scheduled deliveries, expand the manufacturing advantage we currently have over our competitors and scale our network ecosystem. Our recent acquisition of Orbion Space Technologies is a good example of the first point. Orbion is a Michigan-based manufacturer of flight-proven electrical propulsion systems that has already delivered at scale for York missions. Acquiring the company helps us reduce supply chain risk, which improves schedule certainty and enables us to align our technology road maps with the growing constellation scale demands across the sector. Similar to ATLAS, Orbion will continue to operate as a wholly owned U.S. subsidiary of York, serving customers across the broad space industry. Both acquisitions reinforce our deliberate strategy to integrate critical mission capabilities across York Space ecosystem, propulsion, ground operations and end-to-end mission execution. Future M&A may address strategic elements of the supply chain. Some may help us grow our TAM, some may do both. The second use of proceeds will be to build inventory of our satellite platforms. We demonstrated the velocity of our manufacturing process in September by being first to orbit for the PWSA Tranche 1 contract. We demonstrated we can reduce in-orbit delivery by up to 75% with inventoried spacecraft. And we are one of the very few in the industry with proven platforms mature enough in their life cycle to provide this capability. This presents a significant strategic competitive advantage and can also enable us to recognize revenue on accelerated schedules. Our time to orbit was already a differentiator, one we've built through over a decade of manufacturing satellites, but we believe the ability to leverage existing platform inventory provides a step function improvement, further widening the gap between us and our competitors. Demand signals are very encouraging. The government is currently reengaging and the Pentagon is moving quickly to execute their missions. We believe there is a clear understanding across the government that the global threat environment is deteriorating and that investment in space domain awareness, missile defense, connectivity and counter space capabilities are essential to America's security. Proliferated architectures have become the preferred approach for resiliency and fight through capability. We are also seeing a pronounced push to diversify supplier bases in other areas of the market as cost and speed take on greater importance, especially as proliferation is only feasible if satellites can be made affordably enough to deploy in large quantities. York's 2025 performance metrics validate the mission I set when I founded the company. From day 1, our goal has been to serve as a mission prime for proliferated systems. Today, we've built the foundation, scalable satellite manufacturing, a unified software stack across platforms and an integrated space terrestrial ecosystem. Today, York is executing at scale across national security and commercial missions, with 33 satellites currently on orbit, mission operations centers supporting 5 active missions and 2 operational constellations. We are preparing for our eighth launch overall, which will see another 21 York satellites reach orbit on a fully dedicated launch vehicle for the second time. We are executing on our 12th contract and advancing work on our sixth constellation contract, underscoring York's ability to deliver repeated, reliable performance across multiple programs while continuing to scale production and mission execution capacity. York's proven mass production cadence demonstrates its strong competitive advantages, enabling the company to field multiple flight proven platforms with decades of flight heritage, demonstrated on our performance and the ability to deliver fully populated launches at scale. Our latest commercial constellation contract win further demonstrates York's ability to win across numerous markets and customers. For all these reasons, we believe York is well positioned to meet the evolving needs of the United States Government and commercial customers. And with that, I'll hand the call over to Kevin. Kevin Messerle: Thanks, Dirk. As Dirk said, 2025 was a transformative year for York. By successfully delivering on a broad set of contracts, we were able to significantly grow revenue and take significant strides towards profitability. Revenue for the year was $386.2 million, up $132.7 million or 52% on the prior year. Substantially, all of our revenue derives from long-term fixed firm price contracts and is recognized using a percentage of completion method. We believe this approach most accurately tracks the business and it provides generally a steady progression of revenue throughout a program. Year-on-year growth in revenue was primarily driven by increased completion against 2 of our Transport Layer Tranche 2 contracts. Gross margin percentage, which includes allocated labor, overheads and D&A, was 20%, up 7 percentage points year-on-year, driven by improved mix as newer programs became a larger part of the whole and a reduction in negative EAC adjustments. EAC is estimate at completion and is our estimate of final program costs and margins. We have built cross-functional teams at York that reevaluate these on a program-by-program basis every quarter. Turning to operating expenses. While our revenues increased 52% year-on-year, our SG&A plus R&D expenses only increased 8% for the same period. We also incurred approximately $12.1 million of onetime transaction costs associated with our M&A program as well as IPO-related professional fees. The ability to scale our revenue while tightly controlling expenses is the primary driver of our improvement in adjusted EBITDA from 2024 to 2025, and we expect that trend to continue through 2026. On the operations front, we had 710 employees at the end of the quarter, of whom almost 75% are directly involved in the design and manufacture of satellites or delivery of mission services. Just to touch on our liquidity. As of December 31, 2025, our cash and cash equivalents were $162.6 million and availability under our revolving facility was $150 million for total liquidity of $312.6 million. On January 30, 2026, we completed our IPO of 18.5 million shares of our common stock at a public offering price of $34 per share. We received net proceeds of $582.6 million, net of underwriting discounts and commissions and offering costs, bringing our total liquidity at January 31 to $895.2 million. We make use of a number of non-GAAP metrics to inform our management of the business and to give investors insight into our core business drivers. These include contribution margin and adjusted EBITDA. We define contribution margin as revenue less material costs. Historically, 85% to 90% of our direct cost for our program, excluding overhead allocations and D&A, have been material costs. So it is incredibly important for us to price our contracts at a healthy margin above our single largest cost, material cost. We target a 35% contribution margin on all new business. Contribution margin in 2025 was 32%, an increase of 2 percentage points from 2024's 30%. We don't disclose program level margins, but I will broadly say that margins on our newer programs have been quite a bit higher than our older programs. We attribute this improvement to our increased ability to project material costs based on years of experience with actual production runs, together with a more rigorous pricing process that includes the use of appropriate management reserves. To further reduce margin risk, just as we operate under firm fixed price contracts, we largely hold our suppliers to the same. We grew contribution margin dollars by $47 million in 2025 to $122 million, an increase of 63%. Loss per share was $0.89 for the year. Capital expenditures for 2025 were $8.9 million as compared to $18 million in 2024. As Dirk touched on in his remarks, our manufacturing process is highly flexible and very efficient, and this has enabled us to keep CapEx very low by the standards of the industry. Turning briefly to the quarter. Revenue for Q4 was $105 million, up 38% on Q4 2024. Gross profit margin was 20%, operating expenses were $38.2 million. Contribution margin was 33% and adjusted EBITDA was negative $1.4 million, up from the negative $4 million last year. Looking ahead, we expect revenue for the year to be in the range of $545 million to $595 million, up 48% year-over-year at the midpoint. Over 70% of this is expected to come from our existing backlog, with the remainder anticipated to come from new business in the back half of the year. With regards to new business, our current expectation is for government contracts to start to be awarded towards the middle of the year, and York intends to compete strongly for them. And now I'll hand it back over to the operator for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of John Godyn of Citi. John Godyn: Appreciate it. I wanted to -- there are a few things to follow up on, but I guess the one that I'll focus on is this acquisition, Orbion. Maybe you could just talk a little bit more about that, how it came about, what the terms were. And I was curious if this was the deal that was contemplated in the S-1. There was a note in the S-1 about a letter of intent for an acquisition. Was this that? Or was it a different one? Dirk Wallinger: Yes, sure. Happy to dive into that one a little bit. Thanks, John. I appreciate the question. Yes, it is the acquisition that we are contemplating from the S-1. We're really excited about Orbion for a few different reasons. We've launched a good amount of satellites at this point. We've worked with a wide range of propulsion providers. Orbion was really a clear winner as far as their ability to execute, their ability to perform. Their hardware has performed really well in orbit. It's a really great team to work with. So we're excited about bringing that on. And it kind of goes to the vision of when we were doing the IPO, right? We spoke about the 4 different things that we were going to do and how we're going to go on offense. And one of those was some inorganic associated with bringing great technologies kind of in-house so we could align our technology road map, kind of give them a better vision of where the market was headed, where we were headed. So that they could be more successful in developing those products kind of right out the gate. And that kind of communication is going to be critical because we're already a leader as far as costs and schedule go. But with Orbion with us now, we'll be able to align that technology road map, give them assurance of the kind of size of production cadence they're going to need in the coming years. So that they'll be really prepared to deliver for us. And so they've been a phenomenal performer for us for years now. And so we think this will make them an even better performer for us and the rest of the market as well. So they will continue to execute as a wholly-owned subsidiary. John Godyn: That's fantastic. And do you guys -- are you willing to give us a sense of how much revenue that's contributing to this year? And then just on M&A in general, are there any other acquisitions contemplated that we should be aware of? Dirk Wallinger: Yes. Kevin, correct me if I'm wrong. I mean I don't think that we're breaking out them individually, right? I think it's -- we're going to still report at the top level, right? Kevin Messerle: We're not issuing specific guidance, John, on Orbion, but we can confirm that it's included in our consolidated guidance figure. Dirk Wallinger: And to the latter question about additional M&A, I mean, I do think there's some opportunity for some additional M&A. I think people in the industry and in this segment kind of see what we're doing. They're very excited about it. They want to be a part of it. And so there'll be some other things where like Orbion, they make sense, right? They're the best technologies. It will help us continue to drive down cost even further and make that advantage that we have larger, but then also kind of align that so that our schedules continue to be the best in the sector. So I think there could be some more opportunity for that. And then there's also opportunities where we might start to look at kind of adjacent markets and things like that. Operator: Your next question comes from the line of Seth Seifman of JPMorgan. Seth Seifman: I wanted to start off talking about some of the opportunities for new business that you mentioned coming later in the year. Is it some of the Golden Dome opportunities moving maybe to the left of initial expectations for 2027? Is it in the intelligence community? Is it the next tracking layer? And what are the prospects to exit this year with a backlog that's bigger than where it is now? Dirk Wallinger: Well, yes, I mean, I think that we feel pretty great about that, Seth. So I appreciate the question. I thought the pretty exciting part of the call was where we mentioned that we just won a new constellation for M-CLASS for a commercial customer. A 20-plus constellation. It's the first constellation of many planned for this customer. So I thought that was an exciting part. I thought that, that would add to the backlog. But -- so obviously, that's pretty exciting for us as well. As General Guetlein has kind of attested to and been more public in general with regard to Golden Dome and National Defense just in general. I mean, it's got -- everyone focuses on the name Golden Dome, but the reality is it's National Defense, right? So independent of what it's called. He's spoken a lot more about the absolute need to lower the cost, to move faster and then to leverage existing acquisition vehicles. We checked the box on all 3 of those. And so I think that's why we're starting to see a little bit more come out about National Defense and Golden Dome, what that's going to be. I can't go into any more details right now other than to say that it's a late-breaking news that we have not won 1, but we've won 2 IDIQ contracts now for different classified customers. So on this call alone, we have not only our healthy backlog and our ability to convert that backlog into revenue, which Kevin reported on, we've won a new commercial contract for the first of many constellations for our M-CLASS. And then we have now won 2 IDIQs for different classified customers. So we feel very bullish about the position that we're in. I think generally, though, I mean, just as a commentary, you're not going to hear a ton about Golden Done. General Guetlein has been pretty clear that most of the work is going to be classified, and that's kind of what we're seeing, right? We're seeing contracts being awarded on the classified side of things. So I'd be happy to talk more about those contracts that we've won for the different classified customers, but that will be kind of coming in the next few weeks as we kind of sketch those out in a little bit more detail on what we're allowed to discuss and what we're not. So we're still working on that. But hopefully, that gives you more insight. I mean I think that we're in a pretty bullish position with our performance and our ability to just between IPO and now, we've already added quite a bit more to the backlog. So I think we feel like we're in a good position, and we're going to execute like we always do. Seth Seifman: Excellent. Excellent. Maybe to follow up then on the commercial win there. I guess the pieces of the TAM that you guys have laid out in the past were pretty national security oriented. So how do we think about that commercial piece coming into it and how -- maybe the size of that relative to the other pieces of the TAM and how significant that could get within your mix? Dirk Wallinger: Yes. I mean I feel focus historically has been on National Defense, but that's mostly because the reality is that's where the dollars were. That's where the contracts were. So we won the contracts that were available to us and we did a very good job on them and executing on them as well. And so that success led to more contracts. So we're happy with that. But I'm very -- I'm more and more bullish every day on what commercial can do. Unfortunately, we can't disclose who that customer is right now, but I'm very excited about the mission and what they're doing. It's very much aligned with the trends that we're seeing today. And also what I think we're going to see is a lot more growth in this area. Really, traditionally, commercial has kind of struggled with kind of getting that kind of total gravity, I guess, for lack of a better term, on really garnering the attention it needs and the dollars it needs to really be at scale. But we're really seeing that shift. We're also seeing this administration say that they want to leverage more commercial, which obviously encourages investment in it as well. So I'm in hopes this is the first of many. I mean, I know for this customer alone, this is the first of many in the constellations that they're going to deliver to orbit. So we're obviously very happy to be in the position with that. But I think in general, commercial, we're just going to see more and more. The nice part is you kind of have a giant surge in national defense, right, which is a great market for us. And we're now showing some pretty significant diversity in customer base on that front. And then to have some big commercial wins is really great, too. So I think both markets are going to surge. Obviously, I think that we're in a good position to win that work. We just got to continue to execute as we have been, deliver at scale. And I think both of those markets are going to see healthy growth for many years to come. No one is saying we need less satellites in the future. Operator: Your next question comes from the line of Peter Arment of Baird. Peter Arment: Dirk, just maybe just to circle back a little bit on your comments about kind of Golden Dome/the National Defense contracts. Has there -- we're dealing with a lot of investors are kind of very focused on if there's been a material change in what you view the PWSA kind of architecture is. I was wondering if you could just maybe shed light. Do you view it to be materially changing? Or is it just morphing into the various classified versions of Golden Dome? Just any insight would be helpful. Dirk Wallinger: I think it's along the lines of what you said in the latter part there. So look, if it's called PWSA, if it's called Space Data Network, if it's called pLEO, whatever the name is, the government is definitively moving towards it. And they're delivering contracts pretty quickly now out to performers who are going to execute on this. They need this executed really quickly. So I don't think it's about, hey, does PWSA, is that going away? Is MILNET going away? There's nothing going away. Communications is not only absolutely critical for Golden Dome and missile and National Defense in general, it's the most important thing. Nothing else happens without communication. So I think it's more of there's definitely a realization that this is going to be the architecture of the future for the United States. And if it is going to be the architecture for the United States that it needs to be more coordinated, right? That's a general theme that we're hearing across anything, whether that's space, whether that's sea, land, air, it has to be more coordinated. So I think a lot of the "shifts" I guess, that you're seeing in PWSA Transport or MILNET or what have you, isn't really about do we need this? It is about we do need this, how are we going to get them to talk to one another. And maybe we should look at that in more detail and definitize that more before we continue on kind of separate disparate paths, which is kind of what got us into the challenges in the United States faces today is we have lots of amazing capabilities, but they're disparate and they don't talk to one another. So I think it's really more about that is whatever the name is, it doesn't matter, it's needed. I think it's just more about let's make sure that they're going to talk to one another because we shot ourselves in the foot like a couple of times over this. So let's not do that anymore. I think it's really more about that, like that's the mentality. Peter Arment: Got it. That's helpful color. And just it is exciting, obviously, with the new commercial win that you announced in February. Could you maybe talk a little bit about expectations of delivery of those 20-plus satellites just over what time line? Dirk Wallinger: Yes. So T1 is an operational system. And as such, the readiness of the system is controlled information. So I can't discuss actual launch date, but we are very far along on production, and I think shipping is imminent. I probably can't get any more specific than that. Operator: Your next question comes from the line of David Strauss of Wells Fargo. David Strauss: Dirk, I wanted to ask about in the fiscal '26 DoD budget that was passed, I think, end of January or early February, there was still a whole bunch of Tranche 1 and Tranche 2 funding in there. So have you actually received all of the Tranche 1 and Tranche 2 funding? Is that reflected in backlog today for you? Or is there still a fair amount of funding that has to come through and be put into your backlog related to Tranche 1 and Tranche 2? Dirk Wallinger: I believe it's all included in the backlog. But Kevin, maybe if you think I'm mistaken, you can speak up. Kevin Messerle: No, that's right, Dirk. What we report as backlog are only exercised options and only funded exercised options. So it's all -- our backlog is entirely funded. David Strauss: Okay. So even though that wasn't -- the funding wasn't passed until January after the end of your 2025 year, that's in the backlog or it isn't in the backlog? Kevin Messerle: So let me try it this way. So all of the programs that we're on, right, have funds appropriated for them. And then just the way just to get into some of the nuances of how the government funding works is, yes, as we move into different fiscal years, they will then technically fund it, right? So the funding does come over time. I think the bigger point is that all these programs, the money is budgeted and set aside for it. But yes, there is a technical sort of nuance of how the -- over time, the actual money moves technically to that program. So within our backlog, again, it's all exercised contracts or exercised options within those contracts. We don't include unexercised options. A lot of those are the right of launch O&S portion. So that's not included in the backlog. And then to your point, things over time when the funding actually moves it, we don't move our backlog up and down by the funding amount just because it's a very small portion that's not funded, and we know that the funds are there. It's just more of a technicality of when they occur. David Strauss: Okay. And then can you talk about kind of your current build rate? What are you producing at today? And what kind of build rate underlies the 2026 revenue guide as compared to 2025? Dirk Wallinger: Yes. I mean -- so I would say that build rate is definitely not going to be -- is not the challenge for us. We're not building up our production in hopes of meeting the demand that we have or meeting future demand. Quite the opposite. So York has invested pretty heavily in our production capacity. In our Willow facility alone, we have all the capacity to meet all the production needs through 2028, right? So that's Willow alone. It does not include production capacity at our Wazee facility, which is a little bit smaller, but nonetheless, a completely different production facility. And most importantly, our Potomac facility, which is actually 4x larger than our Willow facility. So we've actually built out, invested in and are prepared for massive production numbers on the order of up to 1,000 satellites a year. So that's what we've invested in, and that's what our capacity is today. And that's a little bit of a differentiator between a lot of other companies who are still trying to prove their first product. And even after they prove their first product, try to get to scale. And so that's a little bit different for us. So everything at just our Willow facility alone meets all our projections through '28, and we have 4x more capacity in our Potomac facility. So we're very well positioned for the growth that we expect going on through '26, '28, '29. Kevin Messerle: Yes. I'll just maybe add a few things here, Dirk. There's a pretty helpful slide we have in our earnings deck. I think you should all have access to that either now or after the call. But it's Slide 8, and it shows that right now, we have 33 satellites on orbit. But then we provide some general guidance to the satellites that we have currently in our backlog being produced. It's 107, and we expect all 107 of those to be launching over the course of '26 and '27. As Dirk mentioned earlier, we can't provide specific launch timing for specific programs. That's controlled information. But what we can say is, broadly speaking, we'll have a total of 140 satellites on orbit by the end of 2027, if not sooner. And so the way to think about how that ties to our -- you touched on our revenue. Again, over 70% at the midpoint of our guidance is backlog. And that's really just pretty highly predictable revenue stream. It's driven off our cost incurrence. And we have a pretty mature at this point, supply chain. And we have daily and weekly discussions depending on the vendor and the program. But it's all to say we have a pretty good line of sight into the tempo of that revenue. And it's all generally tied to the higher theme that over the course of the next 2 years, we're going to be putting 107 satellites into orbit. And that actually does not include -- that 107 number I'm citing does not include to be clear, that new commercial constellation. We're still working with that customer to fine-tune some of the expectations for launch dates there. Operator: [Operator Instructions] Your next question comes from the line of Austin Moeller of Canaccord Genuity. Austin Moeller: Just my first question here. Given the funding already included in Big Beautiful Bill and the fiscal year '26 budget for Golden Dome, what funding do you think might be allocated in this $450 billion reconciliation bill for space that they're talking about? Do you think it might include more satellites or more ground infrastructure for Space Force and DoW? Dirk Wallinger: I mean at the 10,000-foot level, it's going to include more for both, for sure. Space is absolutely going to be critical to the National Defense and what we're doing in the future. But that does include a significant amount of ground effort as well. Ground will need to tie, like I said, all the disparate systems together. That's kind of the main challenge that we have is we have all the capabilities we need. We need to be more efficient in how they talk to one another. So ground will be a huge part of that. building out ground is important. And that's one of the IDIQs that I mentioned was a contract win for us is about York helping to contribute to that, us helping to contribute on how you operate hundreds and thousands of satellites in orbit, how you feed that information and how you distribute that information and disseminate it. And satellites are really the best way of disseminating information. It's kind of above the entire battlefront. So there's going to be a significant amount for both ground and satellites, for both. Now all that said, our pipeline that we've identified and we have to update it, I'm sure, but we have $11 billion in identified pipeline right now. So that's seemingly only going to grow. I've seen more requests for more funding for some of our more recent engagements as well. So our identified pipeline is $11 billion, and that was before a lot of the growth that you're talking about here. Austin Moeller: Okay. And as the production lots for Golden Dome or PWSA grows with additional contracts for that constellation or those constellations, what gives you confidence in maintaining the target gross and contribution margins going forward? Is it just the strong execution record and timely delivery and best-in-class product? Dirk Wallinger: Yes. I mean it's -- for us, it's always the 3 main metrics is that best capability, best performance, best schedule, which we meet on all those fronts. But historically, we have executed at a price point that is half the price of our competitors. And we've done it with the margins that we are very close to now. And we think that we have opportunity to increase that because we're only becoming more and more efficient. So just as a kind of a side story, I guess, or an example is critical design review is one of the most critical reviews for any of our programs. I can say that for the T1 program at CDR, we had 65 engineering heads working that program. And at the same critical design review for T2, we had 15, right? So we are seeing significant improvements in our efficiency and our ability to execute. So Kevin, I mean, you might have some more comments on those margins there, but those are the margins that we plan to. Those are the margins that we price to. Those are the margins that we execute on. And we've been doing it at those margins at half the price. But Kevin, I don't know if there's more to add. Kevin Messerle: No, I think you covered it really well, Dirk. What I would say is that, yes, given that we are already half the price of our competition, we're starting from a pretty enviable pricing position, right? So I don't feel like we need to certainly lower price at all. I think our strategy, as Dirk has outlined in the past is probably maintain this pricing. We make nice margins at it. But what we can do and what we are doing, right, is as our supply chain matures and we're ordering more volumes, we're going to see just our supply base or our cost base start to come down, right? So definitely, I think, there's more upside to contribution margin. Just from a sort of an accounting perspective, some of these vertical integration plays that we've done, those are highly accretive to contribution margin. Just the way that the intercompany math works with their profit margin basically getting kind of canceled out. So it's all to say, I feel very good about contribution margin growing from here. And another aspect of that, frankly, is we've been producing at large scale for a couple of years now, which is something a lot of our competition probably still has ahead of them. And so we've learned just a lot by being in the trenches and fielding these large constellations. So we -- there's no more surprises of things that we perhaps forgot to price in when we bid a contract a couple of years ago. Just that's what you get from the level of experience and repetition that we've had. So we don't expect any surprises on the material cost side. And again, the trend will be to continue to drive down our supply chain costs. Operator: Your next question comes from the line of Ryan Koontz of Needham & Co. Ryan Koontz: And I want to ask kind of big picture here with regards to the '26 guide and I see over 70% of that's already in backlog. But if you can expand on the kind of -- the types of revenue or the mix of revenue that's not currently in backlog that you'd expect to see in '26 for us. Kevin Messerle: You want me to start -- Ryan, what I'd say is that we are expecting new business award activity to start to pick up as some of these dollars get allocated in the eventual sort of spending agencies that will ultimately be awarding the contracts. We think that's going to take a little bit of time. We think once we kind of get to that midyear and into the second half, we're going to start to see some pretty robust award activity, and that's the basis of our range of $545 million to $595 million of rev. So we do think most of that will be from our traditional Department of Defense government sector, whether that's PWSA or Golden Dome or IC. One of the themes Dirk has touched on today is that wherever it comes out of, we're a bit agnostic to that because we just believe the capabilities we have are -- position us well across the board. There'll be a little bit of commercial, that new commercial contract. We're not anticipating substantial revenue recognition from that one this year. So I would say it's going to be largely second half government defense awards and a little bit of commercial. Ryan Koontz: Helpful. That's really great. And anything on the supply chain you'd call out as challenging these days. We hear about it in other areas of tech getting tough. But any particular areas you're concerned about having to invest maybe extra working capital to be prepared? Dirk Wallinger: Yes. I mean we do hear a lot about supply chains now. But I think that we're a little bit differentiated in that sense. And how I mean that is we are at production capacity now, which means that we were tackling supply chain issues several years ago. And so I think it's a little bit new for folks trying to ramp up now, but we've done that investment. I think acquisitions like Orbion are very, very helpful in the sense of we can better plan with our partners on kind of what kind of numbers we're going to need and when, and we can co-invest if that's required. And so we've done a lot of that already. And so our supply chain is very robust, very secure. We worked these issues many years ago. We did things like buy solar arrays in bulk ahead of a need, ahead of challenges that were coming ahead. We co-invested on some laser capability to stand up production on that. But again, that was for a tZERO contract. So we've basically retired a lot of that investment we needed to make in our supply chain. We're kind of more now in improvement cycle where we're trying to improve it, make it more efficient and make it a little bit better. But us kind of delaying schedule and things like that because of supply chain is a problem that we looked at a couple of years ago, and we feel like we have a good handle on it. I think when we did the IPO, we did talk about that we were going to inventory a lot of our spacecraft. We're in a unique position to be able to do that. We have a very large backlog. We have a consistent product. We know that it works. We know that it works in orbit. And so we are going to invest in some inventory, which should help with the supply chain challenges as well. The reality is something being delayed is only really a problem if you're already behind, right? But if you are ahead of the need and ahead of a schedule and have an inventory product, if something shows up 3 weeks later than it should have, but you have inventory spacecraft and you have ahead of a need, then you're able to kind of sustain those impacts. So that's where we're focused more is standing up, basically supporting our supply chain to be more efficient, and then we're going to build inventory spacecraft. And that's going to really take that kind of lead time out of the equation for us. Ryan Koontz: Great. And one just quick clarification there. If you're building that inventory and shipping from inventory, is that a different form of rev rec than traditionally? Kevin Messerle: No. What it does is effectively accelerate the revenue recognition. So as Dirk said, we want to be smart about building up some satellite platforms in inventory. And then that way, our BD folks can be empowered to say, hey, how quickly do you need this mission flown because we've proven, I think, Dirk touched on in his prepared remarks with our Dragoon mission, right? We -- ATP to orbit was 7 months, which is pretty unheard of. So what that will do is we'll kind of build up the cost structure on the balance sheet and inventory. And then once we get that allocated to a particular revenue-generating program, it will be a very fast cycle of rev rec. So it will be pretty exciting to see that happen. Operator: Your next question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Congrats on your first quarter. Maybe if I could ask first on just the margin comments and the pricing. You guys offer an affordable solution. What's driving some of the higher margins? I know you talked about the supply chain improvements. What is that? Is that more like supply chain pricing? And how do we think about the volume leverage? And maybe if we could clarify on Orbion, how do we think about the revenue contribution there given that's a vertical integration play as well? Dirk Wallinger: Kevin, why don't you talk to that? Yes. Kevin Messerle: I'll touch on that. Yes, we'll start with the Orbion one. So the way it works, broadly speaking, when we acquire a company like Orbion, and like ATLAS, it's the same thing for ATLAS. So they do York business and non-York business. So when our consolidated numbers are put out, the net impact is just on the non-York business. Because the way it works from an accounting perspective is that our -- their York business, that revenue gets canceled out and the associated COGS from us. So their revenue is our COGS, so to speak, those net out in the elimination. So again, they are baked into our projections. They're not a, I would say, not a substantial portion of our 2026 guidance because, again, we're buying companies that we already buy a lot of stuff from. And then so that kind of -- it's more of a margin improvement. I touched on earlier, the more -- when we do these type of vertical integration acquisitions, they're very accretive to contribution margin, right? Because we're basically stripping out what otherwise would have been profit margin that we were paying to a third-party vendor. Now that just kind of stays within the family, so to speak. So that's a big driver of increased contribution margin and gross -- overall gross margin. So that's how that works. And then just in general, I think you had a question about margin. So our margins improved year-over-year, our gross margin by about 700 basis points. And that's really a result of a couple of things. It's program mix. So our newer vintage program, so a lot of the growth in revenue in 2025 came from our Tranche 2 transport layer programs, alpha and gamma. Those were programs that we were -- we priced when we had a lot of reps in our system through T0 and T1. So we priced that really well, and those are higher margin. In general, our newer programs are higher margin. So it's a factor of mix -- and then we also had reduced negative EAC adjustments in fiscal '25. And again, that's another sort of proof point of a maturing business and maturing sort of pricing rigor and cost rigor. We don't expect to see any sort of meaningful negative EAC adjustments as we move forward. So it's really those 2 things that drove the nearly 700 basis point margin -- gross margin improvement in '25. Sheila Kahyaoglu: Got it. That's very clear. And then maybe if you could just provide a quick update on how you're thinking about Transporter Tranche 3 and just the path forward for that mission. Dirk Wallinger: Yes. As I kind of talked about a little bit earlier, there's no doubt that communications is going to be a major part of Golden Dome and National Defense in general. I believe that it's going to be restructured under something called the Space Data Network, where they're working through that architecture and what that will look like now. My best guess, and it's a guess, is that I think transport will probably be part of that Space Data Network, and it will interlink with the other systems. So it kind of goes to what I was saying before of, they're realizing that these systems cannot be disparate and unique, and they need to be part of a larger architecture that works together. And my feeling is that I think transport will definitively be a part of that. I think that they're working the details of that architecture now and how that will work. Obviously, I think, that we're in a really phenomenal position to win significant parts of that given that we've already performed so well on tZERO, T1. We're already under contract for T2. So I think our delivered capabilities, flight heritage and the fact that we're the first time to launch every single time kind of speak to us being able to deliver that mission successfully. So I think it's going to be part of space data network. And I think that they're working that architecture now, and we feel like we're in a strong position to win that work. Operator: I will now turn the call back to Dirk Wallinger for closing remarks. Dirk Wallinger: Yes. So essentially, I just wanted to say thank you for everyone taking the time who've been -- those -- a lot of folks who have been following us for a little bit. I appreciate you learning more about what we're doing. Hopefully, you can see that we have really strong engagement, the ability to execute. We have a lot of missions in front of us, which we're excited to get into. We're seeing our base grow significantly from not only the kind of proliferated LEO national defense systems we've historically worked on. We're seeing new contracts with multiple classified customers. We're seeing large constellations being secured for commercial customers as well. So we're really excited about the future. We hope that you'll keep following along with us, and I appreciate everyone for taking the time. So thank you so much yes. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Thank you for standing by. Welcome to Kingsoft Corporation Fourth Quarter 2025 and Annual Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Yinan Li, IR Director of Kingsoft. Please go ahead. Yinan Li: Thank you, operator. Ladies and gentlemen, good evening, and good morning. I would like to welcome everyone to our 2025 fourth quarter and annual results earnings call. I'm Li Yinan, the IR Director of Kingsoft. I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various reasons. These forward-looking statements are based on our information and information from other sources, which we believe to be reliable. Please refer to the other publicly disclosed documents for detailed discussion on risk factors, which may affect our business and operations. Additionally, in today's earnings call, the management will deliver prepared remarks in both Chinese and English. A third-party interpreter will provide a consecutive interpretation into English. During the Q&A section, we will accept questions in both English and Chinese with automated interpretation provided by the third-party interpreter. On-site translation is solely to facilitate communication during the conference call. In case of any discrepancies between the original remarks and the translation, the statements made by the management will prevail. Having said that, please allow me to introduce our management team who joined us today: Mr. Zou Tao, our Executive Director and CEO; and Ms. Li Yi, our acting CFO. Now I'm turning the call to Mr. Zou Tao. Tao Zou: [Interpreted] Hello, everyone, and thank you all for joining Kingsoft's 2025 First Quarter and Annual Results Earnings Call. In 2025, we remained committed to technology empowerment and focused on enhancing our core capabilities. Kingsoft Office Group continued to prioritize its core strategy of AI collaboration and internationalization, deepen its presence in the AI office market and development of future-oriented intelligent office products tailored to the all scenario office needs of both individual and enterprise users. In the online game business, we further deepened our expertise in classic wuxia IP and actively expanded into diversified game categories and global markets. In 2025, the group's total revenue reached RMB 9.68 billion, representing a year-on-year decrease of 6%. Among this, revenue from the office software and services business recorded revenue of RMB 5.93 billion, up 16% year on year and maintaining steady growth. Revenue from the online games and others business amounted to RMB 3.75 billion, up (sic) [down] 28% year on year, primarily due to the high base in the same period last year and the decline in revenue from existing games. After release in early 2026, Goose Goose Duck has received positive market reception and has surpassed 30 million cumulative new users. This demonstrated our potential in expanding into new game genres and injected fresh growth momentum into the online games business. Now I will walk you through the business highlights of the full year and fourth quarter 2025. In 2025, Kingsoft Office Group continued to advance its core strategy of AI collaboration and internationalization. Total annual revenue reached RMB 5.93 billion, up 16% year-on-year. Fourth quarter revenue reached RMB 1.75 billion, also up 17% year-on-year. The company is pursuing a dual-track approach encompassing office AI reconstruction and upgrade and AI office native exploration. On one hand, it is driving a comprehensive intelligent upgrade across its existing WPS component suite to reshape the full scenario office experience. On the other hand, it is exploring an agent-native office paradigm, with its office AI agent WPS Lingxi evolving into an all-around AI office companion marking an entry into the era of office AI agents. WPS 365 has undergone a comprehensive AI-driven upgrade, establishing a multidimensional framework that spans technology infrastructure, collaboration systems, intelligent search, and digital employee ecosystems comprehensively empowering enterprises in their digital and intelligent transformation while enhancing office collaboration and operational efficiency. The Company's international expansion is progressing steadily with completed product upgrades and overall model development, now offering global integration office capabilities. For WPS individual business, the user base continued to expand steadily, with both domestic and international operations achieving quality growth. Total annual revenue reached RMB 3.63 billion, up 10% year-on-year. The growth trend continued in the fourth quarter with revenue reaching RMB 918 million, the year-on-year growth rate accelerating to 14%. The cumulative number of annual paid individual users in domestic reached [indiscernible] million, up 11% year-on-year. By the end of 2025, WPS AI's monthly active users surpassed 18 million, representing a year-on-year increase of 307%. Overseas market, the cumulative number of paying users grew substantially with particularly stronger growth among large-scale users. The monthly active devices for the overseas PC version reached 42.5 million, up 54% year-on-year. WPS 365 business, we maintain high quality and rapid growth. Total ad revenue reached RMB 720 million, up 65% year-over-year. Fourth quarter revenue was RMB 210 million, also up [indiscernible] the fourth consecutive quarter of year-on-year growth about 16%. We continue to advance products and service upgrade guided by the core principle of integration, intelligence [Audio Gap] industries specifically additions. The company further consolidated its advantage among central and state-owned enterprises, while accelerating expansion into private enterprises, foreign-invested enterprises, and local state-owned enterprises, while also advancing channel ecosystem development to further enhance its market presence. In 2025, WPS 365 continued to improve the implementation of AI technology in office scenarios. Our official digital employer has already achieved a large-scale standardized delivery. In early 2026, WPS 365 officially integrated enhancing our core capabilities, injecting growth momentum to improving the quality and [indiscernible] enterprise collaboration and office work. This intelligence further enrich our AI office ecosystem. For WPS software business, total annual revenue reached RMB 1.46 billion, up 15% year-on-year. Fourth quarter revenue reached RMB 530 million, up 15% year-over-year. We actively participated in bids for domestic office software by central and local government. We continue to maintain a leading share in both flow-layout and fixed-layout document software market. We continue to advance the implementation of government digitalization projects support the development of digital platforms in multiple regions and effectively empower the intelligent upgrading of government office operations. In the fourth quarter, our flagship PC game JX3 Online enhanced its costume design through technological upgrade and its aesthetic style was widely praised by players. The version optimization and service upgrades completed at the end of 2025 have received positive market feedback, and we will further increase investment in game play and narrative experience. Our classic JX series PC games and its inherited mobile games like World of Sword: Origin continued to iterate on content and versions, maintaining stable operations in both domestic and overseas markets. Social deduction game Goose Goose Duck officially launched in January 2026. It recorded over 5 million new users on launch day, surpassed 30 million cumulative new users, and ranked #1 on the iOS free chart for most of the past two months. Driven by word-of-mouth and organic traffic, it penetrated the broader social circle. Two casual games from the Angry Birds series also received publishing licenses and are expected to launch in China in 2026, further enriching our casual games portfolio. Starsand Island, our cozy pastoral life simulation game began early access in February 2026. With its unique art style and game play, the game established a strong reputation among core players worldwide. Going forward, we will actively optimize the products based on player feedback to lay a solid foundation for the official version launch in the second half of the year. Looking ahead, Kingsoft Office Group will deepen the application of AI agent technology across full-scenario office environments, strengthen the core competitiveness of WPS 365 as an intelligent collaboration platform, and accelerate the execution of its internationalization strategy. For online games business, we will continue to focus on premium content development and global publishing, sustain the vitality of classical IPs, and foster the growth of new game genres to achieve sustainable growth. We will deepen technological innovation and commercial expansion, actively expand global market opportunities, and create long-term value for our shareholders. Yinan Li: Next, I would like to invite Ms. Li Yi to introduce the financial performance for the fourth quarter and annual. Yi Li: Thank you, Zou and Yinan. Good evening, and good morning, everyone. As for the financial results, I'm starting for the Q4 use RMB as a currency. Revenue decreased 6% year-on-year and increased 8% quarter-on-quarter to RMB 2,618 million. The revenue split was 67% for office software and services and 33% for online games and others. Revenue from the office software and services business increased 30% year-on-year and 50% quarter-on-quarter to RMB 1,750 million. The increases were primarily attributable to the growth across 3 principal business of Kingsoft Office Group. The steady increase of WPS individual business was primarily driven by the expanding number of paying subscribers attributable to continuous interaction of AI capabilities and improvement in intelligent office experience. The strong growth in WPS 365 business was mainly driven by the deep integration of document AI and collaboration capabilities, along with continued customer expansion among private and local state-owned enterprises. The growth in WPS software business was mainly supported by sustained demand from government and enterprise clients, further consolidating our leading position in the flow-layout and fixed-layout document market. Revenue from the online games and others business decreased 33% year-on-year and 3% quarter-on-quarter to RMB 868 million. The decreases were mainly due to decline in revenue from certain existing games. Cost of revenue increased 5% year-on-year and decreased 1% quarter-on-quarter to RMB 471 million. Gross profit decreased 8% year-on-year and increased 10% quarter-on-quarter to RMB 2,148 million. Gross profit margin decreased by 2 percentage points year-on-year and increased by 2 percentage points quarter-on-quarter to 82%. Research and development costs increased 30% year-on-year and 6% quarter-on-quarter to RMB 953 million. The increases were primarily driven by increased headcount and AI-related expenditure, reflecting our strategic focus on advancing AI and collaboration capabilities. Selling and distribution expenses increased 36% year-on-year and decreased 18% quarter-on-quarter to RMB 462 million. The year-on-year increase was mainly due to high marketing expenditures in both office software and services and online games business. The quarter-on-quarter decrease was mainly due to high base from promotions for new game launches in the prior quarter, partially offset by increased spending on marketing activities for Kingsoft Office Group. Administrative expenses increased 33% year-on-year and 40% quarter-on-quarter to RMB 202 million. The increases were mainly due to higher personnel-related expenses and increased depreciation arising from the completion and operation of our Wuhan campus. Share-based compensation costs increased 55% year-on-year and 15% quarter-on-quarter to RMB 92 million. The increase was mainly due to the grants of awarded shares to the selected employees of certain subsidiaries of the company. Operating profit before share-based compensation costs decreased 48% year-on-year and increased 70% quarter-on-quarter to RMB 606 million. Net other gains for the fourth quarter of 2025 were RMB 819 million compared with losses of RMB 74 million for the fourth quarter of 2024 and gains of RMB 13 million for the third quarter of 2025, respectively. The gains in this quarter were mainly due to that we recognized a gain on deemed disposal of Kingsoft Cloud as a result of the dilution impact of the issue of new shares of it. Share of losses of associates were RMB 132 million for the fourth quarter of 2025 compared with losses of RMB 148 million and profit of RMB 5 million for the fourth quarter of 2024 and the third quarter of 2025, respectively. Income tax expense was RMB 220 million for the fourth quarter of 2025 compared with expenses of RMB 212 million and RMB 66 million for the fourth quarter of 2024 and the third quarter of 2025. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 975 million for the fourth quarter of 2025 compared with profit of RMB 460 million and RMB 213 million for the fourth quarter of 2024 and the third quarter of 2025. Profit attributable to owners of the parent, excluding share-based compensation costs was RMB 1,026 million for the fourth quarter of 2025 compared with the profit of RMB 496 million and RMB 277 million for the fourth quarter of 2024 and the third quarter of 2025. The net profit margin, excluding share-based compensation costs, was 39%, 18% and 11% for this quarter, the fourth quarter of 2024 and the third quarter of 2025, respectively. And now on the year 2025. Revenue decreased 6% year-on-year to RMB 9,683 million. Office software and services made up 61% increased 60% year-on-year to RMB 5,929 million. Online games and others made up 39% and decreased 28% year-on-year to RMB 3,754 million. Gross profit margin decreased by 2 percentage points year-on-year to 81%. Operating profit before share-based compensation costs decreased 47% year-on-year to RMB 2,072 million. Profit to owners of the parent was RMB 2,004 million for the year of 2025 compared with a profit of RMB 1,552 million for the last year. The group had a strong cash position towards the end of 2025. As at 31st December 2025, the group had cash resources of RMB 27 billion. Net cash generated from operating activities was RMB 2,292 million and RMB 4,787 million for the year ended 31st December 2025 and 31st December 2024, respectively. Capital expenditure was RMB 342 million and RMB 426 million for the year ended 31st December 2025 and 31st December 2024. That's all for the introduction of our operational and financial results. Thank you all. Now we are ready for the Q&A section. Thank you. Operator: [Operator Instructions] We will now take our first question from the line of Liping Zhao of CICC. Liping Zhao: [Interpreted] I have 2 questions on the gaming business. So first, after Mr. Zou recently took on the role as the CEO of Xishanju, what strategic adjustments have been made regarding to the future development of the gaming business? And are there any opportunities or possibilities for implementing AI to improve efficiency in the game development? And second, we have observed that Goose Goose Duck is performing well in terms of popularity. Could you share some insights on the current user base and retention metrics? I'd also like to understand the time line for future monetization and potential incremental contribution to the overall revenue and profit. Tao Zou: [Interpreted] So first off, I'd like to talk about the Goose Goose Duck. And so actually, since we have launched on the 7th of January, we [Audio Gap] research of over 30 million new users. And up to now, generally speaking, and the total users could be quite stable at the 3 million up and down. So we are actually doing this planning started from the spring festival up till the summer holiday. We're going to prepare a series of different versions and with different stages, and we would like to have a stable and continuous stable game. And this is actually for the mid- and long consideration for this game is that firstly, through this launch, we could actually have some of the remaining data, and we have confidence that for the continuous version, we could [indiscernible] generation. And so we could make the BAU higher. This is actually the most important priority for us. And it means that we need to make enough users. And once the product has launched, for the income perspective, we didn't do that much work on it because for the industry -- for the game industry, the average performance in the future, we will consider about the payable rate and also the up value. We still have a very big space for it. But for this game, since launch up to now, the total performances is more than like over our expectations. In the future, we still have a very big space for the growth. And in the future, we also would like to launch in the game space. And from the users' perspective, like we would like to make it stable and make it continuously stable. And then step-by-step digging the commercialization possibilities. This is the first stage is that we need to make sure this version is stable, have a good quality service and also with different version, make sure that the total quantity of the users online is good enough and then furthermore, make it higher. So in the long-term perspective for this IP, we're going to consider how to have like expand different surroundings products and also for the other accessories, we have different ideas for it. So let's put it in the future. But currently, the most important thing is that have a stable operation and make the users like to have a higher user quality. So actually, for this first question, it is quite complex. I would like to make it simplified is that since I become the CEO on the 1st of December last year, [indiscernible] is already 3 months past. So generally speaking, firstly is for the service of the [ fit of the thought ] and also for the JX3 for the business is actually the basic of our business. So we would like to continue for the investment of the basic space. And in the past few years, we always have a lot of very like [indiscernible]. And although we have collected some infections of the external competition and infection. But generally speaking, the customers are quite -- the customer quality is quite stable. That is why we believe that -- so currently, the customer service, we're going to provide a better service for our customers and higher quality for them, especially for the content. This is actually our guarantee, the basic guarantee. Second is that we need to make some projects which doesn't have like strategic way. We need to do some adjustment and also maybe shrink that business. It means that we could have enough space, enough ability to make it into the middle and long-term strategy, especially for we're going to have some strategic value. So currently, it's not that convenient for me to release some of the information about it. But probably in May, when we do this seasonal report, it's going to be more convenient for me to have an official introduction for it. And thirdly is about relevant to the second part of the question is that the AI is going to be a completely new area. It's already arrived, especially for our sales. And we can see is that for the industry of their game, actually for the manufacturing and production of the game, in many years, we have a lot of like a revolution. It's not just to have a high efficiency, but this is actually completely changed the way of the mode production. And since I became the CEO on the 1st of December last year, and we could completely carry out of the AI, the different policies, especially not only for their staff thinking and also the platform of the AI building. In the future, we're going to based on this platform to doesn't have that much like identification for the position, but we're going to like to highlight the innovation through the platforms of AI construction in the future, mostly that the creator is going to create the game on the platform. They're going to have a lot of the creation. They're going to have some meaningful content. And internally, we're going to select some excellent projects and commercialize and promote it into this market. So simplified is that we think in the whole industry organization, the content creation organization will completely change and also the way of working will be completely changed. So basically, based on the platform's creation on the AI, everybody is going to be a producer and everybody is going to be the creator for the content. And this is actually everybody could do the creation. This is the time. The time has arrived. So I have strong confidence for it. And in the past few years, the AI tools have completely like become more mature. And especially this year, the whole industry for the products, we have no doubt about it, AI has already come. That is why I think that the time is already matured. And thirdly is for the positions, they have actually a strategic meaning. And the last year for the game, we [indiscernible] has launched, it doesn't have reached our expectation and also the performances of old game is a little bit slow. But this is actually we make analyze internally and make a conclusion. And this is actually a good point for us because we could deduct some of the old things and also we are conducting new. I think that when we move forward on this, we're going to have more space, and this is going to be our opportunity for season. And in the future under this mode, we're going to have a higher product efficiency. And so that is why I think that sometimes the bad news is not actually a bad thing. So like from the challenges and difficulties last year, we actually have some challenges facing, but this is going to let us get to welcome this a new page for Seasun. Operator: We will now take our next question from the line of Linlin Yang of Guangfa Securities. Linlin Yang: [Interpreted] I have 3 questions. The first is what is the progress of our AI business as well as the development and commercialization of industry-specific models and products. The second question is about the AI industry. Recently, the view that AI will display traditional software while the core business of Kingsoft WPS has not been materially affected so far. But there is uncertainty regarding the expansion of value-added service. What is your opinion about this question? And when you serve enterprise customers, what are their key demand for AI? And what capabilities do you need to strengthen? And recently, Xiaomi has MiMo with a trillion parameter large language model as well as a line of associated models. In what ways will the MiMo model further empower and enhance the WPS business? Tao Zou: [Interpreted] So we would like to answer the first 2 questions, and then Mr. Lei is going to answer the third question. And so this is actually quite busy that since last April, we have set up the AI product center. And this year, we actually have the full hub. We would like to cooperate with the Kingsoft Cloud to have some collaborations altogether. So actually, the Kingsoft Cloud, we already have delivered some of the products like, for example, the Kingsoft [indiscernible] and also internally the target for the like assessment, we already used some of the products. And we made a conclusion since last year that we would like to really get into the typical industry and trying to figure out the way of the road AI hold to have this empowered for different industries. So the key point of this year is that we need to target for the element -- the target the aim, especially like we can see that this year, the open cloud is show that appeared and it's very popular the whole world. So this is actually a great remind for us. AI is going to have empowered for different person. AI could be able to empower for enterprises, and they have different ways to show up. And all of this could be able to be realized. So we will not only need to based on the initial thinking, actually, the key things of this year is that we [indiscernible] scenario and also to focus on different industries to get into that industry. And this is actually the biggest differences between last year and this year is that last year, we are trying different roles and trying to localize in different ways. Maybe that AI works for that industry. But this year, we have to get deeply into typical industries in probably 1 to 2 different regions and then make actual work. This is actually like the AI product center development and also progress. Jun Lei: So I would like to answer the second question is that based on my understanding is that the AI is the influence for the AI [indiscernible] if they are saying that -- if we are saying that AI is going to eat up software is not -- so I don't personally agree on this statement because as we know is that for the big language model, AI has to bring that I would like to using like digitalization system to have like restructured the AI currently. So this trend is quite significantly recently. And since 2023, we have the restructure. I can see that AI is the core thing. And as developed in the past few years, AI has constantly strengthened and more and more be recognized by people and simplified saying that this is actually the whole restructure for the [indiscernible] so AI could actually -- if we are seeing that AI is going to eat up the software, the description is not accurate because the software is compared with hardware. So what is exactly software and hardware. So like this year, you can see that the AI scale, I would like to using like the digital system to expand that, especially for the basic on the AI risk structure for the software and compared with the hardware, like, for example, [ Doba ] this is software, right? But today, we can see is that -- and compared with the previously, they have a bigger function. They have the better interaction and also have more like different multiple functions and abilities, which we cannot imagine previously. So this is actually our understanding. But additional software, they are different because the AI software could be replaced the traditional software. That is for sure. But AI is not going to eat up the software because that is not scientific. This is my opinion since 2023. And also the influence for the office is that since 2023, AI has showed up. I discussed about my opinion. So during that time, we can say is that AI could be strengthened, like keep strengthen the ability in the future. That is why right now, we have changed the name as office because 2023, we initially used office AI, and then we used the change name as AI office. So this is constantly of my first question answer is that initially, the AI ability is not that strong enough. That is why we need to use office to strengthen the AI ability. But as the AI ability has become stronger and stronger, like, for example, we have the native AI office development since 2023, then WPS 1.0, 2.0 and 3.0, especially last year, we have launched Lingxi, and this is actually a constant development. And up to now this year, 2026, it's significantly clear that Office AI is going to be the big part. And all of us is going to use. All of that is like AI office. So this is the second point, which is super for this time since 2023. And also for the WPS AI membership since last year, we could increase 307% since last year. The reason is that last year -- the first -- last year, we have launched the Lingxi that version. So this is actually the second part I like to answer this question. And third part is about Xiaomi. So Xiaomi has launched MiMo-V2-Pro. So no matter for the communication meeting with Kingsoft or the cloud communication meeting, that is based on One Plus and that is the Xiaomi's big model for MiMo. And for Kingsoft and Xiaomi, we are actually AI like mixer. And Xiaomi would like to do this big model but Kingsoft we are not. So as time when we have AI launched, especially recently, Xiaomi has launched that our own AI and the performance is actually quite good. So we can see that the ability of Xiaomi is increasing all the time. And the key thing is that we need to make our competition ability stronger and also to have our own [indiscernible] strengthen their AI ecosystem construction. As time goes by, the whole like Kingsoft series products could have like a very competitive ecosystem together like development together with Xiaomi. Yinan Li: [Interpreted] Hello. Thank you for joining us today, and this will conclude our presentation for the 2025 Fourth Quarter and Annual Results Earnings Call. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good morning, ladies and gentlemen, and welcome to the Jenoptik conference call regarding the financial results of 2025. [Operator Instructions] Let me now turn the floor over to your host, Dr. Prisca Havranek. Prisca Havranek-Kosicek: Thank you very much. Good morning, everyone, and welcome to our fiscal year 2025 results call. Today, I'm here with Andreas Theisen, our Head of Investor Relations. I will lead you through the presentation. And then as always, Andreas and I will be open for your questions. As you know, our preliminary headline 2025 results have already been published mid of February. So today, we will cover the full set of audited financial figures, including key business unit results as well as our outlook for the year 2026. Now let me start with an overview on Page 5 -- 4 of our slide deck. From a management perspective, 2025 was a very busy year. First of all, let me briefly comment on our progress on executing our strategic goals. Number one, we implemented a new organizational structure, making our company somewhat leaner, increased accountability within our businesses and with our new reporting structure, also increased transparency for our investors. Secondly, we brought our biggest single investment, I mean, our new micro-optics fab in Dresden online, and we are now in a position to further grow this business going forward. Thirdly, again, in our semi business, we delivered on our strategy to grow share of wallet in our inspection business. So overall, I think we made substantial progress in making Jenoptik stronger yet again and in delivering on our strategic agenda. Now looking at business development. From a market perspective, in particular, semi lithography was somewhat difficult in 2025. We focused on what we can control and thus, our focus throughout the year was on executing and accelerating our efficiency program. This has paid off in terms of margin protection and cash generation. As we enter 2026, we have seen signals of a rebound, in particular, in the semi market and overall, a more positive trading environment across most of our verticals. In 2026, we will keep our near-term focus on addressing and further developing our growth opportunities, particularly in areas like AI-driven semi demand, optical communication for data centers, defense application, SMS expansion in the U.S. and also AR/VR. As a consequence, we expect to return to profitable growth this year, and I will cover the details of our guidance here at the end of my presentation. Lastly, I'm very excited that our management team will be complete soon again with Dominic Dorfner joining us as our new CEO, as you have seen from yesterday's release. Now turning to Page 5. Looking at order intake in detail on group level, we reported a decline of approximately 3% year-on-year. However, the dynamics have been fairly divergent between our 4 strategic business units. So starting with Semiconductor and Advanced Manufacturing. As you know, development has been impacted by certain supply chain fluctuations in our lithography business as well as an order cancellation in Q1, as we highlighted on our previous call. While we saw a stabilization of demand in the lithography business in the second half of 2025, order intake for the full year was down by around 11% year-on-year. Customer activity in our inspection business was strong throughout the year with us executing on our strategic road map of increasing our share of wallet. Turning to our Biophotonics business. Order intake was very strong last year, being up by around 19%. We saw positive momentum, in particular for our defense product offering, but also a positive development in our life science applications. In MedTech, we have seen lower momentum in the second half post the launch of a new generation product in our dentistry business. I would like to remind you here that quarterly volatilities of order intake in this business has become more pronounced given our customers' order behavior in the defense business. Here, customers tend to place few, but partly very sizable orders, sometimes for multiyear deliveries. Overall, given the nature of this industry, we do expect fluctuations between single quarters to remain high also going forward. Now moving on to our Solutions businesses. In Metrology & Production Solutions, orders are slightly down year-on-year on an ongoing weakness in the automotive market, whereas Smart Mobility Solutions recorded robust mid-single-digit order intake growth last year. Our book-to-bill ratio was slightly below 1 or at 0.95 to be precise. Our order backlog reduced compared to prior year-end to around EUR 591 million. Overall, we anticipate turning more than 80% of this backlog into revenue in 2026. Please follow me now to Page 6. The revenue in 2025 declined by approximately 6% year-on-year to around EUR 1.05 billion. This reflects generally weaker order intake trends at the beginning of the year, especially in the semi space, as I mentioned before, it also includes a 1 percentage point negative impact from euro-USD exchange rate fluctuations. With regards to our semi business, revenue was down 12% year-on-year. This was a result of what we already discussed several times in earlier calls, meaning softer demand in the lithography business, which, as you know, makes up for a big chunk of our volume. On the contrary, revenue with our customers in the semi inspection arena developed very well last year. Now looking at Biophotonics. Here, revenue was up by 10%, driven by a strong performance primarily of our defense as well as our MedTech businesses. For Metrology and Production Solutions, revenue development reflects what I've mentioned before on order intake. So an unchanged difficult market environment in the -- particularly European automotive industry was primarily weighing down on our revenue performance. Now finally, revenue of our Smart Mobility Solutions business was up by almost 9% in 2025, particularly as our efforts in the important U.S. market are gaining traction following our strategic decision to enter the smart mobility market in the U.S. with our own sales and our own service force. Please follow me on to Page 7, where we look at our regional revenue distribution. First of all, I would like to note that given the size of our key account businesses, and I'm talking about our semi and our Biophotonics businesses here, the meaning of regional performance is somewhat limited. Year-over-year decline in revenues in Europe, including Germany, was very much triggered by issues we had in our semi business or to be more precise, our lithography business. In the Americas, we saw a positive development driven by Biophotonics and of course, the now well-advanced go-to-market transition of Smart Mobility Solutions in the U.S. Looking at revenue share we realized with our top 7 customers. Unsurprisingly, this has dropped from 48% to now 43% in 2025, reflecting the somewhat special situation in lithography. Looking forward, of course, we expect that the share of our top customers to grow again. Now on Page 8, I would like to cover our profit performance by business. As you can see on the left hand of this chart, the group's EBITDA reached almost EUR 193 million, down by around 13% compared to last year. Our absolute EBITDA improved sequentially every quarter last year, and margins in the second half improved to the above 20% level. However, the full year, our EBITDA margin contracted by 150 basis points year-on-year, including an about 1 percentage point impact from our cost reduction program. On business unit level now, influenced by lower utilization and changes in the product mix, EBITDA in our semi business unit dropped by almost 18% year-on-year. Importantly, we were able to retain a strong margin level of around 26% on a full year basis and even around 29% when looking just at Q3 and Q4 together. So I believe this clearly shows the resilience we have in this business. In our Biophotonics business, the strong top line growth drove better utilization of our capacities in combination with positive product mix effects. EBITDA margin substantially improved to more than 20% last year. Looking forward, though, broadly keeping the strong margin level is what we're aiming at. And let me reiterate that semi type margins are not realistically in the cards from today's perspective. When looking at our Metrology and Production Solutions business, lower overall revenues impacted profitability on the basis of lower fixed cost absorption. But for sure, our cost reduction program will also help us to get our fixed cost base lower going forward. Finally, Smart Mobility, we saw good margin progression of more than 200 bps to 13.6% based on strong top line development and the associated leverage of functional costs. Now turning to Page 9, looking at key aspects of our P&L. I think we've said several times already, strict cost management was a key priority to us in 2025, considering the lower revenue levels that we alluded to before. Overall, we have reduced our headcount measured by FTE by almost 5% compared to the prior year. So now looking at the main developments of our P&L in detail. Gross margin was down by 130 bps year-on-year, which was primarily influenced by lower fixed cost absorption and product mix effects. On a business unit level, our semi business saw the biggest impact here. On the functional expense side, I think we remain very disciplined as those expenses declined by 1% year-on-year despite some general labor cost inflation impact as well as the already mentioned cost reduction expenses. Moving on to the EBIT line. You see a more pronounced decrease in both absolute terms and of course, margin compared to EBITDA since depreciation and amortizations were as expected, slightly up year-on-year. Further down the line, as you may recall from our Q2 call, we have recognized an income of a little above EUR 3 million resulting from a settlement agreement regarding the sale of VINCORION, our previous mechanical defense activities. Bottom line, our earnings per share reached EUR 1.26 versus EUR 1.62 in 2024. And as you have may read in our communication this morning, the Executive Board and the Supervisory Board proposed a dividend of EUR 0.40 for fiscal 2025 compared to EUR 0.38 for the year before. Finally, on ROCE, not unexpected given our earnings development last year, ROCE was at 8.4%, quite below our ambition level. We continue to see ROCE as a core metric in steering our company and remain committed to getting back to more satisfactory levels. Now turning to Page 10 and looking at cash flow and balance sheet data. Here, let me say that we are very pleased with the development, particularly considering the difficult trading environment for some of our businesses. So despite decline in earnings, as you can see, our operating cash flow pretax improved considerably, mainly on lower inflows into our working capital. And with additional support from the normalization of our CapEx, free cash flow was up by nearly EUR 50 million, enabling significant debt and leverage reduction. Finally, please follow me to Page 12 to cover our guidance for 2026. When looking into 2026, I think it's clear there's still high market uncertainties persisting driven by both macroeconomic, but also geopolitical developments that are generally difficult to predict. With regards to the semiconductor equipment industry, the by far biggest end market for Jenoptik, recent news flow has been positive, given, amongst others, announcement of massive data center investments and the associated need for computing capacity. Based on these trends and as well customer order activity, we expect positive momentum for our business in this space. Overall, for the Jenoptik Group, we expect revenue in 2026 to be up in the single-digit percentage range versus prior year. On profitability, we expect our EBITDA margin to be in the range of 19% to 21% in fiscal 2026. We do expect our CapEx to be slightly below last year's level. With that level, we are delivering what we promised and we will be trending towards our maintenance CapEx level. Now before I close my presentation, and we go into the Q&A, let me give you some extra color in sense of model assumptions, which some of you may find helpful. On revenue, we estimate a similar FX headwind of approximately 1 percentage point as we saw in 2025. Regarding profits, for sure, we may have some benefits from our cost-saving program and the emission of the associated onetime expenses from the restructuring as we are moving into '26, but general cost inflation, expected FX headwinds should also be borne in mind. On the contrary, rising energy prices may not influence the equation significantly, at least as far as we know from today's perspective. On our financial results, we are in the process of refinancing some of our German debenture bonds and overall expect our financial results to be broadly in line with previous year. And very importantly, from a phasing perspective, we do expect revenue in the first quarter of 2026 to be below last year's first quarter, given our current order book structure and capacity availability. So in summary, as we move into 2026, we see an improved demand picture as of now, supporting positive expectations, especially in our semi and defense businesses. Therefore, operational execution is our main focus at the moment. Moreover, we believe we have ample growth opportunities ahead of us, which we aim to realize. And those include, as I've mentioned in the very beginning, firstly, digital data communication with our high-performance microlenses used in transceiver. Secondly, defense, where we have established -- we have an established product offering and a strong international customer base; and lastly, further leveraging our infrastructure investment in the U.S. market for our SMS business. So as I see it, we have everything in our hands to be successful in 2026. And with that, I would like to thank you and hand back to our moderator to start the Q&A session. Operator: [Operator Instructions] And we have the first question. So the first comes from Craig Abbott from Kepler Cheuvreux. Craig Abbott: Good morning, Prisca and everyone. And thank you Prisca for also giving us some of the additional modeling indications. I'll just ask a couple of questions first and then get back in the queue. In the -- looking at your EBITDA margin in your semi activities in Q4 was indeed quite high, I think, around 30%. And I just wanted to -- this could be an indication of a new level of profitability we can expect going forward. Appreciating there will always be some quarterly fluctuations. But if that nevertheless is like kind of directionally a run rate? And can this be scaled further? That would be my first question, please. Prisca Havranek-Kosicek: Of course. Thank you, Craig. And I would like to caution a bit here. Yes. You are right. We were actually quite pleased with the 29.8% margin that we saw in Q4 '25, right? Main driver was better product mix and also lower costs from our reduction program. And also, of course, to be fair, we also have some onetime effects from release of bonus provisions that impact obviously the whole company, but also this business. So to your question on to moving forward, if this is an indication of a new profitability level, we expect good margins to be realized. But we have to also think that we -- next to the sector cost inflation, you know, we have a labor cost agreement of about 3% hitting us as of April '26. We also have to put in additional resources to accommodate the ramp-up and then our accelerating demand that we -- that as I've mentioned that we anticipate at least based on what we see today. So overall, that would not lead me to believe that we will come to a different margin environment for this business in 2026. Craig Abbott: I'll ask two more now and then I'll get back in the queue. The secondly, in semi, you mentioned twice, and you've talked about this before about increasing your share of wallet in the inspection space. I just wondered if there's any more light you could provide here and kind of helping us put that in some kind of dimension. And yes, if you could remind us kind of the sales split in your semi activities between lithography end markets and the inspection activities. Prisca Havranek-Kosicek: Yes. Thank you very much for your question, Craig. So as you know, we talk a lot about lithography, and I'm sure there will be some questions going forward. But our second large pillar in this business is our inspection business, you know, where we, again, also sell optical components, optical systems into the key players there. And we have indicated on several occasions that we actually have seen nice growth development throughout the year '25, both in order intake, but also in revenue. And with that, of course, that business has been growing versus the lithography business that has not been growing in 2025. Strategically, we think that's important, not only to build up, I would say, a second large pillar outside of the lithography business, which, of course, volume-wise is still the bigger one, but also because we believe we have ample share gains that we actually can get in our -- in the share of wallet of our customers. And this is linking back to our Capital Markets Day in 2023, where I think we talked about that. And now it's basically to give you a data point also that we are delivering on that strategic goal. Craig Abbott: And my third and last question for now. Please, on the EBITDA margin progression, if you could help us bridge that through. You gave us some indications in your comments a moment ago, but just trying to gauge like how much of that is like the efficiency measures feed through coming through now plus the follow the cost there last year. And secondly, mix effects from perhaps an over-proportional growth in your semi activities and whatever else may be factors worth pointing out, thank you. Prisca Havranek-Kosicek: Yes. Thank you, Craig. I mean you've seen the segment guidances that we are giving on this. Maybe where I can put a little bit more flavor, as I already alluded to in the comments. So of course, there's a one-off effect overall for the company from the restructuring expenses that we had in 2025 of high single-digit millions, which, of course, on a recurring basis, we will not have that, and we'll get some incremental impact from this restructuring project. We also have a project where we are working on introducing material expenses. That's also part of the activities we have kicked off last year. So that, I would say, is a tailwind. The headwind is, of course, the normal labor cost inflation. We have -- I think I mentioned that in the comments, labor cost agreement in Germany, and this is the biggest cost factor, obviously, for us that starts in April and is above 3%. So we have to, of course, factor this into the equation. And then we have to see overall what the geopolitical situation will bring. At the moment, we do not expect a major increase in costs from the current geopolitical situation, and maybe I can comment some more on that afterwards. But we will, of course, also have a slight increase in energy costs. But keep in mind that we are not an energy-intensive business. Our energy costs are fairly small compared to a lot of other industries. So if you take the net-net there, that gives you sort of the view on the sector cost inflation. And then on top of that, you mentioned our semi business. As you know, the mix matters in our company. So the demand acceleration, the early signs of which we are seeing today will, of course, have some influence on how the year plays out. And the semi profitability, of course, is a big mix factor within our total company profitability mix. I hope that sort of gives you a little bit of flavor on those questions. Craig Abbott: Yes, indeed. Very helpful. Thank you very much. Operator: The next question comes from Maissa Keskes from ODDO BHF. Maissa Keskes: Regarding Prodomax, the order intake is very low in '25 and the backlog is almost done. So how do you see the business development in '26 and beyond? And should we expect additional costs that could put some pressure on margins? And what are the concrete measures that are you implementing to mitigate this? Prisca Havranek-Kosicek: Yes. Thank you, Maissa, for the question. On Prodomax, we have seen in Q4 in 2025, an order cancellation at that business in the mid-single-digit value. So that, of course, is, I would say, not great news. That is unfortunate. It's not something that we will see going forward in our view. But of course, it's also a testimony to what I'm going to say next, which is that the demand situation for Prodomax in the overall North American/U.S. OEM space is still quite volatile and quite subdued. And that, of course, has an impact on Prodomax top line and the demand picture overall, as I've just mentioned also for 2025 order intake. Now what are we doing about this? Now Prodomax is an asset-light business that has actually -- it's based out of Canada. So it has a certain flexibility in its cost base that we have and the management there together with us have already, I would say, put to use in 2025. And of course, that's what we have to closely monitor again in 2026, depending on the demand situation. What I think is important, but I think you're fully right, a very low demand and also depressed revenue level will also hit profitability there. And there will be some structurally remaining costs that we cannot -- that are fixed basically, yes. But I think what is important to note is Prodomax is a business that has a very good market position, I would say, in this North American OEM space. So when -- it's more a question of when the demand will return rather than if the demand will return. So we believe this is temporary in nature. And while it's hard to be specific on when do we think the demand will return, we are absolutely convinced given the market position that it will return given time. Operator: The next question comes from Olivier Calvet from UBS. Olivier Calvet: Prisca, Andreas, my first question would be on the sequential development in margin. Do you expect a similar development as 2025? You touched on the Q1 growth rate being a bit subdued, let's say. Yes, maybe start there perhaps. Prisca Havranek-Kosicek: Yes. Thank you, Olivier. Yes, you are right. I have mentioned, I would like to reiterate that given the current demand pattern and also our internal capacities, we expect Q1 revenues to be below Q1 revenues of '25. That is correct. And obviously, given our full year guidance, then there will be an acceleration of demand -- or of revenue in that sense for the coming quarters. And of course, the margin picture will also -- because your question was on the sequential margin development, that will also follow, obviously, both the revenue development, but also the mix development is important. So I would say I would expect overall a back-end loaded development for the year, given also the start into the first quarter revenue-wise, as I've mentioned. I cannot give you specifics on margins on particular quarters. But I would say, in general, a bit also what we've seen also in '25, I would expect a stronger H2 compared to H1 at this point. Olivier Calvet: And just on your comments on capacity availability, could you maybe just give us a bit more color there? And I guess also within the semis business, could you touch on the lead time or sort of order to revenue conversion cycle in lithography and inspection perhaps? Prisca Havranek-Kosicek: Yes, of course, happy to take that question. So maybe let's start on a little bit of a higher level, right? We have businesses that have longer lead times, and now I'm referring to the semi space that you've been asking about, and that would be the classical optical components manufacturing. So whenever we do classical optics components, lenses, lens systems and subsystems, that has longer lead times. It's more lengthy manufacturing processes and also sometimes in the supply chain, there is longer lead times. If we then look at the micro-optics business, so mainly our sensor business there. So what we have basically invested into Dresden for, that typically is a faster manufacturing process with shorter throughput times, shorter cycles. And so those are the two different dynamics, I would say, in the semi business. And that is valid, I would say, both for inspection and for lithography where applicable. I would say, broadly speaking, you could probably imagine that the classical optical business is more than double of the -- maybe the lead times or the throughput times in the micro-optics business. Now as to capacities, let's say, we have -- as you know, we have invested into Dresden, and we have ample capacity there given the investment there also for, of course, going forward. So we can definitely accommodate substantial future growth for this business in this site. Now in the classical optics, as we have several manufacturing sites, you may have seen that we announced an investment into our Jena manufacturing site in Germany in fall last year. So we have also added there, I would say, moderately capacity in the sense of machines and also, to a certain extent, clean room facility. But we have had a good loading, I would say, overall, in particular, in our German sites in '25, also given the growth dynamics of the inspection business. So of course, we -- while we are -- we will be adding resources to accommodate a potential acceleration, we have to, of course, also make sure that we have -- our loading is not always completely balanced across all sites. I think that's the reality of a manufacturing organization. So in that sense, we have to be putting full operational execution into doing that. And that, of course, will also be determined next to the demand picture on how the year plays out. Hence, being at the beginning of the year, we have to cater for some volatility here. Olivier Calvet: Maybe just a final one on capital allocation. Good to see a higher dividend. But are there any changes that we've seen some moves on the Supervisory Board? Anything we should think of in terms of share buyback or anything like that? Prisca Havranek-Kosicek: So there was a lot of questions in one. I'll try to address at least what I can say. Now maybe, first of all, I'm very happy that our Supervisory Board is now complete. And I think you will understand that I will not sort of -- cannot comment on the composition or the Supervisory Board as such other than saying that I think we have an excellent Supervisory Board that helps the management team together shape the future of the company. As to capital allocation, which, of course, we were very clear at the Capital Markets Day '23 on what our capital allocation policy is. And let me remind you, and I think we've just talked about growth and capacities. Number one, capital allocation priority is supporting organic growth. Having said that, the major investment in Dresden is behind us, hence, also my comment on trending towards maintenance level from a CapEx point of view. But there will always be growth CapEx, obviously, given a little bit also the shape of the demand picture. And then second, obviously, returning to shareholders. You've mentioned the modestly increased dividend that we have. And this is our primary instrument at the moment that we use at Jenoptik. And then last but not least, of course, while I don't want you to read anything into that, but just reiterating what we said at the Capital Markets Day '23, of course, there could also be M&A activity, but we don't have an appetite at the moment to have a focus on M&A. Operator: The next question comes from Martin Jungfleisch from BNP Paribas. Martin Jungfleisch: I have 3, please. I'll go one by one. The first one is on just the start of the year. You mentioned that you have seen a solid start, particularly in the OEM business. Could you just quantify this a bit? So what does this mean on the order side? Would you potentially see a level of the Q3, like EUR 300 million? Or is it more like the Q4 of EUR 220 million? If you could provide some color on that, please? Prisca Havranek-Kosicek: Yes. Thank you, Martin, for your question. And I think you will understand, obviously, I cannot really give you a quarter guidance on that. We've seen, as you said, significant improvement in demand, in particular, our OEM businesses. I have mentioned particularly semi there and also, I would say, the Defense business and some parts of our Life Science businesses. So we actually see good momentum there. But also, of course, our -- as I've said, particularly in the Biophotonics business, including the Defense business, there's high amount of order volatility. So we have to keep in mind that these businesses are driven by ups and downs in order volumes. Yes, but overall, we've seen in the beginning of the year, a significant improvement in demand in OEM, meaning Semiconductor and Biophotonics/Defense. Martin Jungfleisch: Okay. So the order -- the book-to-bill should be probably significantly above 1, I suppose. Prisca Havranek-Kosicek: Yes, I don't know, I cannot give you, as you will understand, some guidance on that. I think you have to do the math yourself there. Martin Jungfleisch: And then -- yes. And secondly, maybe on the semi business. Can you disclose what the segment guidance implies for the litho and the inspection business? Like would you expect higher growth from litho this year versus inspection and some other areas? And maybe if you have also baked in some positive effects from some restocking at your largest customers given their growth ambitions for 2026 and beyond? Prisca Havranek-Kosicek: Yes. I am afraid I won't be able to give you much detail on the specifics of those businesses. As you know, we work with a very concentrated customer base. And then therefore, it's -- we're a little bit limited on what we can say there, as you understand. I mean what I can tell you is that as we have said before, we believe the effects from the supply chain correction in lithography are behind us. As we've continuously said, we think this was most pronounced in the first -- in the beginning of '25. So we believe that this is behind us now. And as Craig has also before -- sorry, asked was around that we are happy with the growth momentum we see in inspection and also our strategic move there. So overall, I think if you put those two together, you sort of get the impact for the wider segment. Martin Jungfleisch: And maybe just one last question is on the photonics product. I think you've highlighted a few times. Can you just talk a bit about the photonics for the micro-optics business and the Probe Card business a bit more? So what kind of size in revenues was that last year? And what are your expected growth rates for this year? I mean there's a lot of companies in the laser transceiver business that are seeing the revenues doubling this year. So just checking with you if you're seeing like a similar trend here? And also, how does this tie with the capacity? Do you have enough capacity to cater for that demand? Andreas Theisen: Martin, it's Andreas here. Maybe on the UFO Probe Card for everyone. So this is for -- this is a testing set of kit for photonic integrated circuits, so special submarket of the semi market. I think we alluded to that before, and we have an interesting product, as I said, for testing those chips. The scale of the business is relatively small at the moment. So we are talking about a single-digit million euro number. We see growth here. But I think we can also say that we are not having the only solution for this for testing those chips. And therefore, we do not really see this to become a tangible or a major driver for our P&L going forward. So it will be growing, but not in a tangible sense. Prisca Havranek-Kosicek: And maybe to add on that, on your question on the micro-optics, basically the micro lenses, yes, the micro lens -- difficult word, arrays that we supply into transceivers basically or optical data communication. Now as I've also mentioned in my remarks, we have seen -- and we talked about that in '25, right? We've seen a big interest, big demand for the existing product portfolio, I would say, we have of our business there. It's modest in size, but we expect, given the -- all the massive investments into data centers, AI driven, we expect actually some nice growth there, obviously, on a smaller basis as we speak. But we believe -- we closely monitor this market, and we believe that it's an interesting growth opportunity for us incrementally. Martin Jungfleisch: Okay. And the capacities are sufficient for growth, I suppose? Prisca Havranek-Kosicek: We are in the business of sort of adding capacities wherever we need them, right? And so in that sense, I would say it's too early to tell how that will really develop. And therefore, for now, we are fine capacity and this -- we'll closely monitor that. Operator: [Operator Instructions] And we have one more question from Lasse Stueben from Berenberg. Lasse Stueben: Sorry to come back on the Q1 again. I was just a bit surprised because Q1 '25 wasn't a super strong quarter. So can you give more color on sort of between the businesses, what's kind of happening? Is this largely down to the lumpiness in Defense or simply just the phasing of the demand in semi? And then the second question I would have is just on the Q4 margin in Metrology, that was very high. And it seems like in the segment outlook, you're sort of guiding for an improvement in the margin there for '26. So maybe some more color on what that could potentially kind of look like? Should we be looking for a double-digit EBITDA margin for Metrology in '26 or something else? Prisca Havranek-Kosicek: Yes. Of course, Lasse, thank you very much. I'll take the Q4 Metrology question first, and then I will try to give a bit more flavor on Q1. Now I mean, if you look at the margin in Q4 Metrology and you look at the revenues, right, it was a super strong given basically comparing the other quarters, Q4 in Metrology. And this is the main effect that you see there. Now from a CFO point of view, I would prefer, obviously, a somewhat more flat or not as volatile revenue development, right? But there's nothing -- the main driver in that margin is the top line. And I've said -- I've mentioned AR/VR growth potentials in -- when I talked about '25. So I think that's an interesting thing to take a look at, not saying that we are planning at all for an inception or anything there. But we've seen some nice commentary and movements also in a trade fair in January in Photonics West regarding that. But then on the other side, as you know, in the metrological business, it's also, as I've mentioned, the automotive business, where we do not really see an improved demand picture right now. So I would say we have to see how this overall plays out into the next year. But that's the explanation on the Q4 on the floor levels. And I -- We have a segment guidance on -- specifically on MPS, which is revenue higher than -- sorry, profitability higher than -- growth higher than revenue. But we have to see how the year plays out. And then on your question on Q1, obviously, we're not guiding for quarters. So I'm somewhat limited on what I can see there. But what I can tell you is keep in mind that, I mean, while semi is the biggest business, there's also sizable other businesses in the Biophotonics space, depending on the Metrology business as we go there. And when we say that we anticipate lower revenues than in the previous year, obviously, it's related to all of those businesses. Do not just focus on the semi business here. Operator: And we have one more question from Craig Abbott from Kepler Cheuvreux. Craig Abbott: Yes. I actually just wanted to follow up on part of what you were just discussing in terms of the Metrology protection business. Indeed, I was pleasantly surprised actually by the positive tone of the outlook for this year. I was going to ask you to what extent that is due to pickup finally in the AR/VR applications? Or is it other applications more than traditional applications for TRIOPTICS? Because I assume also given the margin progression in Q4, that the big driver there is the TRIOPTICS business. Is that correct? Prisca Havranek-Kosicek: Thank you for your question, Craig. So I'll try to give you a bit more flavor here. So yes, you're right. We have guided for mid-single-digit growth in '26, right, for MPS. And as we take a part this plan, if you're right, TRIOPTICS is one of them. And of course, how the smartphone business, which still is a sizable chunk of our TRIOPTICS business plays out, we have to see. So that is one assumption around that. AR/VR, we have seen, I would say, nice small movements and also a lot of press, obviously, if you look at what Meta is doing and so on. But if you then look at the volumes, I think one of the Ray-Ban is 15,000 volumes or something. So you have to say that I don't think we are at the commercialization of that yet. And when and if there will be an inflection point, we have to see. So we have factored some assumptions into that, but for sure, not a complete takeoff of the AR/VR business. But then on the other side, we have factored in that the automotive demand remains depressed, but we have not factored in an incrementally reduced demand. So those are a little bit our assumptions into that segment that has a wide variety of end markets and dynamics there. So that drives our thinking for 2026. But it's early days, so we have to see how those things play out then in detail. Operator: So at the moment, there are no further questions. Oh, we have one more question, sorry, from Malte Schaumann from Warburg Research. Malte Schaumann: I have a question on the Smart Mobility business. You expect quite significant growth in 2026. Order intake has been kind of book-to-bill close to 1. So maybe a comment on how the project pipeline might look like and if you would expect -- I mean, this implies that maybe some larger projects are in the pipeline that might realize during the first half of the year. So maybe additional color here would be appreciated. Prisca Havranek-Kosicek: Yes, of course, Malte. So keep in mind that when we have TSP revenues, our order intake is actually not that relevant, where we have recurring revenues that -- it's really where the hardware sales that the order intake is revenue important, right? Where we have solutions businesses, it's less of an importance. So just as a sort of structural comment on that. And then obviously, we expect a growth trajectory from a continued expansion in the U.S. That's something that we've invested in that we would like to see continue there. And then you also -- on your question on order intake, this business is also somewhat volatile for order intake because sometimes there are projects or orders. Think of our business in the Middle East that we take opportunistically that can increase and decrease certain -- or give some volatility in the quarterly order intake. So that's the thinking around growth in SMS. Operator: So now there are no further questions. [Operator Instructions] But I think there will be no more questions. So then I can give the word back to you. Prisca Havranek-Kosicek: Thank you very much. And I would like to close the call with a clear message. Despite market uncertainties, we believe that we are well positioned to return to profitable growth in 2026 by focusing on both exploiting our growth opportunities in our key end markets as well as focusing on operational execution. Thank you for attending our call, and we look forward to seeing many of you on the road over the next weeks. Thank you very much.
Operator: Good morning, and welcome to KalVista Pharmaceuticals 8-month Fiscal Year 2025 Financial Results and Corporate Update Conference Call. [Operator Instructions] I would now like to turn the call over to Ryan Baker, Head of Investor Relations for introductory comments. Ryan Baker: Thank you, operator, and good morning. As previously announced, the company changed its fiscal year from ending April 30 of each year to ending December 31 of each year. There was an 8-month transition period from May 1, 2025, to December 31, 2025. With that in mind, earlier today, KalVista issued a press release reporting financial results for the 8 months ended December 31, 2025, and provided a corporate update. A copy of the release is available on the Investors section of our website. Before we begin, I'd like to remind listeners that today's discussion will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our SEC filings for a discussion of these risks. KalVista undertakes no obligation to update forward-looking statements, except as required by law. I will now turn the call over to our Chief Executive Officer, Ben Palleiko. Benjamin Palleiko: Good morning, and thank you for joining us. 2025 was a pivotal year for KalVista, highlighted by the successful multinational launch of EKTERLY, the first and only oral on-demand treatment for hereditary angioedema. Since launching in the U.S. last July, we've seen high rates of early adoption, increasing physician engagement and positive patient feedback. Together, these signals reinforce our belief that EKTERLY has the potential to transform the treatment of HAE. As we build on this foundation, we remain focused on launch execution in the U.S. and Germany, expanding access globally and continuing to generate clinical and real-world evidence to support the long-term growth of EKTERLY. The momentum we are seeing in the launch translated into $35 million in global net product revenue in the fourth quarter, bringing revenue from launch through December 31, 2025, to $49 million and reflecting steady and consistent growth during the first 6 months of launch. Turning to the U.S. launch. As of February 28, we've received 1,702 patient start forms and activated 724 unique prescribers across the United States since the launch last July. These metrics reflect broad engagement across the HAE community and strong awareness among both physicians and people living with HAE. One of the most encouraging signals we are seeing reflects what we believe to be favorable utilization trends. Refills now represent the majority of prescriptions and revenue, indicating that individuals who have tried EKTERLY are continuing to use it to treat attacks. This pattern suggests sustained usage and growing confidence as people living with HAE incorporate EKTERLY into their ongoing management of attacks. We are also expanding the global footprint of EKTERLY. In Germany, the launch is off to a strong start with early adoption trends tracking similarly to those we see in the United States. In Japan, our partner, Kaken Pharmaceutical, has initiated launch activities following EKTERLY being listed on the National Health Insurance reimbursement schedule. And in Latin America, we recently announced a partnership with Multicare Pharma to commercialize sebetralstat across several key markets. Collectively, these efforts are expanding access to EKTERLY and strengthening our global commercial presence. Looking ahead, our focus this year is on advancing the pediatric opportunity for EKTERLY, extending its availability to this high unmet need population. We plan to submit an NDA in the third quarter of 2026, seeking approval for its use in children ages 2 to 11, which could support a potential U.S. launch in 2027. Alongside commercial progress, we continue to strengthen the clinical evidence supporting EKTERLY. At the recent AAAAI and Western Allergy meetings, we presented new analyses highlighting the potential for sebetralstat to help people treat more attacks earlier with sustained efficacy and high satisfaction. By reducing barriers to treatment, sebetralstat supports early intervention, which is associated with an improved treatment response. We are particularly proud that EKTERLY was recently recommended as a first-line treatment for adolescents ages 12 and older in the international guideline on the diagnosis and management of pediatric patients with HAE. The first-line recommendation for EKTERLY so soon after becoming commercially available, underscores the strength of our clinical data and reinforces the importance of ensuring individuals have immediate access to on-demand therapy. Overall, our objective remains consistent to establish EKTERLY as a foundational treatment for HAE worldwide. Based on feedback from physicians and patients, it is becoming increasingly clear that the ability for people to treat all attacks quickly and conveniently with an oral therapy represents a meaningful advancement in HAE management. While we are still early in the launch, we believe we have built a strong base across commercial execution, clinical evidence and regulatory progress to drive long-term growth and deliver lasting benefit for the entire HAE community. With that, I'll turn the call over to Paul to discuss the new clinical data presented at AAAAI and the Western meetings in more detail. Paul Audhya: Thank you, Ben. The recent Western and AAAAI scientific meetings, we presented several new analyses from the sebetralstat clinical trial program, including updated findings from the KONFIDENT-S open-label extension study. These data further expand our understanding of the clinical performance of EKTERLY and the evolution of treatment patterns with an oral on-demand therapy. First, looking at the longitudinal data presented at Western, we observed that sebetralstat performed consistently and effectively in nearly 2,500 attacks treated through September of 2025. What was particularly encouraging was that the use of the second dose occurred in only 19.3% of attacks and EKTERLY showed a decreasing trend over repeated attacks to about 12%. The use of conventional injectable treatments occurred in only 5.1% of attacks, which also trended downward toward 2%. While there have been no head-to-head trials, these data are favorable in the context of what has been published in the literature for other on-demand treatments. These findings are also evidence of growing confidence with sebetralstat as patients gained experience. This sustained clinical performance was mirrored by high and durable patient satisfaction, with 91.1% of attacks rated as neutral to extremely satisfied and a median overall score of very satisfied. This leads to AAAAI, where we reported a clear preference for sebetralstat over conventional injectable treatments in the KONFIDENT-S study. A unique part of the open-label, real-world study design was that patients were allowed to choose either sebetralstat or their historic injectable treatment for each attack depending on their preference. Under these conditions, participants chose to treat over 84% of their attacks with sebetralstat. Further, as the study progressed, the preference for sebetralstat grew as patients treated more attacks. Collectively, these findings from confidence reinforce a powerful narrative. EKTERLY is a preferred on-demand therapy, enabling patients to treat the vast majority of attacks, treat them early, and achieve high levels of sustained satisfaction after switching from injectables. Importantly, these results also reflect the trends we are seeing commercially, including growing physician confidence and increasing adoption by people living with HAE. Finally, I am pleased to highlight that these clinical insights are already being translated into global standard-of-care recommendations. The newly released international pediatric HAE guideline recommends EKTERLY as a first-line therapy for adolescents aged 12 and older. The guideline committee issued a strong recommendation based on our robust clinical data published in high-tier, peer-reviewed journals. Importantly, the guidelines emphasize that early intervention and ready access to on-demand treatment are the keys to better outcomes. This directly supports our findings that oral therapy has the potential to remove the barriers that have historically caused adolescents to wait nearly 8 hours before treating an attack with injectable therapy. With that, I'll turn the call over to Nicole to provide an update on the commercial launch. Nicole Sweeny: Thank you, Paul. We launched EKTERLY in the U.S. on July 7, 2025, and now approximately 9 months into the launch, we continue to see steady growth driven by increasing prescriber engagement and positive patient experience. As Paul outlined earlier, data presented at the AAAAI showed the high confidence health care providers have in prescribing EKTERLY and the high satisfaction their patients are having with the drug. Momentum to adopt EKTERLY continues to build. For January and February 2026, we recorded 384 new start forms, which brings the launch to date start form total to over 1,700. The U.S. HAE population is estimated to include approximately 9,000 patients. And based on our current start forms, almost 20% of individuals with HAE have initiated EKTERLY. We have now received start forms from 49 states and have recently expanded into Puerto Rico, further broadening access to therapy. On the prescriber side, during the first 2 months of 2026, we added 144 prescribers, bringing the launch-to-date total of unique prescribers to 724. The breadth and depth of EKTERLY use across all prescriber tiers continues to grow in a linear fashion. 29 of the top 30 HAE prescribers in the country have prescribed EKTERLY for multiple patients. As is typical in the early stages of a launch, we expect some quarter-to-quarter variability in certain metrics. The severe winter weather this quarter affected physician office activity and processing of start forms. We believe this is a temporary dynamic and does not reflect any fundamental change in the underlying demand for EKTERLY. Prescriber engagement also continues to expand. On average, we are adding approximately 3 new prescribers each day, and we recently recorded a milestone where 10 new prescribers activated in a single day. These trends reflect increasing awareness and growing physician confidence as experience with EKTERLY builds. As Ben mentioned earlier, as of Q4, refills represent the majority of units and revenue. This is an important indicator of the real-world utilization patterns and growing satisfaction with EKTERLY. We are seeing uptake among both high-burden patients as well as patients with more moderate disease activity, reflecting the value of an oral therapy that can be used anytime, anywhere. This quarter, we conducted a routine market research survey with both patients and health care providers. Health care providers indicated the oral administration and ability to treat attacks early as the top drivers of EKTERLY use. Further, patients prescribed EKTERLY indicated an increase in attack treatment rate since switching to EKTERLY. It is very encouraging to see initial signals that EKTERLY is delivering on its promise of enabling early treatment and treatment of all attacks for individuals living with HAE. Operationally, we remain focused on enabling broad patient access, supporting reimbursement and onboarding and ensuring a high-quality patient experience through our support services. We believe satisfaction is driven not only by the product itself, but also by the services and support we provide to individuals and physicians. In fact, despite our relatively recent entry, our patient hub services team recently received the highest ratings from health care providers on the quality of patient and access support of any company in the HAE space. Overall, we continue to see growing familiarity with EKTERLY, high levels of patient and physician satisfaction and increasing confidence in the role EKTERLY can play in HAE management. We believe EKTERLY is well positioned to become the foundational therapy in the treatment of hereditary angioedema. With that, I will now turn the call over to Brian to review our financial results. Brian Piekos: Thanks, Nicole. As a result of changing our fiscal year-end from April 30 to December 31, the results we are reporting today reflect the 8-month transition period from May 1, 2025, through December 31, 2025. For comparability, we are presenting the 2025 results against unaudited financial information for the same period in 2024. As previously announced, net product revenue for the 8-month transition period ended December 31, 2025, was $49.1 million, including $35.4 million generated in the 3 months ended December 31. Fourth quarter revenue benefited from our specialty pharmacy customers adding inventory ahead of the holiday shutdowns, which they were able to work through in January. Total operating expenses were $160.2 million compared with $117 million in the prior year period. Cost of revenue was $3.1 million and reflects expenses directly associated with product sales. Inventory sold in 2025 is not reflected in cost of revenue because it was manufactured prior to FDA approval and expensed to the R&D line at the time produced. Research and development expenses were $33.4 million compared with $52.2 million in the prior year period. The decrease primarily reflects lower clinical trial costs as the KONFIDENT trials wind down, reduced discovery activities, the reclassification of certain medical affairs expenses from R&D to SG&A beginning in the fall of 2024 and the capitalization of manufacturing costs following FDA approval in July 2025. SG&A expenses were $124.7 million compared with $64.9 million in the prior year period, driven primarily by commercial launch activities and the continued build-out of infrastructure to support the commercialization of EKTERLY. Operating loss for the period was $112 million compared with $117 million in the prior year period. As of December 31, 2025, we had $300 million in cash and investments, which we believe is sufficient to fund the company to profitability under our current operating plan. Overall, this period reflects our transition to a global commercial organization with the direct launch of EKTERLY in the United States and Germany. The investments made in 2025 position us to support continued commercial execution. Looking ahead, we expect operating expenses to remain relatively consistent when adjusted for a 12-month period, with the exception that cost of revenue will increase meaningfully as we sell through the remaining zero-cost inventory. With respect to the non-financial KPIs, starting with the first quarter 2026 earnings call, we will report patient start forms and unique prescribers for the 3-month period ended that corresponds to the financial results of that reporting period. With that, I'll turn the call over to Ben for closing remarks. Ben? Benjamin Palleiko: Thank you, Brian. We are very encouraged by the early launch trajectory of EKTERLY and the strong response from people living with HAE and physicians. With continued U.S. growth, expanding international launches, and a pediatric filing ahead, we believe we are well positioned for 2026 and beyond. Our focus remains on disciplined execution, expanding access globally, and delivering on the full potential of EKTERLY for the HAE community. Operator, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from Tazeen Ahmad with Bank of America. Tazeen Ahmad: Congrats on another strong quarter. Can you talk to us about how do we think about the uptake for the ex-U.S. launches? You guys have made it to 20% of U.S. patients in a short amount of time. So can you maybe talk about the nuancing in the country specifically, let's say, Germany and Japan, to help us with how to think about uptake in general? And then for peak sales, what do you expect the split to be for revenue between U.S. and ex-U.S. Benjamin Palleiko: Sure. Thanks for the question, Tazeen. I'll start off and then I think Nicole can give some more detail. So at a high level, the German trends we've seen are tracking more or less the U.S. trends. It's obviously a much smaller marketplace, but the patient uptake has been quite strong. And I think we're comfortable that, that growth is going to look a lot like it looks in the U.S., again, just from a smaller base point. Japan, we did launch, but just factually, it's too early to tell. We did our -- we had our first sale in Japan last week. So it's probably a little early to extrapolate from that trend at this point, but more to come here as that launch progresses. And then with regard to peak sales splits, in general, the U.S. obviously represents the vast majority of sales for effectively any pharmaceuticals product. And so it will be somewhere in the 85/15, plus or minus a few points in either direction, U.S. sales over time. As we've said consistently, ex-U.S., the vast majority of the world is overwhelmingly on-demand only. You don't see a lot of modern prophylaxis use outside the U.S. But again, just because the pricing dynamics tend to be so much different from a unit standpoint, it may be pretty sizable. But from a dollar standpoint, it will always be a relatively small proportion. Operator: Next question comes from Paul Matteis with Stifel. This is Julian on for Paul. Congrats on the strong progress. Can you just tell us a little bit about the types of patients that have started on therapy over the last couple of months in terms of phenotype and how they may compare to the end of last year? And further, you also talked about how the end of the year may have been impacted by the holidays and you still showed some linear growth in start forms. Just curious over the next couple of months, if you expect to continue to see increased linear growth? And anything that we should think about going into 1Q with respect to inventory or GTN would be helpful. Nicole Sweeny: Sure. So thanks for your question. In terms of patients adopting EKTERLY we're very pleased to continue to see that the high-burden segment, we continue to increase our share with that segment in particular, as we look at the past few months of 2026. We're also very encouraged to see the broadening though of our patient base of growing both those patients with both mild and moderate burden of disease. And to us, that just really signals the broad appeal of EKTERLY to the entire population. And then in terms of the holidays, certainly, we do believe that demand is very strong in the fundamentals in terms of just the attractiveness of the profile for both patients and physicians. But we did certainly see earlier this year as many companies that the severe weather that impacted several states with multiple storms certainly did have a negative impact on demand in terms of the ability for patients to get into the offices to see their physician as well as for staff to complete administrative steps to complete paperwork for start forms. Benjamin Palleiko: Brian, do you want to talk about Q1? Brian Piekos: Sure. We, like other high-priced specialty medicines will have a small impact to Q1 gross-to-net associated with co-pay assistance. It's kind of small in magnitude of order and temporary in terms of just getting through the deductible reset process. Operator: Our next question comes from Stacy Ku with TD Cowen. Stacy Ku: We have a couple. So first, maybe could you comment on how refill trends are progressing in 2026 and where you think things could settle just given really the high demand you're seeing for EKTERLY. So that's the first question. And then a couple of quick follow-ups. Are you able to comment on the high-burden patients where you are in the penetration of that patient bolus? So that's the second question. And then the third, we appreciate you providing forms through February. Are you able to comment high level if the rate of patient start form adds is similar in March? Are you seeing kind of the same dynamic that we've seen in Q4? I appreciate you following up on that. And Nicole, aligned with the processing of start forms, could you just further discuss your comment there? Is it just the normal seasonality around deductible resets, payer changes, et cetera? Nicole Sweeny: Sure. Sure, absolutely. And I appreciate the question. So in terms of refills, we're very pleased to see that we're really maintaining the trends that we've discussed on previous calls and that refills, we're seeing patients anywhere between 1 to 3 cartons per refill as well as the high-burden patients continue to refill more frequently than when we look at those with more mild and moderate burden. And we've seen -- again, we've discussed that looking at claims data for some of the other on-demand therapies, those more mild-to-moderate burden patients are refilling just a few times a year, and we see that the high-burden patients refilling certainly more frequently. In terms of the share of the high-burden patients, we continue to grow. We're roughly around 1/3 at this point in time. And so we're pleased to see that continue to grow quarter-over-quarter. And really just the attractiveness of the profile continue to draw that particular segment of the market. And then just looking -- could you just remind me of your questions with regards to seasonality, just to make sure that we're answering it appropriately. Stacy Ku: Yes. I just want to make sure we can maybe further just dissect your comment of processing of start forms, just the processing aspect of it. Is it around the normal seasonality from high deductible resets, payer changes, et cetera, as we think about kind of the short-term Q1 dynamics? Benjamin Palleiko: Stacy, it's Ben. Just -- I think there's a couple of seasonality things we've tried to highlight here and maybe we're mixing a little bit together. The first is the fact that in Q4, we've said fairly consistently the wholesalers, the PBMs -- the wholesalers ended up with higher-than-average stock towards the end of the year. And also, we do think that patients took on more drug in Q4, whether that was for increased need or just in anticipation of the kind of standard Q1 deductible resets, we'll never really know. But we fairly consistently said the volumes were probably higher in Q4, driven by some of these seasonal factors. And that -- some of that resets in Q1. And so we've just been trying to tell people that that's kind of a normal course activity. With regard to the start forms, we've consistently said, and we believe this trend will continue that we expect the launch to be consistent and linear. That does not mean, I think when Nicole was trying to highlight those, it will be consistent and linear, but there will be fluctuations quarter-to-quarter, and we don't attach any fundamental significance to them. It's just driven by a number of factors. What she was, I think, trying to highlight was the fact in January and February, you had several bouts of extreme weather in the U.S. and that absolutely impacted physicians' offices. There were certainly days in January and February when we had zero start forms simply because all the offices were closed. And so that does have a little bit of impact on some of the numbers we've talked about so far. But again, it's not a fundamental thing. It's just a weather thing. And also, she was trying to highlight the fact that when physicians' offices are closed, the start forms, which the physicians' offices have to process just don't get processed and so -- and to convert them to commercial. And so there's just some factors like that. We're just trying to make sure everyone is aware of as we roll through Q1. But the high-level message is we believe in the linearity of the launch to a greater or lesser degree. And I think we're very comfortable with the way things are progressing and nothing about this we're trying to suggest any shift in our anticipation of the future growth. Operator: Our next question comes from Maury Raycroft with Jefferies. Unknown Analyst: This is Amy on for Maury. Congratulations on the strong quarter. We have 2 questions. One is a follow-up. Can you talk more about EKTERLY currently the refill rate and the dynamics? And how do you think the refill pattern will evolve in 2026 as the patient base broadens? The second question is, can you talk more about how you see the sales shaping up for the rest of the year? And would you be possible to share guidance at some point? And if not, what are the possible gating factors to do that? Benjamin Palleiko: Yes, I'll start with the second question, and then Nicole will pick up on the refill rates. Again, I think as is the norm with companies of our stage in the launch and activity level, we're just not in a position to provide guidance at this point. Again, for us, every quarter is the first quarter we've done this. And so for us to make any long-term projections right now, I think we're -- would probably not be helpful and may be defeating to everybody's activities. So what we do try to do is just convey what we do -- what we are seeing that's been consistent, and that just ties back to what I said to Stacy a minute or 2 ago just about how the launch continues to be to be quite consistent in terms of patient demand metrics. And all the other metrics that flow from that, patient commercial starts, refill rates, all that stuff also continues to trend in a favorable direction with really no dramatic shifts noted or expected. With that, I'll turn it over to Nicole to talk about the refill question. Nicole Sweeny: Sure, absolutely. So as mentioned earlier, with refills, we typically see 1 to 3 cartons per refill. And so when we discuss our high-burden patients, those individuals are typically receiving more on the 2 to 3 cartons on a regular basis and that regular basis being every 1 to 2 months. And then when we take a look at those that have more mild to moderate burden of disease, they're really averaging more in the lower end of that 1 to 3, so typically 1 to 2 cartons and the frequency of which we would expect would really line up more with what we see with some of the other on-demand therapies in terms of them refilling approximately 3 to 4 times a year. Operator: Our next question comes from Joseph Schwartz with Leerink. Will Soghikian: This is Will on for Joe. Congrats on the progress this quarter. So it's great to see the penetration into the U.S. market continue to grow at such a strong rate at this very early stage in the launch. And as we think about it moving forward, where do you expect things to eventually settle out? And what kind of peak penetration are you targeting? And how does that inform the growth of the on-demand market from $650 million to $1.5 billion? Benjamin Palleiko: Yes, sure. Will. We believe this market over time should overwhelmingly convert to oral therapies. The injectables, obviously, everyone knows this, they're quite efficacious. They've served patients well for the past decade. But I think it's fairly obvious from just how EKTERLY has done to date, we've entered a new era here of therapeutics in HAE and orals that offer all the benefits of the injectables with none of the burdens of the injectables just are a better option for patients, just the classic sort of dominant choice. And so we do believe that over the next several years to a very high rate, the market should transition to orals. So that's a key underlying expectation here. And as part of the transition to orals, what you should also see is treatment rates go higher. Right now, again, it's kind of commonly accepted, and this has been talked about many times in many different venues that something between 50% and 65%, call it, 60% plus or minus of attacks are treated at all nowadays. So setting aside the fact that late treatment is right, you've only got slightly more than half of attacks under any circumstance that are treated, period. And so the point there is that as that attack rate goes up, obviously, the usage of therapeutics to treat these attacks will obviously be substantially increased as well. And so the point there is that the market overwhelm overall just gets larger. And that's really, again, just driven by the fact that when you have a better option to treat your attacks with, you'll treat more of your attacks. So we think the story of the on-demand market coming back to your dollar size is driven largely by just that central fact of the fact that you have now have just a much better choice. And so when you get to those numbers you just talked about, really, that's not even, in our minds, an aggressive growth belief. If you took the units that are sold today, which is right around -- last year was right around 87,000 units. At the moment, the vast majority of those units are, in fact, generic icatibant. And so that's -- the reason for the dollar size of the market today isn't anything having to do with lack of demand. It's just the fact that most of that demand is sold at a low price. Clearly, as we've talked about before, we're converting patients in this marketplace over to EKTERLY from all the therapies, which includes a lot of folks coming from generic. And so obviously, every time those folks switch from a generic, they're moving to a branded therapy. And so the overall market dollar size, if you will, increases with each conversion. And so really, that $1.5 billion TAM you mentioned a minute ago isn't, in our minds, an enormous lift. It's really just presuming that you convert the vast majority of the market over to orals. So again, a lot of generic moves to branded pricing. And you have some -- and that -- the number you mentioned doesn't really become terribly ambitious in this manner, but it assumes that there's some growth in the marketplace based upon this higher treatment rate we talked about. And then on top of that, we've talked about a number of other more marginal impacts, people coming off of prophylaxis, things like that. But fundamentally, that number is really just reflecting more or less the current units converting over to branded and then some increased treatment share, which, again, I don't believe in the context of that number you talked about is terribly ambitious. Operator: Our next question comes from Serge Belanger with Needham. Serge Belanger: Nice 1Q preview. I guess, first, regarding payer reimbursement and access, any updates there? And I think in the past, you had mentioned that most of the patient starts or prescriptions were being almost universally covered under medical exception. Just curious if there's been any change on that front. Secondly, I think in the past, you've talked about potential use of EKTERLY as a short-term prophylactic. What does that market opportunity look like? And do you need to conduct clinical trials to capture that opportunity? Benjamin Palleiko: Serge, it's good to hear from you, and thanks for all the questions. I think maybe Nicole can talk a bit about the reimbursement metrics. And then I think we'd like to bring Paul into the conversation here and have him talk about the short-term prophylaxis, the work we're doing in that space and why we think it's important. Nicole Sweeny: Sure. I'm glad to speak to you about the access side of things. We continue to convert paid patients across all the payers. Right now, we are leveraging a mix of medical exception as well as the EKTERLY policies where we have them in place. Those policies commonly are PA to label. There are some instances where we give a step through icatibant, but given the experience that people have with that product, we're able to move those patients through without delay. Right now, our payer team is very much focused on really those remaining large PBMs who we expect to formalize policies in the coming months. So from our view, we're very much on track and looking to have really that steady-state access realized later this year in 2026. Paul Audhya: Serge, in terms of the STP opportunity, we currently still thinking about this from a research perspective. And so there are ongoing studies. We've currently seen use in about 50 procedures that are fairly invasive. And so far, the medication seems to work quite well. We're going to share the data at upcoming clinical conference. And we are initiating an additional trial to look at use in short-term prophylaxis. The reality is today, similar to the more general framework that injectable therapies are challenging to use in the setting of short-term prophylaxis where the recommendation remains strong that for patients undergoing procedures that they have an STP, that is typically recommended as an IV C1 inhibitor. This gives patients an additional option to consider using their oral on-demand therapy instead. And so we're still evaluating what the opportunity there is. But the data to date are pretty encouraging and it's a space to watch. Ben, I don't know if you want to add anything to that? Benjamin Palleiko: Yes. Serge, it's really just to tie. I mean, STP, pediatrics, at a high level, what we're really looking to do is continue to provide EKTERLY in places where we think it can address a meaningful unmet need. We haven't talked much about pediatrics today, but clearly, that's a space where it's not a lot of patients, but the current options are very much undesirable. And so we think that EKTERLY, even though it's not going to come for another year or so, still will offer an opportunity for folks to really address the unmet need in this young population in a much better way than they can currently. And so it may not be a huge economic pickup for us. But in terms of just expanding the availability of EKTERLY to populations that really could get benefit from it, we think it's substantial. And STP is exactly the same thing. I don't think we're presenting this as an enormous step-shift in terms of revenue opportunities. But there's a high need nowadays for better ways for patients to treat themselves prior to their procedures. Based upon the data we've seen so far, we think EKTERLY holds a lot of promise in there. And so this really all this comes under the tent of EKTERLY, really, we do expect to become the foundational therapy for HAE management. And this is just 2 more ways that we expect to accomplish that. Operator: Our next question comes from Jon Wolleben with Citizens. Catherine Okoukoni: It's Catherine on for Jon. I have kind of a quick follow-up question to the kind of thought of patients switching from icatibant. Are you seeing any like -- is it too early to be seeing any dent in the amount of prescriptions for generic icatibant? And is any of that data going to be kind of captured by you guys have shown just kind of track how the launch of EKTERLY is impacting that generic market? Benjamin Palleiko: So a couple of things here. First of all, the vast majority, as you would expect at this point in the launch -- of people who are transitioning EKTERLY still are in the process of switching over to EKTERLY. And so it's largely -- when we talk about the 1,700 start forms, it's start forms. Not all of those people have moved to commercial. And so you would -- the number is still small enough that I think you probably wouldn't see a tremendous impact to date in that data, if you were to look at it. But I do think that as you play through the year, that will start to become more apparent. But factually, we're still relatively early in the launch from a commercial shipments perspective. And so it's going to take a little bit longer for what you talk about to play through. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Kuaishou Technology Fourth Quarter and Full Year 2025 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. [Operator Instructions] I will now turn the call over to Mr. Matthew Zhao, VP of Capital Markets and IR at Kuaishou Technology. Huaxia Zhao: Thank you, operator. Good evening to everyone. Welcome to Kuaishou Technology Fourth Quarter and Full Year 2025 Financial Results Conference Call. Joining us today are Mr. Chen Yixiao, Cofounder, Chairman and CEO; Mr. Jin Bing, Chief Financial Officer. Before we start, please note that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ from those discussed. The company does not undertake any obligation to update any forward-looking information, except as required by law. For all important information about this call, including forward-looking statements, please refer to the company's public information or the fourth quarter and full year 2025 results announcement ended December 31, 2025 issued earlier today. During today's call, management will also discuss certain non-IFRS financial measures. These are provided for additional information and should not replace IFRS-based financial results. For a definition of the non-IFRS financial measures, a reconciliation of IFRS to non-IFRS financial results and related risk factors, please refer to our fourth quarter and full year 2025 results announcement. For today's call, management will use Chinese as the main language, a third-party interpreter will provide simultaneous English interpretation in the prepared remarks session and a consecutive interpretation during the Q&A session. Please note that English interpretation is for the convenience purposes only. In case of any discrepancy, management's standards in the original language will prevail. Lastly, unless otherwise stated, all currency mentions are in RMB. I will now hand the call over to Yixiao. Yixiao Cheng: [Interpreted] Hello, everyone. Welcome to Kuaishou's Fourth Quarter and Full Year 2025 Earnings Conference Call. Over the past year, guided by our tech-driven user-centric philosophy, we accelerated the execution of our AI strategy across all major business areas, our Kling AI, multimodal large video generation models maintain a global leading position, and we continue to leverage our advanced capabilities to empower Kuaishou content and commercial systems. These efforts supported a high-quality growth across the user scale, revenue expansion and profitability. In Q4 2025, average DAUs on the Kuaishou app reached 408 million, representing solid year-over growth. Total revenues for Q4 2025 increased by 11.8% year-over-year to RMB 39.6 billion. Revenue from our core commercial business, including online marketing services and other services, primarily e-commerce increased by 17.1% year-over-year. Adjusted net profit increased by 16.2% year-over-year to RMB 5.5 billion. For the full year 2025, average DAUs in Kuaishou app reached 410 million, and total revenues increased by 12.5% year-over-year to RMB 142.8 billion. Adjusted net profit for the full year increased by 16.5% year-over-year to RMB 20.6 billion, with an adjusted net margin of 14.5%. As we scale AI investments, we continue to deliver steady improvements in the group's overall profitability. Our AI capabilities have become a core engine driving Kuaishou's long-term growth. Meanwhile, as disclosed in the results announcement given the company's business performance, the Board has recommended the payment of a final dividend of HKD 0.69 per share for the year ended December 31, 2025, amounting to approximately HKD 3 billion in total. This reflects our confidence in company's long-term growth prospects and solid financial position as well as our unwavering commitment to enhancing shareholders' value ensuring the benefits of the company's strong cash flow generation. We are sincerely grateful for our investors to continue to support quite a steady growth. It would not have been possible without the trust and support of our shareholders. Looking ahead, by staying closely aligned with the business development and market conditions, we'll flexibly evaluate and continue advancing diversified shareholder returns, including share repurchases and dividend distributions to deliver the fruits of our growth to all our shareholders. Next, I will walk through the details and progress of our major business segment in Q4 2025. First, our AI strategy and the progress of our large video generation model, Kling AI. Kling AI remained committed to its core vision of empowering everyone to craft competing stories with AI aiming to become the premier inclusive, efficient video regeneration infrastructure for the AI era, while driving continuous breakthroughs in model capability, product experience and monetization. In Q4 2025, Kling AI accelerated rollout of multiple model upgrades across several iterations. We launched the Kling01, the world's first unified and multimodal video model developed on the multimodal visual language architecture, Kling01 transcends traditional [indiscernible] video generation models by integrating multimodal text video image and subject increasing a single generative managing engine. Kling01's unified architecture enables end-to-end content creation within 1 model system, allowing users to envision systematically from generation to editing and refinement without switching tools. We also released the Kling Video 2.6 model, which incorporates simultaneous audio visual generation capabilities. The model can generate a complete video containing natural voiceover, sound effects and ambient audio in single process, enhancing creative efficiency across the AI video creation flow. Kling Video 2.6 also introduced a motion control feature that enables users to replicate a specific movement from uploaded videos or from the online motion library. By pairing this with the character reference image, users can generate character specific videos with the frame level precision in both body movements and facial expressions. In February 2026, we launched the Kling AI 3.0 model series developed under on all-in-one product framework, Kling 3.0, supports full multimodal input and output, spanning text images, audio and video, integrating video understanding, generation and editing within a single streamlined AI workflow. This modes unifying multiple tasks within a native multimodal architecture, enable more complex narrative logic, automated story boarding and precise shot control while maintaining strong prompt adherence. Kling AI's innovations in foundational models and product features have paved the way for what is spread commercial applications across professional creative sectors, including marketing, e-commerce, film and television, short plays, animation and gaming. These capabilities have supported a stronger adoption among professional creators and enterprise clients globally, earning the model's widespread acclaim and accelerating their monetization. In Q4 '25, Kling AI achieved revenue of RMB 314 million. Notably in December 2025, Kling AI's monthly revenue exceeded USD 20 million, corresponding to an ARR of USD 214 million. At the same time, Kling AI's motion control feature gained significant traction across major global social media platforms, driving widespread discussion and organic distribution. This momentum brought in Kling AI's reach beyond professional creators to a broader mainstream user base. In Q4, '25, we continue to deepen the impact of large AI models to empower our content and our commercial ecosystems while driving further quality and efficiency improvements or organizational infrastructure. In terms of strengthening the foundation of our content ecosystem, our proprietary multimodal large language model, Kwai Keye-671 billion model has demonstrated strong video comprehension capabilities. Meanwhile, we upgraded our short video and live streaming content understanding in the system and launched a TechNext, our next-generation teching system, which enables more accurate content understanding, driving higher app usage time per user and the retention rate. In content recommendation, we iterated our end-to-end generator recommendation large model with the launch of OneRec-V2, continuously enhancing the precision of the recommendations. For online marketing services, we further optimized our end-to-end generative recommendation technology by deeply integrating multidimensional business data, we enhanced model performance and improved the precision of online marketing material recommendations. For intelligent bidding technology, we developed a unified bidding large model built on multi-scenario and multi-objective data. Together, our generated recommendation large models and intelligent bidding models drove roughly 5% of growth in Domestic Online marketing services revenue in Q4 '25. While reducing the cost of generating online marketing materials, AIGC technology also unlocked additional budgets from our online marketing clients. In Q4, the total spending from online marketing services driven by AIGC marketing materials was nearly RMB 4 billion. For e-commerce business scenarios, during Q4, we further iterated our end-to-end generative retrieval architecture OneSearch. We introduced editable structured Semantic identifier tailored to the e-commerce business, enhancing sematic understanding for mid- to long-tail search query. This drove a nearly 3% increase in search order volume in shopping mall in Q4. In addition, we expanded the application of end-to-end regenerative recommendation technology from pan-shelf-based e-commerce to content driven scenarios such as livestreaming rooms and short videos, propelling GMV growth in all e-commerce scenarios. For live streaming business scenarios, we further refined the AI Universe gift customization feature to deliver better interactivity, reach our dynamic presentation, more refined visual aesthetics, significantly increasing users' willingness to send virtual gifts. To drive the organization efficiency, we have completed the upgrade of our intelligent coding tools, our self-developed AI programming tool CodeFlicker has evolved from a coding assistant to an AI engineer with more engineers adopting the agent-based coding model and the generation rate of new code has roughly risen over -- to over 40%. Moreover, our AI advancements are underpinned by our investments, and we're going to optimization in computing power infrastructure. Building on the success of our self-operated in-house self-built data center, we are steadily advancing the construction of our new computing power center to continuously elevate server and bandwidth operating efficiency. Second, user growth and content ecosystem. In Q4 '25, average DAUs on the Kuaishou app reached 408 million, and MAUs reached 741 million with average daily times spent per DAU on the Kuaishou app was 126 minutes. We're committed to building a vibrant community with the distinctive quality Kuaishou characteristics, continuously strengthening high-quality user growth, differentiated premium content supply, traffic mechanism optimization and interactive scenario development to achieve a healthy, sustainable expansion in both the user scale and traffic to drive the high-quality user growth that we refine user acquisition strategies across channels to continue to optimize the user segments and improve the retention rates. We also leveraged AI technology to enhance push strategies, including resulting in a higher open rate for Kuaishou app. In addition, we introduced innovative user engagement retention initiatives that are consistently improved ROI. Harnessing our established capabilities and content operations, we supported the growth of benchmark creators like Xinyu the Ostrich Lady and continue to create and cultivate high quality top-tier content IPs with the distinctive Kuaishou characteristics, rural culture and entertainment activities, exemplified by the Village Gateway Mini Stage in able to call rural residents to transition from passive viewers to active on-stage participants, featuring diverse content ranging from intangible cultural heritage performances to agricultural technology demonstrations. These initiatives enriched the rural culture life and provided a new channel fo showcasing rural culture. We produced the 6th anniversary concert for Teens in Times, which garnered over 680 million live streaming views. Leveraging live streaming, interactive features and AI-powered creative content, we crafted a shared youthful memory that fosters a mutual bond between the fans and idols. We optimized our traffic mix of increased traffic exposure for top-tier original content, fostering a virtual cycle between content creation and consumption. In Q4, the number of high-quality content uploads increased more than 15% year-over-year. To further develop engagement scenarios, we continued to innovate private messaging engagement features, driving year-over-year increase of nearly 3 percentage points in daily average penetration rate of private messages among users with mutual followers during the quarter. Third, online marketing services. In Q4, revenues from online marketing services to reach RMB 23.6 billion, up 14.5% year-over-year. The accelerated integration and innovative application AI across diverse online marketing service scenarios, not only empowered our ecosystem partners, but also injected a new growth momentum into our online marketing services business. In Q4 '25 within lifestyle service sector, where clients primarily operate under lead-based model, we have the clients to reach users more efficiently and achieve the higher user conversion rates by upgrading our private messaging products and optimizing our algorithms at the same time by continuously expanding into more industries and acquiring new clients. We broadened our online marketing client base and generated incremental marketing placements. In addition, as the lifestyle service actor clients are predominantly small and medium-sized business, we leveraged AIGC tools to enhance their ability to produce market materials. These enhancements for the barriers for marketing placement and drove further growth in online marketing spending. In Q4, content consumption sector, led by short plays, comic-style short plays, mini games along with the application sector were the key growth revenue driver for the non-e-commerce online marketing services. In the content consumption sector, short plays continue to sustain solid growth by optimizing marketing materials exposure format. So we increased the marketing spending in short play vertical meanwhile, empowered by the deep integration of AI technologies. Comic style short plays advanced rapidly through continuously comprehensive supporting programs and rolling out the comic style short play AI agent, we further expanded high-quality and diverse content supply to capture emerging growth opportunities in the sector. Moreover, rising market budgets from clients across the AI application vertical, we leveraged our insights into industry placement pace and market trends to consistently optimize resource allocation and commercial efficiency, effectively channeling and capturing marketing placement and spending from AI application clients. In Q4, for online marketing products, we continued to upgrade offerings including our UAX placement solutions, the AIGC marketing material solutions, live streaming digital human solutions and digital employee solutions. These enhancements helped to lower various marketing placements, improved client placement experience and drive further growth in online marketing spending. Specifically during the quarter, UAX developed a periodic delivery and account level smart replacement product. These upgrades enable clients to extend managed campaign cycles and alert system management from the app unit level to account levels, thereby improving overall delivery efficiency, raising the selling floor campaign scale and providing more stable cost performance for our clients. In Q4, penetration rate of our UAX placement solutions accounted for nearly 80% of the non-e-commerce marketing spending and its penetration rate among active users exceeded at 90%. For e-commerce marketing services following our consolidation of e-commerce business and related online marketing team made September last year to advance traffic synergy, we established our closed-loop capabilities and pricing traffic, transaction, online marketing conversion and merchant services. This was designed to align our platform's overall revenue growth with merchant mix refinement, enabling e-commerce merchant in GPM and CPM for marketing services to improve in tandem in Q4. In first half of 2025, we essentially completed capability refinement of our omni platform marketing solution. In the second half, we focused on addressing differentiated scenario needs across diverse customer segments, effectively increasing incremental GMV generated for e-commerce merchants across omni-domain scenarios and enhancing business stability. In Q4, our omni platform market inclusions accounted for even greater share of our total e-commerce marketing spending, rising further to 75%. Our omni platform product promotion achieved full coverage across products and scenarios, becoming the primary placement offering for our e-commerce marketing services. Our fully managed the auto placement and product combo for small and medium-sized merchants gained broader adoption and recognition, driving a significant increase in spending by these customers. In Q4, by continuously optimizing our pan-shelf-based e-commerce scenarios and strengthening the synergy of omni domain supply and aligned distribution, our e-commerce marketing services revenue pan-shelf-based scenarios increased rapidly year-over-year. Fourth, our e-commerce business. In Q4 '25, our e-commerce GMV grew 12.9% year-over-year to RMB 521.8 billion, building on the systematic omni domain operations category for their integrated pathway between public domain, traffic conversion and private domain asset accumulation, unlocking a new growth engine for merchants and supporting their stable, sustainable operational development across diverse scenarios. During Q4, we continue to empower merchants, strengthen their private domains and operational efficiency, broadening a variety of supply as a result, repeat purchase frequency of active e-commerce merchant users further increased year-over-year. Meanwhile, by enhancing the operations of our key product categories, anymore precisely identifying the needs of our core user bases, we drove continued growth in ARPPU. In Q4 2025, we mobilized the combined strength of service provider agencies and industrial zones to broaden our e-commerce supply, guided by a full life cycle framework. For new merchant development, we deepened our cost reductions and efficiency enhancement, stepped up incubation programs for new merchants, strengthened support for merchants from industrial zones and for the optimized business environment. Collectively, these measures bring force to merchants operational stability, empowered both new merchants in a small and medium-sized merchants to grow and enhance long-term predictability, sustainability of merchant operations during Q4. Both newly onboarding merchants and newly onboarded active merchants growing year-over-year and quarter-over-quarter, driving our active merchant base to another record high, up 7.3% year-over-year. Furthermore, in Q4, we launched the Voyage Initiative focusing on in-depth partnerships with the top tier brands in diverse sectors through a coordinated resource empowerment and initiative aimed at a pioneer new model of mutually reinforcing growth for both the platform and the brand. At the end of December, we began to capture early benefits from our high-quality product and content supply as well as merchant mix optimization. In terms of our live streaming scenario development, the Pop-Up Follower Red Envelopes initiative, which was launched in Q3 to drive targeted follow growth, achieving a meaningful result. By increasing the streaming frequency of streamers with over 10,000 followers, the program drove a 12.7% year-over-year increase in the number of average daily active streamers hosting live sessions with over 10,000 followers, further reinforcing virtuous cycle follower growth and transaction performance in Q4. Through coordinated operations with agencies and leading to organizations, we expanded our KOL supply to further empower KOLs, we advanced our platform endorsed product offerings, which are trusted by both merchants and KOLs building on this foundation, our KOL Blockbuster Initiative focus on high-demand product categories, highlighting our platform's strong order aggregation capabilities and driving greater KOL participation and distribution. The penetration of KOL within our distribution pool continued to improve with a number of active KOLs more than doubling year-over-year, supported by our platform endorsed product offerings, mid-tier to small and medium-sized KOLs were able to overcome product selection challenges and with platform traffic support, they achieved meaningful leaps in operational scale. In Q4, our omni domain operations ecosystem, including pan-shelf-based e-commerce and short videos, continue to demonstrate steady and resilient development. In Q4, the contribution of pan-shelf-based e-commerce GMV to total e-commerce GMV remained broadly stable quarter-over-quarter. We continue to expand our supply scale driving sustaining year-over-year and quarter-over-quarter increases in average daily active merchants for pan-shelf-based e-commerce. Super Links and the official channel for platform recommended products continue to strengthen its role as a core operational tool for shelf-based offerings, which achieved a record growth during the quarter. In Q4, Super Links penetration rate and pan-shelf-based e-commerce product cards reached 19.1%. We also encouraged merchants to expand omni domain operations by leveraging our marketing hosting tools. We guided merchants in content-based scenarios towards shelf-based operations significantly increasing the penetration rate of active merchants using our marketing hosting tools quarter-over-quarter. During Q4, we further advanced our short-video e-commerce content supply, prioritizing refined merchant-centric operations. By continuously leveraging the synergy between short videos and live streaming, we enriched our high-quality content supply and optimized funnel efficiency. These efforts led for a significant growth in short video e-commerce GMV, which continued to outpace overall e-commerce GMV growth. In Q4 '25, we deepened AI integration across e-commerce scenarios delivering tangible efficiency gains for merchants while supporting their growth. The broader rollout of OneRec, OneSearch and other large language model technologies across the e-commerce scenarios continue to generate incremental value. powered by e-commerce knowledge graph and leveraging large models' world knowledge and reasoning capabilities, we strengthened our foundational understanding of products, videos and users. This enabled a more accurate long-term user-interest modeling, improved recommendation diversity and drove higher revisit and repurchase behavior. E-commerce content new generation capabilities have also advanced during the fourth quarter. Features such as live streaming highlights and AI-assisted content creation further strengthened merchants across scenario operating capabilities, propelling step change growth in both content output and GMV. To improve operating efficiency, we launched an AI-powered order analysis feature in Q4, helping merchants identify abnormal orders more effectively, reduce pre-shipment refund rates. Next, regarding our live streaming business. In Q4, live streaming revenue was RMB 9.7 billion. We remain focused on fostering healthy live streaming ecosystem during the quarter, oriented towards high-quality, value-driven content and reinforcing the platform's community-centric core. For live streaming supply, we continue to intensify in professional operations of our core competitive categories, including group live streaming and multi-host live streaming, while strengthening coordinated development across multiple categories. This enriched our live streaming content operations portfolio and drove us to develop improvements on the supply side, better serving users diversified preferences. Our Grand Stage deepened integration between online and offline scenarios supporting the incubation of distinctive streamers on our platform while increasing user engagement. On the product side powered by Kling AI video generation capabilities, our AI universe gives a series with customizable special effects, enhanced interactive feature experience, dynamic motion rendering and visual aesthetics. As of the end of the fourth quarter, the number of cumulative AI Universe gift creations succeeded 1 million. In addition, we expanded the application of the AI capabilities in our live streaming rooms, empowering streamers with AI Interaction Assistant and AI Digital Avatar Solutions to improve streamers' service efficiency. In Q4, our live streaming+ model extended the boundaries of the live streaming ecosystem while also unlocking additional commercial value. Through refined operations, our Ideal Housing and Kwai Hire business deliver both quality improvement and efficient gains. In Q4, the average monthly number of Ideal Housing paying clients increased by over 40% year-over-year. Finally, our overseas business progress. In Q4, we remain firmly committed to our high-value growth strategy, supporting a virtuous business cycle across our overseas business. Despite a complex market dynamics, we achieved a steady growth in overseas business. On the traffic front, while improving customer acquisition efficiency and optimizing our user growth structure, we strengthened the user mind share for the Kuaishou community by expanding the supply of content with a distinctive Kuaishou characteristics, further broadening our core user base. Brazil, our key markets of our overseas development, maintained stable DAUs and time spent per DAU. For online marketing services, we captured the industry opportunity to expand brand presence in Brazil, growing our client base across diverse industries. In addition, we upgraded our products and solutions and actively exploring the new content-driven marketing scenarios, including short videos to improve client performance visibility and unlock new growth momentum supporting our client's long-term development. Our e-commerce business in Brazil achieved a steady year-over-year growth in GMV transaction scale and order volume in Q4, supported by AIGC driven improvement in e-commerce content and quality and operational efficiency and aided by more refiner logistic cost to management, our overseas profitability improved significantly. Looking back over the past year despite multiple challenges, we anchored our core AI-first strategy, leveraging our profound technological expertise, a thriving diverse content ecosystem and continuously enhanced infrastructure and commercial footprint. We collaborated with ecosystem partners to drive systematic growth. Looking ahead, although challenges will intensify, we remain steadfastly guided by our user needs. We're deeply cultivated the building of a one inclusive and a universally accessible digital community, while continuously deepening the seamless integration of AI technologies across our business. This empowers our merchants and marketing clients to effectively elevate their operational productivity. Staying true to our long-term vision, we will deliver a superior user experiences, build broader platform for our partners and create a more sustainable value for our shareholders, collectively unlocking new growth opportunities in the AI era. That concludes my prepared remarks. Next, our CFO, Bing will review the company's financial data for the fourth quarter and full year 2025. Bing Jin: [Interpreted] Thank you, Yixiao, and hello, everyone. Looking back to the past year, we significantly progressed our AI strategy and achieved remarkable results, leveraging our advanced AI capabilities. We strengthened Kuaishou's content and commercial ecosystems, delivering high-quality growth across both our operational and financial metrics. We continue to refine our user growth and retention strategies, resulting in an average DAUs reaching 410 million for the full year. At the same time, we deepened the application of AI large model across multiple business scenarios delivering superior experience for our users, creators and business partners while further improving our operational efficiency. For the full year of 2025, total revenue grew 12.5% year-over-year to RMB 142.8 billion. Adjusted net profit reached RMB 20.6 billion, up 16.5% year-over-year with an adjusted net margin of 14.5%. Importantly, we achieved this growth while continuing to scale our investments in AI, making steady improvements to the group's overall profitability throughout the year. Now let's take a closer look at our Q4 financial performance. Our total revenue grew 11.8% year-over-year to RMB 39.6 billion in Q4. The increase was mainly driven by growth across normal marketing services, e-commerce and Kling AI. Online marketing services revenue increased 14.5% to RMB 23.6 billion in Q4 from RMB 20.6 billion in the same period last year. The growth was primarily driven by AI-powered upgrades to our online marketing product solutions which improved the conversion efficiency and grow higher spend from our marketing clients. Revenue from other services, including e-commerce and Kling AI business reached RMB 6.3 billion in Q4, up 28% from RMB 4.9 billion in the same period last year. The increase was mainly driven by growth in e-commerce GMV, which boosted our e-commerce commission income. And by the continued expansion of our Kling AI business by continuously refining Kling AI's financial models and developing more innovative features, we have expanded this to a range of applications for professional creators and driven new breakthrough in commercialization. In Q4, our live streaming revenue was RMB 9.7 billion. We continue fostering a rich healthy live streaming ecosystem. At the same time, we refined operations across our core categories, providing users with a more diverse high-quality content, leveraging the end powered product innovation. We also drove greater user engagement through high-quality live streaming content. Cost of revenues increased 9.2% year-over-year to RMB 17.7 billion in Q4, accounting for 44.9% of total revenue. The increase was mainly due to higher revenue sharing costs and related taxes in line with our revenue growth. In Q4, our gross profit grew 14.1% year-over-year to RMB 21.8 billion. Gross profit margin was 55.1%, up 1.1 percentage points year-over-year. Turning to expenses in Q4. Selling and marketing expenses were RMB 11.4 billion compared with RMB 11.3 billion in the same period last year. Selling and marketing expenses declined to 28.8% of total revenue, down from 32% in Q4 last year, reflecting the stronger effectiveness of our sales and marketing. R&D expenses increased 20.1% year-over-year to RMB 4.1 billion, accounting for 10.5% of total revenue. Increase was really due to higher employee benefit expenses, including share-based compensation expenses and increased investments in AI. Administrative expenses was -- were RMB 930 million compared with RMB 8.7 million in the same period last year. And administrative expenses accounted for 2.4% of total revenue, largely flat year-over-year. Group level net profit for Q4 was RMB 5.2 billion. Group level adjusted net of profit rose 16.2% year-over-year to RMB 5.5 billion with an adjusted net margin of 13.8%. Our balance sheet remains robust. Cash and cash equivalent, time deposit financial assets and restricted cash totaled RMB 104.9 billion as of December 31, 2025. Net cash generated from operating activities in Q4 was RMB 7.3 billion. Additionally, we actively delivered on our commitment to shareholder returns based on the market conditions. As of December 31, we had repurchased approximately HKD 3.12 billion or around 56.78 million shares, representing about 1.32 percent of our total shares outstanding for 20. Next, I'll provide a quick overview of our financial performance for the full year. For the full year of 2025, our group's total revenue reached RMB 142.8 billion, up 12.5% year-over-year. This includes online marketing services revenue of RMB 81.5 billion, which rose 12.5% year-over-year. Revenue from our online -- our live streaming business increased by 5.5% year-over-year to RMB 39.1 billion. Revenue from other services, including our e-commerce business, totaled RMB 22.2 billion, an increase of 27.6% year-over-year. Gross profit margin expanded by 0.4 percentage points year-over-year to 55% in 2025. Our adjusted net profit for the full year of 2025 was RMB 20.6 billion, up 16.5% year-over-year with an adjusted net margin of 14.5%. Looking ahead, we will continue to prioritize the user needs and we remain committed to investing in AI, leveraging our leading AI capabilities. We will drive further innovation across Kuaishou's content and commercial ecosystems, maintaining our core competitive edge in the rapidly evolving market and delivering high-quality and sustainable long-term growth for the company. Here concludes our prepared remarks. Now we can open for Q&A. Operator: [Interpreted] [Operator Instructions] The first question comes from Lincoln Kong from Goldman Sachs. Lincoln Kong: [Foreign Language] Congrats on the solid fourth quarter results. My question is about Kling AI. So we have seen an accelerating pace for various video generation models across the industry, including CDAS 2.0 launching recently. So what's the impact for the overall industry and to Kling itself. And therefore 2026, what are the strategy or the plans for Kling in terms of our model capability, product upgrade as well as monetization? Unknown Executive: [Interpreted] Thank you for the question. As we mentioned before, large video generation models are highly complex, both the input and output modalities are open-ended, which allows for considerable flexibility in technical pathways and product strategies, leaving significant room for innovation. At this stage, we believe video generation technologies and products are so far from maturity, but especially from diverse players in the ecosystem can help exonerate industry advancement and better meet user needs. Recent accelerated updates to large video generation models, including CDAS 2.0 and others have brought positive momentum to the industry. While lowering the threshold for everyday users to create content, they also have increased the penetration of AI video generation across a wider range of applications scenarios, effectively expanding the overall market. CDAS 2.0 adopts the multimodal input architecture, which aligns with the Kling01 model we released in December last year, underscoring our revisionary early positioning in multiple iterations centered on multimodal capabilities. Kling AI continues to maintain globally leading position in both model and product capabilities. Kling AI was ranked among the top video generation models by artificial analysis.ai with exceptional benchmark scores. Regarding character consistency and controllability, fiscal realism and stability in complex scenarios, including AI 3.0 model series demonstrate stronger performance reinforcing Kling AI's differentiated advantages among professional creators and enterprise clients. Kling AI played a key role in the production of virtual singing and visual effects in the recent hit drama supports into cloud shares produced by film and TV. It delivered high quality and commercial-grade content while significantly reducing production costs. The partnership is a primary example of Kling AI's commercial value in top-tier film and television production. It validates our focus on film and television production scenarios, as the live strategic direction. In terms of revenue, Kling AI maintained a strong month-over-month growth throughout the year, reaching an annualized revenue run rate or ARR of over USD 300 million in January. Based on what we are seeing now, we are confident that Kling AI's revenue in 2026 will more than double. Regarding Kling AI's model iteration over the past year, we have consistently evolved in the unified native multimodal path. When we launched the Kling AI 2.0, we introduced the concept of multimodal visual language or MVL which enables creative expression by combining multiple modalities and addresses the limitations of pure text interactions. With the release of the Kling01 large model in December 2025, we advanced the MVL interaction architecture even more, enabling multimodal inputs across text, image and video. Around the same time, we launched our Kling 2.6 model for simultaneous audio visual generation, multimodal product capabilities. In February this year, we launched the Kling AI 3.0 model series, developed under an all-in-one product framework and this series towards full multimodal input and output within a single model. Looking ahead, we plan to expand the many modalities in our models to further enhance controllability and video generation, including modality for motion and facial expressions. We will also focus on addressing the configuration and consistency challenges of complex scenarios. Meanwhile, on the product front, we will keep advancing our AI agent capabilities to enable fully automated end-to-end content creation. The goal is to empower our models to automatically plan storyboards based on user needs, ensure consistency across characters and scenarios and simultaneously generate well-aligned audio and visual design lighting, visual term and camera movement. Overall, Kling AI remains committed with its vision of empowering everyone to craft [indiscernible] stories with AI. We will continuously refine our model and product capabilities, sustaining Kling AI's global leadership in technology, product and commercial monetization. Operator: [Interpreted] The next question comes from Daniel Chen of JPMorgan. Qi Chen: [Interpreted] So my question is related to the AI investment strategy. So besides the multimodal and video generation area which related to Kling AI, where do -- what are the other segments that management thinks are worse, more investment in the future? Unknown Executive: [Interpreted] Thank you for the question. Regarding the direction of our AI investments, beyond the multimodal video generation domains, we will continue to invest in the research and development of an application of large models across our content and commercial ecosystem scenarios such as large generative recommendation models and large multimodal understanding models. In terms of the large generative recommendation models, over the past few quarters, we have seen significant potential for generative models in recommendation scenarios and we will continue to explore in this direction. For example, in our online marketing recommendation system, we are exploring deeper integrations between generative models and our ranking architecture, shifting from single request optimization to long-term value modeling. In terms of the model capabilities, by leveraging our lens to introduce a stronger logic reasoning, inference and broader world knowledge, we are attempting to break the data feedback loop problem found in traditional recommendation systems. Concurrently, we are building a native, highly concurrent and scalable next-generation ranking architecture for large recommendation models. Through system design and foundational engineering upgrades, we aim to ensure that the expansion of computing power and parameter scale translate into performance improvements. In the direction of the large multimodal understanding models, our proprietary multimodal foundational large language KwaiYii empowers Kuaishou's content understanding infrastructure. In core short video and live streaming scenarios, KwaiYii performs video parsing and user behavior inference effectively driving improvements in the user time spend and retention metrics. Moving forward, we'll upgrade our AI capabilities from one-way passive Q&A to a long-term contextual understanding and a complex task processing further expanded the application to core monetization scenarios such as online marketing services and e-commerce and develop practical intelligence assistance with multimodal interaction capabilities to drive greater commercial value. In 2026, we will also explore the application of agent capabilities across other various business areas. For example, in online marketing scenarios, we are developing an AI agent that delivers automated marketing placement for our e-commerce merchants. This covers the entire workflow from intelligent product selection, creative editing and AI-generated materials, smart bidding and dynamic pricing and customer support and post placement data analysis, lowering the threshold for clients to place marketing materials and improving placement of performance and cost stability. Additionally, we will also explore sales AI agents for lead focused sectors, helping clients improve lead conversion efficiency and reduce customer acquisition costs. In e-commerce scenarios, we will improve the user search experience through the development of a search and recommendation agent, driving higher user search-based order volumes. We will also explore agent-based automated computing power optimization. We will further share our progress on these fronts with you at appropriate time. Finally, we will also advance the construction of the new computing power centers. Computing power is the core foundation and underlying support of our AI development, meeting the company's demand for R&D iteration, model training and inference enhancement. We have integrated the construction of computing centers into our strategic planning, aiming to solidify the computing foundation for AI development. By reserving expansion space to accommodate long-term needs, these centers will deeply support core tasks such as AI algorithm optimization and large model training, empowering our AI innovation with a robust computing foundation. In summary, we will continue to deeply calibrate the R&D of core technologies and their implementation across multiple scenarios. With firm computing investments and a deep AI talent pipeline, we will empower our content ecosystem and realize continuous growth in commercial value of our ecosystem partners. Thank you. Operator: [Interpreted] The next question comes from Thomas Chong of Jefferies. Thomas Chong: [Interpreted] On e-commerce, how should we think about the growth strategies in 2026? How should we think about the trend this year and the growth opportunities? Unknown Executive: [Interpreted] Thanks for the question. Our broad focus for 2026 remains on returning to the essence of Kuaishou's content-based e-commerce and on maximizing our strengths as the content platform. Our growth strategy spans across 3 areas. First, we'll focus on the supply side reforms to continuously refine supply and consistently offer good products. As mentioned earlier, in Q4 2025, we launched a Voyage Initiative to provide a targeted support for top-tier brands. It's designed to help them quickly achieve strong start and sustained growth within the Kuaishou ecosystem. In 2026, we will also invest in more resources on the supply side, primarily across 4 areas: merchant traffic, product, operations and services. Our focus will extend beyond brands to include merchants in the key industrial zones. We already identified 100 priority industrial zones and we are actively managing them. Meanwhile, we are working closely with our e-commerce industry team, small- and medium-sized merchant team and service providers to empower our new merchants. As the e-commerce market matures and macroeconomic dynamics remain challenging, the relationship between platforms and the brand is being reshaped. Platforms are evolving from single transaction roles to collaborative partners that grow alongside merchants. As we empower merchants more effectively, we also plan to refine the platforms, the supply ecosystem and provide users with a wider variety of products. Second, we will continuously improve in paying user acquisition and penetration. Currently, there's still significant growth potential in a number of e-commerce monthly average paying users. In 2026, we'll focus on exploring and better understanding users' interest in e-commerce content. We will also optimize our traffic strategies and leverage effective subsidy mechanisms and across scenario synergies to boost paying user conversion and scaled growth within superior products. Third, we will further optimize resource integration. This quarter, we have seen some preliminary success in implementing traffic synergy. Moving forward, we aim to deepen the integration between e-commerce and commercialization, enhanced coupon synergy, improved subsidy efficiency and optimize the overall resource allocation and investment efficiency. We believe that the inherent conversion advantages of content-based e-commerce will continue to drive its penetration in the online retail market. Over the past year, categories such as men's and sportswear and fresh food grew rapidly. We expect these verticals to maintain their growth momentum this year. As we just mentioned about ramping supply in 2026 and leveraging intelligent operational tools to help merchants reduce costs and improve efficiency while offering them a clear, more certain path for growth. We expect even more structural growth opportunities in content-based e-commerce. In 2026, we expect Kuaishou e-commerce to achieve steady, high-quality growth. Under the promise of high-quality growth, we will further strengthen our e-commerce monetization capabilities and deepen the foundational capabilities of our omni platform marketing solution and smart placement products. We expect that the core incremental growth for e-commerce marketing service revenue will come from 3 areas. First, scale expansion. By focusing on key verticals and broadening industry supply, we aim to scale monetization through e-commerce marketing services in categories such as cosmetic sports and outdoors, fresh food and home furnishings. Second, efficiency improvement. We will actively bring in more brand clients, optimize client composition and integrate resources to drive aligned growth for both GMV and marketing spending. Women's apparel and health care will be a particular focus where we can enhance monetization efficiency. Third, sector expansion. We will expand into sectors where we lag our competitors, such as maternal and children pad and consumer electronics, identifying clear opportunities in driving breakthroughs. In addition, we are also looking to continuously improve monetization efficiency in shelf-based e-commerce. By expanding omni domain product supply, we can increase merchants' marketing budgets on product cards. In short, guided by the e-commerce growth strategy and monetization road map we outlined for 2026, we will take a steady, disciplined approach. We will focus on the right long-term initiatives while leveraging our content platform strengths to better meet the consumption needs of our users. Operator: [Interpreted] The next question comes from Felix Liu Lee of UBS. Felix Liu: [Interpreted] Sorry, just let me finish the English translation in addition to e-commerce, what are the main advertisement industry growth opportunities in 2026? And how do we plan to capture these opportunities? Unknown Executive: [Interpreted] Thank you for your question. From a sectoral perspective, we believe the key growth opportunities this year will mainly come from 3 sectors: lifestyle service, comic-style short plays and AI applications. In the lifestyle service sector, we have seen a continued shift in user behavior from traditional search platforms toward content platforms. Short videos and live streaming formats are more effective at building user trust, reducing decision-making friction and improving conversion efficiency. In addition, the lifestyle service sector continues to deepen its online penetration for merchants in sectors like agriculture, materials, education and automotive. Online platforms are gradually becoming key channels for our marketing and customer acquisition and the platform level will continue to upgrade our products to help merchants reach their potential customers more effectively, while enhancing our in-platform interaction capabilities to improve conversion rates. Moreover, clients in the lifestyle service sector are mostly small and medium-sized merchants that require strong customer service and operational support. Through our AIGC marketing material solutions, we help small- and medium-sized merchants generate marketing materials at a low cost. In addition, our AI-powered customer service solutions to enable merchants to provide 24/7 online support. In the content construction sector, as AI technology significantly improves content production efficiency and lowers production costs, the emerging content format, comic style short plays is advancing rapidly. As a top-tier player, Kuaishou has the dual advantage of our mature short-play ecosystem and the world-leading video generation model by deeply integrating content and technology, where building a comic-style short-play ecosystem that spans the entire value chain from tools and content to distribution. Additionally, we introduced a full-scale comic-style short-play support program covering computing power, traffic and other resources. These continuously enrich the platform's comic-style short-play content supply and boost online marketing spending in this category. Since the second half of last year, the total spending from online marketing services driven by Kuaishou's comic-style short-play has increased rapidly. In March this year, peak daily marketing spending exceeded RMB 15 million. The AI application sector is also what we view as another key growth driver for 2026. As the AI technology continues to advance and new applications emerge, the industry remains in a rapid growth phase. We expect depending on the relevant sectors to continue growing significantly in 2026. Against this backdrop, we will strengthen and refine our operations for our clients, continuously optimize short and long-term retention metrics, helping clients maximize the user lifetime value, all of which will prompt AI application clients to increase both their marketing spending scale and commitment on our platform. In summary, for 2026, harnessing our product upgrade content ecosystem development and refine our operations for our clients in priority sectors. We aim to better capture incremental growth opportunities in the lifestyle service sector, comic-style short-play and AI applications, driving solid growth in our online marketing services revenue. Huaxia Zhao: Operator, last question, please. Operator: [Interpreted] The next question comes from Yuan Liao from Citic. Yuan Liao: [Interpreted] You have repeatedly mentioned the construction of computing power centers. So my question is, could management share your plan scale of AI-related CapEx in 2026? And the key area of your investment? So how will this CapEx investment affect your overall profit margin? Bing Jin: [Interpreted] Thanks for the question. As Yixiao said, over the past year, we have fully deepened our AI strategy, our multimodal large leader generation model, Kling AI has achieved impressive results in technology and advancement, product duration and commercial monetization. At the same time, AI has delivered strong value empowering our content and commercial ecosystems, reinforcing our commitment and confidence to continue investing in AI. In 2026, we expected the group's total CapEx to reach approximately RMB 26 billion, an increase of about RMB 11 billion compared with 2025. This covers computing resources for Kling AI's large models and other foundational models as well as routine server procurements such as off-line data storage and processing and investments in data and computing center infrastructure. The increase in CapEx for Kling AI's large models is partly due to higher inference computing needs from our expanding user base and revenue scale. It also takes into consideration of our major Kling AI model upgrades scheduled for the year, which require additional investment in training computing power. With advancement of model iteration in the future, we will also flexibly allocate computing resources between inference and training to maximize the efficiency of computing resource utilization. I would also like to emphasize that we are highly focused on cash flow management and maintaining ample cash reserves in 2025 despite approximately RMB 15 billion in CapEx, the group delivered nearly RMB 12 billion in free cash inflow for the year. For 2026, even with increased CapEx, we aim to continue maintaining positive free cash flow at the group level for the full year. We believe that every investment today will efficiently translate into future profit drivers. As we stay focused on long-term technology investments, we will maintain disciplined financial management and ample cash reserves. Our robust balance sheet will empower the group's sustainable high-quality growth in the AI era. Thank you. Huaxia Zhao: That concludes the Q&A session. Thank you, operator. Operator: [Foreign Language] Huaxia Zhao: Thank you, operator. [Foreign Language] Operator: Thank you once again for joining us today. If you have any further questions, please contact our capital market and IR team at any time. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte Fourth Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised today's conference may be recorded. I will now hand the conference over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead. Dean Ridlon: Thank you, operator. Hello, everyone. I'm Dean Ridlon, Cognyte's Head of Investor Relations. Thank you for joining us today. I'm here with Elad Sharon, Cognyte's CEO; and David Abadi, Cognyte's CFO. Before getting started, I would like to mention that accompanying our call today is a presentation. If you'd like to view these slides in real time during the call, please visit the Investors section of our website at cognyte.com click on Upcoming Events then the webcast link for today's conference call. I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call, and as except as required by law, Cognyte assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause Cognyte's actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal year ended January 31, 2026, being filed today and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods and among our peer companies that publish similar non-GAAP measures. Please see today's presentation slides, our earnings release and the Investors section of our website at cognyte.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for or superior to GAAP financial information, but is included because management believes it provides meaningful information about the financial performance of our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures that the company uses have limitations and may differ from those used by other companies. Now I would like to turn the call over to Elad. Elad Sharon: Thank you, Dean. Hello, everyone, and thank you for joining us today. Before we begin, I want to acknowledge and thank our employees, customers, partners and investors for their continued support over the past month. Cognyte's mission is to help make the world a safer place. That mission is constant and our teams continue to execute. We delivered strong results in the fourth quarter and closed fiscal '26 with another year of consistent execution. Revenue grew by double digit with strong gross margin, profitability improved significantly, and we continue to generate solid cash flow. Fiscal '26 played out largely as we expected with strong repeat business from our installed base, continued new customer momentum and strengthening profitability. We expect this growth to continue into fiscal '27 and today provided revenue guidance of $448 million at the midpoint of the revenue range, and we are on track to achieving our targets for the fiscal year ending January 2028. We'll share more details later in this call. We operate in a market environment where the underlying drivers continue to strengthen, threats are becoming more complex, adversary is more sophisticated and the volume of data continues to grow exponentially. At the same time, decisions need to be made faster than ever. This is driving sustained demand for mission-critical intelligence technology, exactly where Cognyte is positioned. Our solutions operate in extremely demanding environment across national security, military intelligence and law enforcement. In these environments, performance is not optional. Our customers are not experimenting. They are deploying systems that must work consistently in real operational conditions. Over time, our value becomes deeply embedded in our customers' workflows and operational systems. This creates durable relationships, high switching costs and a strong competitive position. Over the past year, we executed against our 3 primary growth pillars. First, installed base expansion. Customers continue to expand deployments, upgrade functionality and are also extending into new use cases and operational domains. For example, border intelligence. Repeat business continued to represent a significant portion of our revenue, reflecting the trust our customers place in us and the operational value we consistently deliver. Second, new logos. We added 61 new customers this year as our solutions continue to prove themselves globally and deliver real operational value. This important new business is driven by our proven track record and customer references and is aligned with our land and expand strategy. We increased our footprint within military intelligence agencies, including in NATO countries. And third, North America. This is a key market for us. We recently strengthened our North American leadership, bringing in a seasoned sales executive with deep experience and track record in the federal market. We also added a new channel partner, Carahsoft, who will provide access to federal, state and local procurement channels and will support broader deployments of our solutions. Together, these steps reinforce our commitment to scaling our U.S. presence and aligning with long-term federal modernization programs. Our growth is driven by a balanced approach, installed base expansion, new customer acquisition and U.S. market scaling. In Q4, we secured several significant deals across geographies and customer segments. One example is with a long-standing national security customer in EMEA, where we amended the perpetual agreement into a 5-year subscription at a new annual value of $6 million. This reflects both a significant expansion in scope and a shift in commercial model. The transition to subscription was driven by the customers' need for continuous access to new capabilities, AI-driven functionality and faster upgrade cycles. While most agencies still prefer perpetual deployments, we are seeing a gradual increase in the adoption of subscription models. We also signed several multimillion dollar deals across multiple regions, including new solution deployments, expansions and support contracts. In addition, this morning, we announced an about $5 million deal with one of the largest state law enforcement agencies in the United States. This is a new customer win, replacing an incumbent provider. The deployment will support mission-critical field operations, including fugitive apprehension, missing children cases, criminal investigations and search and rescue. It represents an important step in expanding our footprint in the U.S. Security and intelligence agencies globally are accelerating efforts to address increasingly complex threat environments. Today's challenges extend beyond traditional crime and national security. Agencies must respond to hybrid threats, cross-border activity, cyber-enabled and organized crime, all of which increase the volume and complexity of data they must analyze. This is driving sustained demand for platforms that can fuse, correlate and analyze data to deliver actionable intelligence for real-time decision-making. Across regions, we see a consistent shift toward more integrated proactive intelligence models with greater emphasis on cross-unit collaboration and faster time to decision. Our platform is purpose-built to support exactly this type of complex operational environment. As agencies continue to modernize and scale, our positioning is directly aligned with their immediate and long-term priorities. Today, we are seeing growing adoption and reliance on artificial intelligence. AI is embedded in our platform, shaped by real-world investigative use cases and years of operational experience. AI also plays a part in our customers' growing challenges. It increases the scale and the sophistication of the threat to our customers address. In our market, access to AI models and Gen AI is not the main constraints, operationalizing them is. Having access to advanced AI is not enough for an analyst to process sensitive communication data, correlate it with financial and behavioral signals or generate outputs that meet legal and evidence standards. The challenge is everything required to make AI usable in real investigated environments. That includes integrating fragmented and sensitive data, applying domain-specific intelligence methodologies, operating in strict security and compliance frameworks and embedding AI into investigative workflows that produce actionable, auditable outcomes. As AI capabilities continue to advance, this infrastructure becomes more, not less critical. Customers are not buying AI features. They are buying operational outcomes powered by AI. This is what makes our advanced AI operationally useful, and it's not easy to replicate. We believe AI is a structural tailwind for our business. Earlier this month, we hosted our Intelligence Summit, bringing together senior intelligence and law enforcement leaders from across the globe. The level of participation and engagement reinforced Cognyte's strong leadership position within the investigation and intelligence communities. The conversations were direct and forward-looking. Leaders are not discussing theory. They are executing modernization programs now. They are confronting real operational challenges and sharing practical approaches between them and with us. Across panels and closed door discussions, agencies emphasized 3 priorities: connecting fragmented data into a unified intelligence picture, reducing time from data to decision in live investigations, enabling collaboration across units, agencies and even countries. We were honored to host Jürgen Stock, former Secretary General of INTERPOL and former Vice President of Germany's Federal Criminal Police Office as our keynote speaker. He spoke about the importance of sharing fragmented intelligence across domains and the need to partner with the private sector, specifically in technology to accelerate innovation and operational effectiveness. The summit once again confirmed why customers choose to partner with Cognyte, access to advanced proven technology and methodologies, solutions that translate directly into real-time operational outcomes and the quality, support and long-term trust they can rely on. In summary, we delivered strong results. We operate in a growing high barrier mission-critical market. We are expanding with both new and existing customers. AI is a structural tailwind. We remain focused on execution and long-term value creation and are well positioned for continued growth. We operate where the hardest problems live. This is not a coincidence. It reflects 30-plus years of connecting advanced technology to operational realities. Ultimately, we help eliminate the unknown, so our customers can act with clarity, speed and confidence. With that, I'll turn the call over to David for a deeper review of our results. David? David Abadi: Thank you, Elad, and hello, everyone. As Elad outlined, Q4 ends a year of continued strong execution across the business. Our results this quarter and throughout FY '26 demonstrate our durable business proposition, the value of our differentiated solutions and the operational discipline that all drive these strong results. Let me begin with our fourth quarter results. Revenue for Q4 FY '26 was $106.2 million, up $11.7 million or 12.4% year-over-year, reflecting a healthy demand environment and the value of our solutions. Breaking down the revenue mix. Software revenue was $45.9 million, an increase of $8.5 million or 22.6% year-over-year. Software revenue is comprised of perpetual licenses, appliances and some term-based subscription licenses. Software services revenue grew by $3.4 million to $49.3 million. Software services revenue comes mainly from support contracts and to a lesser extent, cloud-based SaaS subscriptions. Total software revenue, which includes the combination of software and software services revenue, grew by $11.9 million year-over-year or 14.2%. Professional services revenue was similar to Q4 of the prior year. Fluctuation in professional service revenue between quarters is expected and are a result of revenue recognition timing. Recurring revenue increased by 5.6% to $50 million, representing 47.1% of total revenue. Note that recurring revenue is calculated from GAAP revenue, driven primarily by support contracts and sub time-based and SaaS subscription offerings that enhances our visibility in both the near and long term. Looking at gross margin, we continue to make significant improvements. Q4 non-GAAP gross margin reached a record of 74.7%, an expansion of 320 basis points year-over-year. Non-GAAP gross profit grew much faster than revenue and increased by $11.8 million or 17.4% year-over-year to $79.4 million. It's important to mention that all the incremental year-over-year increase in revenue flow through to gross profit. This again demonstrates how our differentiation translates into strong gross margins. On profitability, Q4 non-GAAP operating expenses were $67.3 million. GAAP operating income was $5.2 million, up from $697,000 last year. Non-GAAP operating income reached $12.1 million, doubling year-over-year. Adjusted EBITDA continues to expand significantly faster than revenue. It was $15 million, up 62.5% from the $9.3 million generated in Q4 last year. GAAP net income was $5.1 million compared to a net loss of $0.2 million in the same period last year. The improvement is largely due to the significant increase in operating income. Our Q4 performance again highlights the scalability of our model as software revenue grows and the leverage in our model generates significantly higher profitability. While most of our government customers buy through perpetual licenses, we offer both models and have seen some recent wins in subscription. Subscription agreements support greater visibility over time and align with broader software market trends. RPO or remaining performance obligations represents contracted revenue to be recognized in future periods, influenced by factors such as sales cycles, subscription deals, deployment time lines, contract lens, renewal timing and seasonality. The strength of our RPO remains an important pillar of our near- and long-term visibility. While fluctuations are expected in RPO, current levels support our growth expectations. At the end of Q4, total RPO was $557.2 million. Total RPO is a sum of contract liabilities of $123.7 million and backlog of $433.4 million. Short-term RPO rose to $369.5 million, providing solid visibility into revenue over the next 12 months. It's worth noting that had we included cancelable periods of subscription deals in total RPO, it would have increased by approximately $42 million. Q4 billings grew 15.6% year-over-year to $109.9 million. Turning to our full year FY '26 results. Revenue for FY '26 was $400 million, up 14.1% year-over-year. Full year non-GAAP gross margin increased to 73%, up 200 basis points year-over-year, primarily driven by scale and operational efficiencies. We achieved our FY '28 gross margin target 2 years ahead of our plan. Profitability continued to improve significantly, reflecting the leverage we have in our business model. GAAP operating income reached $13.3 million, a significant turnaround from a $5.1 million GAAP operating loss last year. Non-GAAP operating income was $36.7 million, more than double year-over-year. Out of the $49.4 million year-over-year increase in revenue, $21 million flowed through to non-GAAP operating income. Adjusted EBITDA was $48.2 million, up from $29.1 million, a 65.7% year-over-year increase. GAAP net income was $4.6 million compared to net loss of $7.2 million last year. Across the board, FY '26 showcases a disciplined operating model that scales effectively with our strategy. Turning to cash performance. In Q4, net cash from operating activities was $20 million, slightly above the same quarter last year, benefiting from both increased profitability and strong collections. For the full year, operating cash flow totaled $40.3 million, reflecting consistent execution and disciplined working capital management. Cash flow from operations came in below our expectation of $45 million due to delays in collecting certain receivables in the quarter. These receivables were collected early in Q1. We ended the year with $116.9 million in cash and no debt, providing significant strategic flexibility. Our capital allocation is consistent and return focused. We maintain the liquidity and working capital necessary to run the business. Above this operating baseline, we allocate excess cash to areas that can generate the highest long-term return, such as acquisitions and share repurchase programs. Earlier this month, the Board of Directors approved an additional $20 million to our existing share repurchase program. This increase brings the total authorized for share repurchases to $40 million and reflects the Board's ongoing commitment to long-term shareholder value creation and confidence in our growth prospects. During Q4, we bought approximately 592,000 ordinary shares for an aggregate purchase price of approximately $5.5 million. For the full year, we repurchased approximately 2.3 million ordinary shares for an aggregate purchase price of approximately $21.4 million. Since the initiation of our first repurchase program in November 2024 until the end of Q4, we have repurchased a total of approximately $26.7 million worth of shares out of the total program authorized for $60 million. Throughout the year, we remain focused on balancing investment in innovation and market expansion, while improving operating efficiency. Our financial model is scaling, and we believe there is an opportunity for additional leverage as revenue continues to grow. And now looking ahead, for fiscal '27, we expect full year revenue of about $448 million, plus or minus 3%. This represents approximately 12% year-over-year growth at the midpoint of the revenue range. We believe the mix between total software revenue and professional services revenue to remain similar to last year. We believe that our strong short-term RPO of $369.5 million and the continuing favorable demand environment support this outlook. We expect Q1 revenue to be slightly below the Q4 levels we are reporting today with sequential growth each quarter throughout the year, aligned with the seasonality of previous years. We expect non-GAAP gross margin to increase year-over-year to approximately 73.5%, above our target for FY '28. This reflects improvement of 50 basis points. Gross margin may fluctuate between quarters based on our revenue mix. This improved gross margin allow us to partially offset the foreign exchange headwinds related to the recent strength of the Israeli shekel versus the U.S. dollar. As a result of the improved gross margin, we expect gross profit to increase at a faster rate than revenue growth. For the full year, we expect our non-GAAP operating expenses to grow slower than revenue, reaching approximately $273 million, an increase of about 7%. A significant portion of the increase is due to strengthening of the Israeli shekel against the U.S. dollar. Operating expense seasonality should be similar to last year with slight fluctuations throughout the year. We expect non-GAAP operating income to be about $56 million, more than 50% year-over-year growth. We expect adjusted EBITDA to be about $68 million, representing about 40% year-over-year growth, all at the midpoint of the revenue range. We expect our non-GAAP taxes to be about 27% or $15 million and noncontrolling minority interest of about $5 million. As a result, we expect annual non-GAAP EPS to come in at $0.47 at the midpoint of the revenue range based on a weighted average of approximately 75 million fully diluted shares in FY '27 and we expect to generate GAAP net income again this year. Turning to cash flow. We expect to generate $45 million of cash flow from operations in fiscal '27. For the full year, we expect total CapEx of approximately $11 million. Regarding our FY '28 targets, given the business momentum, expanding profitability and visibility, we believe we are on track to meet our targets for the fiscal year ending January 31, 2028, revenue of approximately $500 million and adjusted EBITDA margin of over 20%. To conclude, Q4 capped a year of strong performance. We delivered strong growth, expanding margins and strong cash generation. Our AI-driven investigative analytics solutions are built on decades of domain expertise and designed for mission-critical environments. Our balance sheet is strong. Our backlog provides visibility and our execution remains focused and consistent, and we are well positioned to deliver sustained profitable growth and long-term value creation. Thank you again for joining us today and for your continued support of Cognyte. Operator, we are ready to take questions. Operator: [Operator Instructions] Our first question comes from Taz Koujalgi with ROTH Capital. Imtiaz Koujalgi: A couple of questions from my side. So if I look at -- if I'm doing my math right, very strong bookings growth this year based on RPO, the RPO number that you disclosed. Can you just give us some puts and takes on the bookings number being so strong? How is the duration? Were there is some large contracts that closed early in this quarter? Elad Sharon: If you look at the market, one way to think about this is actually to see firsthand what our customers told us during the Intelligence Summit. We had 2 weeks ago. Actually, we do see that across geographies and customer segments, the demand drivers are very consistent. And actually, we give answers to all of those, which is increasing sophistication of the bad actors, growing volume in fragmented data, AI and also the need to move much, much faster. And given the demand drivers are significant and growing and healthy across domains and across territories, we do see that actually the demand is very healthy. In terms of the large deals that you've mentioned, we had a few of them. I gave an example earlier this call. We had a few more multimillion dollar deal. One example is $10-plus million deal with Tier 1 national security customer in EMEA, which is an expansion and upgrade with functionality. We have these customers with us for over a decade. We had another $5 million order from top NATO member, military organization. So you can see that one national security, the other one is military intelligence, and we had another one in APAC of $5-plus million subscription deal, another customer that is with us for [ 2 ] decades. So actually, what you see is that the need is there. Customers are going to the same direction globally and across segments, law enforcement, national security and national intelligence. And actually, this is what drives the demand. And as you mentioned, the RPO is strong. The cRPO is nearly $370 million. The total RPO is over $0.5 billion, and this gives us the visibility into fiscal '27. Imtiaz Koujalgi: Got it. Very helpful. And then you mentioned about the strong -- the addition of new partners in the U.S. market. As you think about your goals going forward from $400 million this year to $448 million and then $500 million in fiscal '28, maybe some more color on what is the mix of the U.S. business today, either from a revenue or bookings perspective? And then what are you expecting, I guess, for the next 2 years for the U.S. mix to be to reach that $500 million target in the next 2 years? What is assumed in the guide of the $500 million? How much should the U.S. be, broadly speaking, of that $500 million in the next 2 years? What is assumed in the guide for U.S.? Elad Sharon: Yes, sure. So U.S. is one of the largest and most advanced intelligence and law enforcement agency market globally. They face actually similar problems. We had some customers joining us for the Intelligence Summit. So we actually do see that they suffer same problems and they need similar technology. And actually, we do believe that we have a very strong fit into their needs. In terms of fiscal '28, between fiscal '26 and '28, we need incremental $100 million. We do believe that about 50% of it will come from expansions and upgrades of existing customer base. About 25% will come from new customers outside of the U.S. And we believe about 25%, the rest 25% should come from the U.S., and we are taking actions in order to continue and expand presence in the U.S. Including partners, including hiring a new general manager for North America that came from Cellebrite. He was leading the federal sales in Cellebrite, including a lot of sales and marketing efforts. So generally speaking, they do believe that we take the right actions, and that's the assumption. The 25% incremental out of the $100 million will come from the U.S. Imtiaz Koujalgi: Got it. Very helpful. Just one for David. So David, you've seen -- you've shown strong leverage in the model. Your adjusted EBITDA margin this year was 12%. You outperformed your guidance. I think there's a little bit of a -- if I'm looking -- if I'm doing the math right, the free cash flow seems a little bit, I guess, lighter than the guide. So maybe just help us understand the gap between the EBITDA and the free cash flow number this year. David Abadi: Yes. Thank you, Taz. We had a strong year with the cash collection and cash from operation and free cash flow. During this year, we were able to generate $40 million of cash from operations and $30 million of free cash flow. We came short versus our initial expectation of $45 million, mainly because of certain collection that took place early in this quarter. But if you look at the overall picture, we were able to generate $40 million on a $36 million of non-GAAP operating income. So actually, we were overachieving the operating income. And obviously, you have more things under the line like taxes and things that you paid. So in general, we are pleased with where we are from a cash from operation and free cash flow. And going forward, we guided for next year for $45 million. Imtiaz Koujalgi: Got it. Very helpful. And then if I look at the adjusted EBITDA guide for next year, you're guiding to 15% and I think that jumps to 20% in fiscal '28. Maybe just remind us what are the sources of leverage. You're guiding from 12% to 15% for next year, but then the guide goes from 15% to 20% in fiscal '28. So maybe just some remind us on what the sources of leverage are for the next 2 years? David Abadi: So actually, we are very pleased with the leverage that we had with the gross margin. As you saw, we achieved 73% gross margin 2 years ahead of our initial plan. So this is one of the area that we believe that we'll continue to create leverage. We guided for FY '27 to 73.5% -- so this is an area -- the gross margin itself, it's a place that we think that will create -- continue to create for us leverage. And obviously, we have also some OpEx leverage. We -- OpEx will grow this year at 7%, while top line will grow 12%. So that creates for us the leverage. And we believe that it will continue with us into FY '28. Operator: Our next question comes from Matthew Calitri with Needham & Company. Matthew Calitri: Matt Calitri over at Needham here. I'm curious on what the puts and takes are to the initial FY '27 guide, particularly as it relates to the ramp in the U.S., but I would also love to hear any color on why you widened that range by a point versus previous guides and then expectations on new customers versus expansions, group sense contribution, AI, anything of that nature? Elad Sharon: So fiscal '27 guidance actually presents double-digit top line growth, 12% with an adjusted EBITDA growth of 40%. So it means that we expect another strong year in terms of leverage and top line growth. In terms of the range, we added plus/minus 1% to each side, given the volatility and uncertainty in the market, it can grow in both directions, upside and downside, but we feel comfortable with the midpoint. But the reason for the plus/minus 3% is related to the market environment. In terms of what drives the guidance, the way we look at it is we look at the cRPO, we look at our performance, we look at the market environment. We also look at the anticipated conversion timing of the cRPO to revenues. And taking all of those together, we have a very good visibility into the year. So overall, I think that we should expect another strong year. And we're also on track to meet the target for fiscal '28. So we are on track. Matthew Calitri: Okay. Great. Sticking there for a second, how would you categorize the size of the cohort of customers you expect to renew or expand this year compared to prior years? I know there aren't set dates with the perpetual model, but what are your assumptions based on what you're seeing for pipeline or historical customer trends? Elad Sharon: Yes. So the history shows that unlike commercial stuff that you buy and you stick with it in our domain, the challenges are much, much higher and the pace is very fast. Just a few examples, customers that have a certain deployment today, they'll have to support data that is growing. They'll have to support more functionality. They'll have to catch up with technology, including AI-powered analytics and Gen AI. They'll have to address new use cases that are coming, whether it's financial crime or others. We do see that in military intelligence, there are new concerns related to border control and others. So generally speaking, this is a very dynamic environment and customers have to continue and upgrade and expand. And we expect that the upgrades and expansions are actually what we call repeat business, or leverage of our customer base will continue to be strong also going forward. So this is something that is a significant, I would say, baseline for our business. On top of it, we have, of course, the new logos, which is primarily land and expand strategy. Usually, they start small and grow over time with us and the U.S. business, which I discussed earlier, which is a strategic and important market for us and another growth pillar. So overall, I do believe that the repeat business will continue to be very strong, given that the environment is changing and customers have to adapt and run and catch up with this. Matthew Calitri: Awesome. Great to hear. And then, David, on the cash flow from operations, what caused the delay in collections? And how are you thinking about that conversion rate of adjusted EBITDA to cash flow as you scale towards the '27 and '28 targets? David Abadi: So actually, we had certain delays that took place due to, I would say, customer delays, and we collect everything in the beginning of the quarter. So this is something that may happen. And then you are relying on customer when they pay. And if we look ahead, you need to take into consideration that on top of the adjusted EBITDA, you need to take other items like tax payment and other expense below the line that may take a place. For this year, we guided for $45 million of cash flow from operation, while the guidance for the adjusted EBITDA is $68 million. I think this is something that you can take as a going-forward view about how it will convert over time. Matthew Calitri: Okay. Great. And then -- it was also cash flow in '26, the cash flow from operations was very heavily weighted towards the second half. Is that seasonality expected to repeat or any commentary on that? David Abadi: So actually, there is some seasonality in cash flow from operation. Usually, Q2 cash flow operation is negative due to actually expenses and less about collection. You may have some seasonality related to the size of the deal. So meaning that if there is a large deal that's taking place in a certain quarter, you will see an impact on that quarter. But it's not a given part. It's not seasonality on the nature of between Q1 to Q3. It's more about the specific deal and the mix of the deal in a given quarter, except for Q2, which usually is impacted by certain expenses that are taking place in Q2. Operator: Our next question comes from Eric Martinuzzi with Lake Street Capital Markets, LLC. Eric Martinuzzi: Congrats on the good finish to FY '26. Your comment about the seasonality of the Q1 revenue would point towards kind of the lower end of the overall full year guided growth range. Just curious to know, if you expect that to reverse? Is that more of a second half reversal to get to the midpoint? Or is it maybe Q2, Q3, Q4 will kind of grow to offset that slightly lower growth rate in Q1? David Abadi: So usually, from a seasonality perspective, Q1 is slightly below Q4. It really depends on certain things that are taking place, certain dynamics that usually takes from Q4. If you look year-over-year, it may create some fluctuation between the quarters from a growth perspective. But when we look at the overall year and the pattern of the year, usually, you start in Q1 slightly below Q4 and then growing over quarters. This was a typical year. It's not different versus other years. Eric Martinuzzi: Okay. And then the -- you talked about a slight preference for subscription versus perpetual. Is that also part of the slightly wider guided range for FY '27, just not being able to predict how customers are expecting to buy? Are you -- are bids being responded to with both a subscription and a perpetual and you just don't know, which the customer is going to choose? David Abadi: So obviously, when you convert certain deals into subscription, it do have an impact on revenue and over time. But given the fact that we have such a strong cRPO, it gives us more confidence about how the year will look like. So you need to remember that we have $370 million of cRPO. So a big portion of our guidance is covered already. Subscription can play a role, but given the plus or minus of 3% that we gave, it's more about what we see in the market and there is upside and downside that can play a role given the geopolitical situation and what we see in the overall environment, and we thought that this is the right approach for this year. Eric Martinuzzi: Okay. And then lastly, more of a macro question. But historically, you have talked about pipeline or top of funnel activity increasing with increased global conflict. Any signs with regard to the Iran war impact on pipeline? Elad Sharon: Yes. So actually, if you look at the market, generally speaking, when there are security concerns, usually, it will translate into demand in certain areas, certain territories, certain use cases. It takes time because it's government agencies, it takes certain time to respond. But what I can give you as an anecdote for this question today is for the example, the military intelligence. We do see demand growing in military intelligence, including in NATO countries. The reason is that they have to use this technology with their special forces and also have to improve their broader security. Usually, it's military intelligence. So we do see that certain areas with certain use cases have tailwinds related to the geopolitical situation today in the Middle East. So the answer is that usually security concerns, it create some more demand. Of course, it depends on the territory and depends on the use case. But generally speaking, the answer is yes. Operator: Our next question comes from Charlie Zhou with Evercore ISI. Charlie Zhou: This is Charlie for Peter, Evercore. I have 2 questions for you guys. Firstly, with the incremental buyback authorization now in place, how should we think about the cadence of buybacks in FY '27? And then maybe just walk through how are you balancing buybacks relative to ongoing investments in growth and expansion? Elad Sharon: Thank you, Charlie. So actually, we are very pleased that early this March, we were able to announce additional $20 million, which gave us a total plan since November '24 of $60 million. The remaining capacity under this plan is around $33 million remains for us to execute. Looking in the overall picture, we ended the year with $117 million of cash with a very strong balance sheet and continue to generate cash. What we are trying to do is to take a balanced approach between investing in our value creation for our shareholders and creating a buyback. And this is why we are placing all these plans. Actually, the Board ongoing commitment to long-term shareholders value creation and confidence in our growth prospects allow us to do that. Going forward, we will continue to assess on a regular basis. Now we have enough capacity for the upcoming quarters, and we'll continue to execute that. We are executing it technically under -- we have 2 ways to do it, regular purchase in the market when we are not black out and using a 10b5 plan during the blackout period. So by doing -- using these 2 tools, we're able to execute. Charlie Zhou: Got it. That makes sense. And second one, maybe for you, David. Both gross and operating margins came in very nicely this quarter. And as you mentioned on the call, the incremental gross margin this quarter came in at around 100%. And based on your gross margin guide, it seems that the incremental gross margin will be around 83% for next year. And maybe can you just help us think about the key drivers of that outperformance first and then how sustainable are those benefits as we move through FY '27? David Abadi: So we are very pleased with the gross margin improvement. If you look at the last few years, we improved on a regular basis our gross margin, it's a continued improvement. It's actually another indication and validation for us about the value perceived by our customers. Our customers are buying premium solution and willing to pay for that, and we invest a lot on R&D. And the way that you get a return on that is by being able to sell our solution to Tier 1 customers that appreciate this value that we provide them. Looking at the overall trend, you can see that the total software is crossing the 80% gross margin and the professional service continue to increase above 20%. The combination of the 2 of them allow us to improve more margin when the scale is coming. So overall, we believe that this trend will continue. We already guided for this year to be at 73.5%. And we believe that in the long run, we leave more room for improvement on gross margin. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to Dean for any further remarks. Dean Ridlon: Thank you, Kevin, and thank you all for joining us today. Should you have any questions, please feel free to reach out to me, and we look forward to speaking with you again next quarter. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
The consensus remains bullish on inflationary expectations, including precious metals, stocks, and oil. As prices fall, leveraged participants necessitate selling across all assets to pay down margin debt.
Operator: Good evening, and welcome to MillerKnoll, Inc. Quarterly Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations. Please go ahead. Good evening. Wendy Watson: And welcome to our third quarter fiscal 2026 conference call. On with me are Andi Owen, Chief Executive Officer, and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are John Michael, President of North America Contract, and Debbie Propst, President of Global Retail. We issued our earnings press release for the quarter ended February 28, 2026 after market close today, and it is available on our Investor Relations website at investors.millerknoll.com. A replay of this call will be available on our website within 24 hours. Before I turn the call over to Andi, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors which are detailed in today's press release. The forward-looking statements are made as of today's date and, except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics and our press release includes the relevant non-GAAP reconciliations. With that, I will turn the call over to Andi. Andi Owen: Thanks, Wendy. Good evening, everyone, and thank you for joining us. I want to begin our call by expressing my appreciation to our 10,000 associates across the globe for their hard work in delivering our third quarter results. Our team's dedication and focus on our strategy to drive long-term value delivered another solid quarter with continued sales and order growth and disciplined execution. Despite ongoing macroeconomic and geopolitical uncertainty, as well as the impact of severe weather during the quarter, we were able to deliver quarterly results within our expectations and we continue to be optimistic about the impact that our strategic initiatives can deliver. Before I move to segment-specific highlights from the quarter, I want to congratulate the operations team on the 30th anniversary of MKPS, our MillerKnoll, Inc. performance system used across our manufacturing footprint. We have successfully worked with Toyota for 30 years and remain a model for efficient and reliable production. MKPS is a significant competitive advantage for MillerKnoll, Inc., and enables us to produce all of our products efficiently, at the highest quality. So let's move to the current macro environment. From a tariff perspective, we do not expect the most recent developments to result in any meaningful changes to our approach, and we expect to continue to fully offset tariff costs for the remainder of this fiscal year as we did in the third quarter. Recognizing that things can develop quickly, however, we are very experienced in navigating tariff changes and continue to monitor both policy and rates closely. With respect to the Middle East, this region remains an important long-term growth opportunity for our International Contract business. In the near term, the current conflict is creating disruption, and we do expect some impact to fourth quarter sales and costs. Kevin will provide additional detail on this later in the call. Moving to some highlights and trends in our segments. In North America Contract, the power of this business as a cash generation engine was on display this quarter with gross margin and operating income strength building as deals continued to grow year over year. Industry benchmarks continue to show improving trends in Class A leasing, net lease absorption, and return to office. When looking at dynamics by industry sector, we saw order growth in most sectors and are pleased with the resiliency of demand as our customers continue to invest in their spaces and earn commute. With Design Day at our largest industry trade show coming up in early June, we are looking forward to showcasing launches for the workspace and health care from Herman Miller, Knoll, Geiger, NaughtOne, Hay, Muuto, and Maharam. Our marketing, product insights, and North America Contract teams are in full preparation mode, and we are looking forward to welcoming our customers and our dealers to Fulton Market. In International Contract, our advantage with the most desired product portfolio continues and we remain bullish about our ongoing opportunities in faster-growing, underpenetrated markets, as well as expanding our dealer share of wallet across these markets while generating enviable margins. As we have discussed in previous calls, another strength in our International business is our diverse regional footprint and localized production, where strong performance in certain regions can mitigate softness in others. With these varied regional dynamics, we can sometimes see quarter over quarter choppiness, and our team is both deliberate and nimble on where and how to target growth. In particular this quarter, we saw sales strength in India, China, Japan, Southern Europe, Germany, and the UK. In Global Retail, we continue to grow and take market share in the approximately $150 billion global premium home furnishings market. In the third quarter, segment comparable sales increased 5.5% and in the North America region, we had comparable sales growth of 3.9%. Our comp sales included both sales through e-commerce, as well as stores that have been open for 13 months. While adverse weather conditions across North America during the quarter resulted in lower traffic than normal as well as store closures, we were pleased to deliver comparable sales growth despite these headwinds. We continue to expand our store footprint in the third quarter, opening new DWR locations in Fort Worth, Texas and Pittsburgh, Pennsylvania, and a Herman Miller store in Phoenix, Arizona. We plan to open three to four more locations before the end of fiscal 2026, ending the year with 14 to 15 new stores in the US, executing on our strategy to approximately double our DWR and Herman Miller store footprint over the next several years. As a reminder, North American retail growth is being driven by four strategic levers: new store openings, expanded product assortment, e-commerce acceleration, and increased brand awareness. During the quarter, we executed several high impact brand campaigns designed to attract new customers and drive store traffic across our Design Within Reach and Herman Miller banners. We launched our very first Herman Miller seating campaign with engaging video and targeted in key regions around the world. During Modernism Week in Palm Springs, where our recently opened DWR store continues to perform well, we held an exhibition of modern seating from the MillerKnoll archives in partnership with the Palm Springs Art Museum, connecting us more deeply with the Palm Springs community and reinforcing our leadership in modern design. And just in the past few weeks, DWR unveiled a collaboration with Tracee Ellis Ross. Our designers worked directly with Tracee to transform her Pattern Beauty offices. The collaboration was covered in Vanity Fair, Forbes, Essence, and House Beautiful, and has generated more than 200 million media impressions. In summary, I am proud of our solid performance in the third quarter and continue to be optimistic about both our Contract and Retail businesses. Regardless of the macroeconomic and geopolitical landscapes, our team will continue to focus on our targeted initiatives, new product launches, and growing retail footprint. As Kevin will discuss, we made meaningful progress strengthening our balance sheet during the quarter, and we remain well positioned for profitable growth. We are focused on creating long-term value across our powerful collective of brands through our balanced strategy of sustained revenue growth, margin expansion, cash generation, and shareholder returns. Finally, I want to welcome Claire Spofford to our Board of Directors. Claire most recently served as President and Chief Executive Officer of J.Jill, and she brings a powerful combination of consumer insight, retail strategy, and governance experience that will enhance our Board as we continue to grow our global collective of brands and drive long-term value creation. With that, Kevin will discuss our financial results in more detail and share our outlook for the fiscal fourth quarter. Kevin Veltman: Thanks, Andi, and good evening, everyone. I will begin with a summary of our third quarter results and then discuss our outlook. In the third quarter, we generated adjusted earnings per share of $0.43 compared to $0.44 in the same quarter last year. Consolidated net sales for the quarter were $927 million, up 5.8% year over year on a reported basis and 3.8% higher organically. Orders for the quarter grew to $932 million, up 9.2% as reported and 7.2% higher on an organic basis, driven by growth in our North America Contract and Global Retail segments. Our consolidated backlog was $712 million at quarter end, up 3.7% from a year ago. Third quarter consolidated gross margin increased 20 basis points to 38.1%, driven by gross margin strength in our North America Contract segment. Turning to cash flows and the balance sheet, we generated $61 million in cash flow from operations in the quarter and reduced our debt by $41 million, lowering our debt to EBITDA ratio to 2.75x as defined by our lending agreement. This moved us meaningfully towards our mid-term goal of a net debt to EBITDA ratio in the range of 2.0x to 2.5x. We also finished the third quarter with $594 million in liquidity. In January, our Board of Directors declared a quarterly cash dividend of $0.1875 per share. The dividend is payable on April 15 to shareholders of record on 02/28/2026. At an annual indicated dividend of $0.75 per share, the yield is 3.9% based on yesterday's closing stock price. Our capital allocation priorities continue to balance our investments in growth with improving our debt to EBITDA ratio, retaining our commitment to our dividend, and maintaining a strong balance sheet. With that, I will move to the third quarter performance by segment. Net sales in the North America Contract segment were $489 million, up 4.4% on a reported basis and 4.1% higher. Orders increased to $491 million, up 13.1% on a reported basis and up 12.8% organically from prior year. Operating margin was 8.6% and adjusted operating margin was a strong 9.8%, up 70 basis points year over year, primarily from gross margin expansion driven by leverage on higher sales and operating efficiency. International Contract segment's net sales were $157 million, up 7.8% on a reported basis and up 1.9% organically. Orders were $160 million, up 0.7% versus prior year on a reported basis and down 4.3% organically, driven primarily by lower orders in Latin America and the Middle East, partially offset by strength in Asia Pacific. Third quarter reported operating margin was 7.7%, adjusted operating margin of 8.2%, down 110 basis points compared to prior year, primarily related to regional and product sales mix in the quarter as well as foreign currency impact. The Global Retail segment net sales were $281 million, up 7.1% on a reported basis and up 4.4% organically. Orders improved to $280 million, up 7.9% year over year on a reported basis and up 5.1% on an organic basis. Operating margin was 2.2% in the quarter. On an adjusted basis, margin was 2.8%, down 340 basis points year over year, primarily due to a freight benefit in the prior year, targeted promotional actions to offset adverse weather in the quarter, and the impact from opening new stores. As Andi mentioned, we opened three new stores in the third quarter. We expect to open three to four additional stores in the fourth quarter, and anticipate opening a total of 14 to 15 new stores in the full fiscal year. Turning to our Q4 guidance, this outlook incorporates our current best estimates for items that we believe will impact our fourth quarter sales and earnings from the conflict in the Middle East. In the fourth quarter, we expect net sales to range between $955 million and $995 million, up 1.4% versus prior year at the midpoint of $975 million. This includes an expectation that we will ship only a minimal amount of approximately $12 million in Middle East-related orders in the fourth quarter. Gross margin is projected to be between 37.5% and 38.5% and includes higher expected logistics costs from higher oil prices related to the conflict in the Middle East. Adjusted operating expense is expected to range between $311.5 million to $321.5 million, higher year over year primarily due to increased compensation, variable selling expense, new store costs, and the impact of foreign exchange. Adjusted diluted earnings are expected to range between $0.49 and $0.55 per share. This includes our current estimate that the direct impact of the Middle East conflict will be $8 million to $9 million in the quarter, or $0.09 to $0.10 per share. Included in our expectations for operating expense and EPS are approximately $3.5 million to $4.5 million in incremental year-over-year operating expense for new store locations and global initiatives. These investments are aligned with our strategy to expand our retail footprint and drive long-term profitable growth. For further details related to our outlook please refer to our press release. With that overview, I will turn the call over to the operator. As always, we welcome your questions and look forward to discussing our progress, outlook, and strategic priorities. Operator: We will now begin the Q&A session. If you would like to ask a question at this time, please press star one on your telephone keypad. Your first question comes from Doug Lane from Water Tower Research. Your line is live. Doug Lane: Yes. Hi. Good evening, everybody. Just want to clarify or maybe you could put some color on how the snowstorms and ice storms and all that weather we had earlier in the year impacted your business. Maybe, you know, do they the Contract versus the Retail? Andi Owen: Yes, Doug. Let me give you a kind of a high level. This is Andi, by the way. We definitely saw lower traffic than normal across our retail stores. We had quite a few closures during that frigid weather period. We had several plants that were also closed during that frigid weather period. So for us, we would say that the impact ranged. Kevin, you would probably give us— Kevin Veltman: Yes, when we look at relative to our guidance, obviously it did not incorporate the severe weather. Most of it was in our Retail business, which was when we look at where our miss was to guide on the top line, a little under half of it was related to our North America Retail business. Andi Owen: And I would say just from a Contract perspective, when you look at order patterns in the quarter, we certainly saw a slowdown in showroom visits and visits to kind of our corporate headquarters during that month of January. So the order patterns reflected that weather trend a little bit, but primarily in Retail is where we saw the biggest impact. Doug Lane: Okay. That makes sense. Just and then you know, I get that it is a volatile situation in the Middle East, and I can see the demand being impacted. That is pretty obvious. But I am wondering throughout the P&L, where else are you seeing potential cost pressures? Have you seen any movement on plastics or aluminum or some of these, you know, commodities that go through that part of the world? Has it begun to be impacted yet? I know it can take a while to work through your inventories. But what are you seeing? And what are you doing about the potential for elevated costs coming through? Andi Owen: Yes. You know, we are looking at a variety of things, Doug. Obviously, you know, we have not seen much except for increases in diesel and things that are really impacting oil-related fuel so far. But we anticipate we will see increases in the cost of plastics, foam, all the things where you see petroleum-related products. We have not seen it yet. This was a really hard quarter to take a look at because the situation is obviously very chaotic and moving every day. What we have tried to layer into this guide is what we know today, which has higher oil costs and potentially higher logistics cost. Shipping containers, we have really looked at that across all of our businesses, as well as our inability to ship orders we have directly into the Middle East. As we have done in the past with tariffs and the kind of changing environment around tariffs, we will watch the situation closely and we will continue to react as we can with pricing and surcharges if needed as we see other situations continue to develop. But we are looking at it every day and scenario planning as the situation changes. Kevin, what would you add? Kevin Veltman: You covered it very well. Doug Lane: Are you starting to build inventories just out of precaution, or is it just early to make any of those judgments? Andi Owen: You know, we are looking at—we have dual supply in a variety of places for most of our really important components. We learned that lesson in COVID. So we are looking at that right now. We do not see a lot of areas where we are going to need to take supply or inventory yet. We are being very cautious as we look at that, but so far not yet. Doug Lane: Okay. That is helpful. And just one last thing, if you could, you know, characterize the office environment. I mean, the tone has been fairly positive from a macro standpoint. And, again, I do not know if you are seeing anything shift here with all the geopolitics or you just see the underlying business continuing to firm as it has for the past several quarters? Andi Owen: You know, as it always is, Doug, it is a different story depending on what region of the world you are in. I have been on a plane a lot in the last couple of months. I would say in North America, and certainly John Michael can add color to this, we continue to see momentum. We continue to see architectural billings moving in the right direction. We continue to see lots of customer visits and demand and orders, and we are very pleased about that. I would say when you step out of the US, it really varies by region. I think we are seeing a little bit of price sensitivity. We are seeing a little bit of different reaction in different parts of the world. We are not seeing major pullbacks anywhere, but I think in places that are touched more closely, whether it is the conflict in Ukraine or whether the latest in the Middle East, we are certainly seeing a little bit more caution, but not necessarily reflected in order trends that have changed. Doug Lane: Okay. Fair enough. Thanks, Andi. Andi Owen: Thank you. Operator: Your next question comes from the line of Philip Bley from William Blair. Your line is live. Olivia Whittie: Good evening. This is Olivia Whittie on for Philip. So can you talk a little bit about the volatility, if any, that you have seen from the recent oil market volatility and rising gas prices? Do you have any concerns that the uncertainty could cause a bigger pullback or deferral in the Contract business that could be prolonged? And then what kind of impact does the market fall have on your traffic or conversion in the Retail segment? Andi Owen: Okay. Those are great questions. I would say from a Contract perspective, like I was telling Doug, I think we have built in some caution around oil prices and how that might impact trucking expense and diesel certainly in shipping containers, Olivia. So we are looking at that for the Contract business. We will continue to monitor component costs and costs that go into the products that we make. We have not seen any movement yet, but we anticipate we will if this is prolonged. And then from a Retail standpoint, you know, whenever you have a consumer that has seen prices rise, that could potentially see inflation go up, and also is paying more at the gas pump, we watch that carefully. So far we have a consumer that tends to be premium and tends to be rather unaffected by many of these changes. So we have a resilient consumer that continues to come back and continues to buy from us, but we are still making sure that we are balancing our price and our demand, and so that we are not beginning to kind of out-price the demand levers that we have in the business. Debbie, would you add anything from a Retail perspective or John in Contract? Debbie Propst: I would just add in Retail that I think we are well poised to continue to navigate macroeconomic conditions that are unfavorable as we have been. And we are well poised to do that because we have demand levers and initiatives that we are deploying such as assortment growth, which drove the majority of our comp demand growth in the quarter, such as our new stores and our e-commerce acceleration and our marketing funnel mix investments. So we continue to be optimistic that we can bend macroeconomic trend curve. John Michael: I would say from a Contract perspective, customers have become accustomed to the uncertainty and the geopolitical risk. So whereas maybe uncertainty a couple years ago would have—they would have put the brakes on—they are proceeding cautiously. So it maybe is slowing down timelines a bit, but activity still seems to be pretty robust. Olivia Whittie: Okay. Great. Thank you for all that detail. And then in the Contract business, I know government is not a huge contributor, but still a chunk of the North America business. So could you talk about recent trends here and how the partial shutdown could potentially impact spend there? Andi Owen: Yes. John, you want to take that one? John Michael: We came into this year expecting that the federal government business would be rather tough and would be down a bit year over year. I think we still saw there were sort of a number of agencies that still had a lot of activity. I think once the war started in Iran, we saw that sort of slow down because a lot of the agencies that were getting funded were now involved in supporting that conflict. So I think it has had an impact. On the other hand, there are a number of projects coming out of the ground for the federal government—buildings that are going to need to be filled with furniture. So it will be rather choppy with federal government for the next several months probably, but there is still activity there. Olivia Whittie: Okay. I see. Thank you. That is helpful. Operator: Thanks, Olivia. Your next question comes from the line of Reuben Garner from The Benchmark Company. Your line is live. Reuben Garner: Hi, Reuben. Evening, guys. Operator: Hello. Reuben Garner: Maybe to start, just a clarification. Kevin, the $8 million to $9 million, or $0.09 to $0.10 of earnings drag, is there something specific about the fourth quarter or how quickly this evolved that is kind of making the earnings impact a little bigger in the near term? Or is this more—if it drags out, is that kind of $0.10 a quarter the right way to think about it on an ongoing basis? Kevin Veltman: The sales that we do not expect to be able to ship in the quarter is pretty close to what our run rate has been, that $12 million that I mentioned. The cost side, that is the piece where initially you are seeing it in diesel prices and things of that nature. But some other elements of cost, if this becomes a prolonged situation, would not have fully flowed through yet, right? Think container rates or foam, resin-type costs. So not a huge impact to that. Mostly, it is logistics-related things that are reflected in what we see as the fourth quarter exposure. Andi Owen: But I would say just like tariffs, Reuben, when these things come up quickly, it is harder for us to cover them in the immediate quarter. We just—by the nature of the Contract business—we are not able to get that pull-through. So you will see it sort of gradually come through as we see what happens with cost. Kevin Veltman: Which gives us time to think about the different levers that we have as well. Reuben Garner: Great. And is this—know, is this an opportunity to use surcharges in a way given the abrupt nature of it and how it could very well be temporary, or do you not see a path to use that mechanism this go round? Kevin Veltman: It is a tool we have in the toolbox, and it is definitely one we will consider. But there are a number of other levers that we could look at as well. And as you know, our two segments operate on a little different cadence from a pricing perspective. So Retail is one where we can react without needing to think about surcharges. Reuben Garner: Got it. And then a lot of discussion in the market about AI and its implications on various industries. I think office furniture is one that has been topical of late. Just curious. I know you guys have had some insights in the past, you know, from your own board even, how you are thinking about that. What are you seeing today from your technology clients from an order perspective? Are they building out their offices in a bigger way? Any insights into kind of sector-specific growth within Contract would be helpful. Hi, Reuben. It is John. John Michael: Yes. The tech sector is very active right now, particularly in the Bay Area. As you might imagine, we have seen this significant uptick in activity in that area. And I think, you know, the other sort of tech-focused areas around the country, whether that be Austin or other areas like that, the activity is really robust. Andi Owen: And I think, Reuben, just like any other sort of technological step change, we are seeing, you know, some organizations that are talking about laying off certain types of employees and others that are adding on just as many of other types of skill sets. So we are really seeing it kind of balance out as AI impacts different parts of the economy and of businesses. But so far, we are seeing quite a robust tech business. John Michael: Reuben, one other item I would call out is we just look at some of the different sectors in the third quarter. General business services and insurance and financial are big categories of activity, and both of those were showing nice activity in the quarter. Reuben Garner: Great. Very helpful. And then last one for me. I do not know if you gave it. If I missed it, I apologize. But quarter-to-date order growth rate for Retail and North American Contract? Do you have those numbers, or did you already share them? Kevin Veltman: Yes. So let me unpack that with you. And you will recall this from discussions last year in the fourth quarter. At this time last year, we were starting to see some of the order pull-ahead related to the tariff surcharges and price increases we were putting in place. And so our comps are a little bit tricky early in the quarter. If you look at International and Retail, which did not have the surcharge scenario pushing through, those are both up here through the first few weeks of the quarter. NAC is down, but if you adjust for the estimate of the pull-ahead impact, it is more flattish. And so if you take that noise out, around 2% year-over-year growth at this point, with some normalization. Reuben Garner: Great. Thank you, guys, for the color, and good luck going forward. Operator: Thanks, Reuben. Your final question comes from the line of Greg Burns from Sidoti & Company. Your line is live. Greg Burns: I just wanted to clarify the $12 million shipped to the Middle East, was that what you are going to be able to ship or what you are not going to be able to ship? Andi Owen: It is what we anticipate we will not be able to ship. Greg Burns: Not be able. Okay. Perfect. Okay. And then in the Retail business, I know we are not into fiscal 2027 yet, but would you expect the pace of store openings to remain about the same next year, or do you expect to continue at the current pace and would that mean that the incremental cost per quarter will kind of remain the same into next year? Kevin Veltman: Yes. We are expecting next year's store openings to be in a similar zone to the 14 to 15 this year, maybe a touch higher based on our plans. And so I think that would be a good modeling assumption to assume you continue to have somewhat similar year-over-year OpEx growth, that kind of $3.5 million to $4.5 million that we had mentioned. Greg Burns: Okay. And then in terms of product assortment, could you just talk about maybe some of where you are adding to your product portfolio and maybe what areas are still opportunities for you to round out? Andi Owen: Yes. Debbie, I will let you take that one and give some specifics. Debbie Propst: Absolutely. So from a Retail perspective, we continue to grow what we call the lifestyle category, which is really our residential home furnishings. We have made significant progress in areas of upholstery, bedroom, storage, but we still have a lot more latitude in those areas. We are also continuing to invest in our gaming portfolio, which is continuing to show major traction. All of our categories were positive to last year, but the biggest opportunity areas continue to be rounding out the home furnishings areas of the home. Greg Burns: Okay. And why was the Retail gross margin down? Debbie Propst: Our gross margin was impacted versus last year by a couple of things, predominantly that we had a favorable freight true-up last year of just over a couple of million dollars, and then we had some incremental ship and revenue costs in Q3 as we pushed into some free shipping promos to try and adjust the trends during the time that we had weather impact. So those are the largest areas, but we also had a little bit of FX impact and variable incentive impacts at the OI line as well. Greg Burns: Alright. Great. Thank you. Operator: There are no further questions. We will now turn the floor back to President and CEO, Andi Owen, for any closing remarks. Wendy Watson: Thanks, everyone, for joining us on the call tonight. Andi Owen: We really appreciate your support, and we look forward to updating you again next quarter. Have a nice day. Operator: This concludes today's meeting. You may now disconnect.
Operator: Good afternoon, and welcome to today's Noodles & Company's fourth quarter 2025 earnings conference call. All participants are now in a listen-only mode. After the presenters' remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to introduce Noodles & Company's Chief Financial Officer, Michael Hynes. Michael Hynes: Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2025 earnings call. Here with me this afternoon is Joe Christina, our Chief Executive Officer. I would like to start by going over a few regulatory matters. During the call, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are only projections and actual events or results could differ from those projections due to a number of risks and uncertainties, including those referred to in this afternoon's news release and the cautionary statement in the company's Annual Report on Form 10-Ks and subsequent filings with the SEC. During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our fourth quarter 2025 earnings release. To the extent that the company provides guidance, it does so only on a non-GAAP basis and does not provide reconciliations of forward-looking non-GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable efforts. I will now turn the call over to Joseph Christina, our Chief Executive Officer. Joseph Christina: Thank you, Mike, and good afternoon. As we reflect on 2025, the story is clear. We have built meaningful and sustained momentum across Noodles & Company, culminating in system-wide comp sales growth of nearly 7% in 2025 and further escalating to over 9% in 2026 thus far, with only a week remaining in the quarter. And profitability far exceeded the prior year in 2025 and as we have guided in 2026. That progress is not accidental. It is the result of disciplined execution and a clear focus on what matters most. 2025 was a pivotal year for the brand. We significantly elevated our food, with the launch of our most comprehensive new menu in the history of the company and the introduction of craveable limited-time offers, including Chili Garlic Ramen, one of our strongest LTOs in recent years, which we believe also introduced new customer groups to Noodles & Company. We leaned into strong value messaging with the launch of Delicious Duos, giving guests compelling meal combinations at an attractive price point that delivered balance, variety, and everyday affordability without compromising quality while also raising consumer awareness of our new menu offerings. We initiated a thorough review of our portfolio, resulting in the closing of underperforming restaurants, which have continued into 2026 and, importantly, has resulted in a material transfer of sales to nearby locations, resulting in a step baseline increase of average sales volume at those go-forward restaurants. Which also favorably impacted margins, as Mike will discuss in more detail shortly. And we strengthened operational excellence by introducing our Operational Excellence Review program, raising standards and driving greater consistency and accountability across every restaurant. Underpinning all of this was a renewed focus on the fundamentals. Throughout 2025, we tightened execution in our restaurants, improved food consistency, managed costs with discipline, and sharpened our marketing approach. When you consistently execute the fundamentals at a high level, performance follows. And that is exactly what we began to see in the back half of the year. But before I dive deeper into the progress we made in 2025, I want to highlight our first quarter comp sales performance to date as the progress we built last year has further accelerated into 2026, delivering sales increases, which we believe are the top of the fast casual industry. In the first quarter thus far, we have delivered continued increases in traffic and same-store sales, with system-wide comparable sales growth over 9% and traffic over 4%. March will mark our seventh consecutive period of traffic growth and, notably, period two of 2026 delivered one of the strongest comparable sales performances in the company's 31-year history. We kicked off the year by bringing back Steak Stroganoff as a limited-time offer, one of the most requested fan favorites ever. We leaned into that fandom with a creative AI-driven campaign that generated strong engagement and reminded guests why this dish has remained such an enduring classic. The Steak Stroganoff results exceeded prior launches of the LTO and cemented this great dish as a returning favorite craveable LTO over the winter months in the coming years. When you pair a comforting favorite like Steak Stroganoff with stronger restaurant execution and a great guest experience, it becomes even more craveable. The combination of great food and consistent operations is clearly resonating with our guests. We entered this year with clear goals and a sharpened focus, aligning the organization around four strategic goals: developing winning teams, igniting growth, driving guest satisfaction, and delivering strong financial results. These goals are shaping how we operate, how we invest, and how we measure success, and already, we are seeing that progress continue. With that context, let us recap progress we made in fiscal 2025 to build the foundation for our strong performance to start the year. Fiscal 2025 was about strengthening the core of our business and restoring consistency across the system. We started with the food. We sharpened our menu, elevated recipe standards, and improved execution at the restaurant level. Enhancing training and tightening operational controls drove better consistency bowl after bowl. Our limited-time offers were also more impactful and more focused, bringing energy to the brand and reinforcing our authority in noodles. A great example is Chili Garlic Ramen, which we introduced as a limited-time offer in October. Inspired by trending ramen hacks, this brothless bowl delivered the buttery, spicy, umami-packed flavors guests were already craving. It quickly became one of the strongest LTOs in our history. A new ramen dish not only resonated with our loyalty members, but also, we believe, introduced our brand to a new consumer who desired a ramen dish in a fast casual environment. We have just recently brought the ramen back along with a previous fan favorite, Indonesian Peanut Chicken Sauté, as we raised awareness of our Asian noodle collection on our menu. Furthermore, we are currently evaluating additional ramen recipes, as we believe a ramen section of our menu could be as equally successful as our collection of Macs. Together, these improvements strengthened guest confidence in our food and helped drive stronger engagement with the brand throughout the year. Operational excellence follows. The launch of our Operational Excellence Review, or OER, program introduced a more structured coaching accountability model across our restaurants. Area managers and regional leaders now use OERs to focus on root causes, develop clear action plans, and reinforce consistent execution across our teams. This approach has strengthened leadership alignment, improved training accountability, and raised operational standards across the system. We are seeing the results of that work in our guest experience. Over the course of the year, our OSAT scores improved, as measured by SMG, meaningfully, and we have steadily closed the gap with the fast casual category average. In January, our overall satisfaction reached 72%, the closest we have been to the fast casual benchmark since launching the program in early 2024. These improvements reflect stronger execution across the fundamentals of the guest experience, from cleaner restaurants and better hospitality to more consistent food quality and stronger dinner operations. Just as importantly, our teams are now operating with clearer expectations, stronger coaching, and a shared focus on continuous improvement across people, operations, guests, and financial performance. We also established a more thoughtful and sustainable approach to value. As we listened closely to our guests, it became clear that value is not simply about the price. Our guests want to feel good about the amount of food they receive relative to what they pay for. Value means balance, feeling satisfied, and leaving with the sense that you had a great dining experience. In addition, in the current macroeconomic environment, today's consumer has become more value-conscious, which we wanted to be able to address in our menu offerings, not through a temporary discount, but rather in an ongoing value-oriented option for our guests. That insight informed the launch of Delicious Duos. Rather than introducing a discount, we focused on elevating our value proposition by offering craveable combinations that deliver both variety and satisfaction at an accessible price point. The platform has resonated with guests, supporting traffic and frequency while maintaining the integrity of our heart. It also raised awareness of our new menu due to the combinations Delicious Duos offers and the marketing of that offering, which showcased those various menu offerings. Our marketing approach has become more disciplined, more data-driven, and more focused on the core of who we are as a brand. We returned to the foundation of our business, noodles. Our messaging leaned into craveability, variety, and the comforting, shareable occasions that define the Noodles & Company experience. As we often say internally, we know noodles. And our marketing is once again centered on celebrating that authority. At the same time, we evolved how we plan and manage marketing investment. We moved away from static annual plans toward an always-on, performance-optimized marketing engine. Using ad-supported data and channel-level performance input, our teams dynamically adjust investment based on return, incrementality, and audience response, allowing us to balance brand building with demand generation. As a result, we are managing media investment more actively across channels, reallocating dollars toward the highest return opportunity while refining audience targeting and leaning into markets where guest response is strongest. Combined with improvements in food, operations, and value, these efforts contributed to steady improvement in comparable sales trends, traffic stabilization, and eventual growth, and expansion of restaurant-level margins. At the same time, we strengthened the financial foundation of the business. We improved labor productivity through better scheduling and tightening operational management. We managed food costs with greater precision. And we increased efficiency in our marketing deployment. These actions, combined with leveraging the significant same-store sales increases, expanded restaurant-level margins in 2025 to 14.1%, an improvement of 290 basis points year over year. Our guidance for 2026 that Mike will discuss calls for improved margins for the full year of 2026 over 2025, due to all that I have mentioned. The result is a healthier system with stronger unit-level economics and a more resilient operating model. What gives me confidence today is the consistency we are seeing across the business. Food is better. Execution is stronger. Standards are clearer. And the results are following. The work we have done in 2025 created a solid foundation. We are now building on that foundation as we move through 2026. Before I turn it over to Mike, I would like to provide an update on the status of our previously announced review of strategic alternatives. As previously shared, our Board of Directors initiated a review of strategic alternatives to explore ways to maximize shareholder value. The process may include a range of potential actions such as refinancing existing debt or other strategic or financial transactions. No decisions have yet been made, and there is no set timetable for completion. Until the review is completed, we will not provide additional commentary. I will now turn the call over to Michael Hynes to walk through the financial details. Michael Hynes: Thank you, Joe. In the fourth quarter, our total revenue increased 0.8% compared to last year to $122,800,000. System-wide comp restaurant sales during the fourth quarter increased 6.6%, including an increase of 7.3% at company-owned restaurants and an increase of 3.8% at franchise restaurants. Company comp traffic during the fourth quarter increased 1.4% and average check increased 5.8%, inclusive of 2% effective pricing during the quarter. Company average unit volumes in the fourth quarter increased 9.9% to $1,440,000. As Joe mentioned, our sales momentum continued to accelerate in 2026. Our company comp sales in 2026 are positive over 9% year to date. We are extremely encouraged by the sales acceleration, especially against a tougher comparison in 2025, where comp sales were positive 4.7% and incorporated significant marketing of our new menu rollout in March 2025. Turning back to 2025, our sales acceleration in the fourth quarter delivered impressive bottom-line growth. Our restaurant contribution margin in the fourth quarter increased to 14.1% from 11.2% in 2024. Cost of goods sold in the fourth quarter was 26% of sales, a 120 basis point decrease from last year, which was driven by a combination of menu price, vendor rebates, and lower discounting, partially offset by higher food costs associated with our new menu offerings and modest inflation. Our food inflation in the fourth quarter was approximately 1%. Labor costs for the fourth quarter were 30.9% of sales, which was down 140 basis points to prior year, primarily due to the benefit of sales leverage, partially offset by wage inflation. Hourly wage inflation in the fourth quarter was 2.3%. Occupancy costs in the fourth quarter decreased to $10,700,000 compared to $11,400,000 in 2024 due to a reduction in our company-owned restaurant count over the last twelve months. Other restaurant operating costs increased 40 basis points in the fourth quarter to 20.1%. The increase in other restaurant operating costs was primarily driven by a combination of higher third-party delivery fees from higher third-party delivery channel sales and higher marketing expenses, which were mostly offset by sales leverage. G&A in the fourth quarter was $11,700,000 compared to $11,300,000 in 2024. Net loss for the fourth quarter was $6,800,000, or a loss of $1.16 per diluted share, compared to a net loss of $9,700,000, or a loss of $1.70 per diluted share last year. The loss in 2025 included a $5,600,000 non-cash impairment charge primarily related to our decision to close underperforming restaurants. Adjusted EBITDA in the fourth quarter was $7,600,000 compared to $4,000,000 in 2024, an increase of over 88%. In the fourth quarter, we closed nine company-owned restaurants and three franchise restaurants. Our fourth quarter capital expenditures totaled $2,300,000 compared to $3,800,000 in 2024. At the end of the fourth quarter, we had $1,300,000 of available cash, and our debt balance was $110,200,000 with over $11,000,000 available for future borrowings under our revolving credit facility. As a part of our restaurant portfolio optimization project, we closed a total of 33 restaurants in 2025, and have closed 20 restaurants year to date in 2026. We continue to see great results from this ongoing project. The most meaningful impact is the post-closure transfer of sales to nearby Noodles & Company restaurants, which is driving a significant increase to our company-wide restaurant-level profits. This is attributable in large part to our high mix of off-premise sales. In 2025, we estimate that the closures benefited comp sales by approximately 100 to 150 basis points. We forecast that the portfolio optimization project will positively impact 2026 comp sales by 200 to 300 basis points. We view the sales transfer from closed restaurants to nearby Noodles & Company restaurants as a permanent benefit to our baseline average unit volumes at those go-forward sites. Throughout 2026, we will continue to look for additional opportunities to optimize our portfolio of restaurants in an effort to increase restaurant-level profitability, including the benefit of sales transfer trends we have been experiencing. We currently estimate that we will close 30 to 35 restaurants in 2026. Turning to guidance. Our forecast for 2026 projects the following: comp sales of approximately 9% and adjusted EBITDA of $5,700,000 to $6,300,000, more than doubling prior year results. For the full year 2026, we are providing the following guidance: total revenue of $478,000,000 to $493,000,000, including comp restaurant sales growth of 6% to 9%; restaurant contribution margin between 14.7% and 16%; general and administrative expenses of $49,000,000 to $52,000,000, inclusive of stock-based compensation expense of approximately $2,500,000; depreciation and amortization expense of $24,000,000 to $25,000,000; interest expense of $10,000,000 to $11,000,000; adjusted EBITDA between $30,000,000 and $35,000,000; one to two new franchise restaurant openings; and we estimate total 2026 capital expenditures of $9,500,000 to $10,500,000. We expect to be free cash flow positive and have the opportunity to reduce our debt balance in 2026 by $5,000,000 to $10,000,000. For further information regarding our 2026 expectations, please see the business outlook section of our press release. With that, I would like to turn the call back over to Joe for final remarks. Joseph Christina: Thanks, Mike. We have built meaningful momentum by focusing on the fundamentals and executing with disciplines that elevate the guest experience. When great food, strong operations, and targeted marketing that connects with guests come together, performance follows. And that is what we have been seeing come to fruition. This is evidenced by the significant year-over-year increase in adjusted EBITDA in 2025 and our expectations for significant further growth in adjusted EBITDA in 2026. We are confident that the foundation we built in 2025 and the strong acceleration of sales in early 2026 position us for sustainable growth throughout 2026 and beyond. Thank you for your time today. I will now turn the call back over to the operator. Operator: Thank you. We will now be conducting a question-and-answer session. 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 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment while we poll for questions. Our first question comes from the line of Todd Brooks with Benchmarkstone. Please proceed with your question. Todd Brooks: Hey. Thanks for the questions, and congrats on such a strong start to Q1 after a really great finish to 2025. So well done with that. Two questions, if I may. Thanks. Two questions, if I may. One is your way, maybe it is best looked at through the lens of the 2026 guidance. You talked about a Q1 contribution from sales transfer. You talked qualitatively about kind of a margin benefit of the sales transfer. If we can talk maybe, Mike, on the year-over-year improvement in both metrics in the 2026 guidance, how much is attributed to the sales transfer versus just the core underlying momentum that you are seeing in the business right now? Michael Hynes: Sure. If we look at the full-year guidance for 2026, $30,000,000 to $35,000,000 of adjusted EBITDA, if we just take the midpoint there, it suggests about a $10,000,000 EBITDA improvement year over year. Think about a little less than half of that will be due to closures, just under $5,000,000, with the rest due to core business improvement. Todd Brooks: Okay. Great. That is helpful. And we will just back that up the income statement for kind of the restaurant-level margin thoughts to get at what the improvements are from operational improvements and leverage then? Okay. Perfect. And then the second one that I had for you, the strength and the 9% numbers, pretty amazing considering the environment we are in. Joe or Mike, do you have any sense of any stimulative benefits from maybe some of the early tax refund activity benefiting the business or kind of to the other side over the last few weeks, any pressure that you have seen from activity and gas price increases? I am just trying to figure out how we get the 9% number to something that reflects where the consumer kind of is at at the baseline level, not some of these exogenous pressures and benefits. Thanks. Michael Hynes: Yes. Those are two pretty big factors in the industry, and they are both fresh. When we look at our performance year to date, outside of weather, we see a lot of consistency. It is not like we saw a big change in March when tax refunds would have started coming in or post the conflict. So we are not seeing an obvious impact on our end. And also, when we look at our performance versus industry, the industry has been hovering in the zero to 1% same-store sales range, and we have been consistently beating that, going back to early 2026, by over nine percentage points. So I do not think those things are showing up yet. Joseph Christina: Yes, and I think, Todd, also, I think, also, we have built a menu around what you have and what you are willing to pay. So as we leaned into Delicious Duos and then had great LTOs that drive more traffic into the restaurants, I think we have something for everyone. And that should sustain us through the coming months. Todd Brooks: And how do Delicious Duos mix, Joe? Joseph Christina: They mix depending on whether there is a strong LTO going on, because that gets factored into the Delicious Duos mix, but right around 5%, which is what we expect it to be since its inception back in late July last year. Todd Brooks: Okay. Great. Thank you both. Operator: Thank you. We have reached the end of the question-and-answer session, and this also concludes today's conference. You may disconnect your line at this time. We thank you for your participation. Have a great day.
Operator: Good day, ladies and gentlemen. Thank you for standing by and welcome to the Health In Tech, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. As a reminder, we are recording today's call. Now I will turn the call over to Lori Babcock, Chief of Staff for the company. Ms. Babcock, please proceed. Lori Babcock: Thank you, Operator, and hello, everyone. Welcome to Health In Tech, Inc.'s fourth quarter and full year 2025 earnings conference call. Joining us today are Mr. Tim Johnson, Chief Executive Officer, and Ms. Julia Qian, Chief Financial Officer. Full details of our results can be found in our earnings press release and in our related Form 10-Ks filed with the SEC. These documents will be available on our Investor Relations website at healthandtechinvestorroom.com. As a reminder, today's call is being recorded, and a replay will be available on our IR website as well. Before we continue, please note that today's discussion includes forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on information available as of today, and involve risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed or implied, including those discussed in our annual report on Form 10-Ks for the period ended 12/31/2025, filed with the SEC. Please review the forward-looking and cautionary statement section at the end of our earnings release for various factors that could cause actual results to differ materially from forward-looking statements made today during our call. Except as expressly required by federal securities laws, we undertake no obligation to update and expressly disclaim the obligation to update these forward-looking statements to reflect events or circumstances after the date of this call or to reflect new information or the occurrence of unanticipated events. We may also refer to certain financial measures not in accordance with generally accepted accounting principles, such as adjusted EBITDA, for comparison purposes only. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. With that, I will now turn the call over to our CEO, Mr. Johnson. Operator: Thank you, Lori, and good afternoon, everyone. We appreciate you joining us today. Tim Johnson: 2025 was a pivotal year for Health In Tech, Inc. It marked our first year as a public company. But more importantly, it was a year in which we demonstrated that our AI-enabled underwriting marketplace, distribution-led growth model, and technology platform can scale within a large, underpenetrated, self-funded health insurance market. For the full year 2025, revenue increased 71% to $333.3 million, reflecting strong execution across our core growth drivers. When we look at what drove this performance, three factors stand out: distribution expansion, platform advancement, and program innovation. First, distribution. Our business scales through distribution, with brokers and TPAs serving as the primary channel through which employers access self-funded health plans. As a result, the breadth and productivity of our distribution net are directly correlated with our growth trajectory. In 2025, we expanded our network to 858 brokers, TPAs, and agency partners, representing a 34% year-over-year increase. Importantly, we believe we remain at a very early stage of market penetration. There are approximately 1,100,000 insurance brokers in the United States, and even with over 800 distribution partners on our platform, our penetration remains well below one-tenth of 1%. Similarly, within an estimated $0.9 trillion self-funded health care market, our scale represents only a fraction of the total addressable opportunity. The key takeaway is that while we delivered strong growth in 2025, we believe that the long-term runway for expansion remains substantial, particularly as we continue to scale distribution and engagement across our partner network. Second, platform development. A core inefficiency in this industry is that underwriting remains highly manual, time intensive, and difficult to scale, particularly in the large employer segment. In 2025, we expanded our Enhanced Do-It-Yourself Benefit Systems, or EDIBS, to support employers with over 100 employees, extending our capabilities beyond the small-group market where we initially established strong product-market fit. This is a meaningful step up-market. Larger-group underwriting is characterized by long sales cycles, fragmented workflows, and significant operational friction. Our platform addresses these challenges by compressing underwriting timelines for larger employers from approximately three months to roughly two weeks, which enhances broker productivity, improves the client experience, and increases placement efficiency. We believe this speed and automation represent a durable competitive advantage, particularly as the market increasingly demands faster, data-driven decision-making. Before I move on, I want to address one of the most important questions we hear from investors: What is our AI advantage, and why is it not easily replicable? The short answer is that our advantage is not just the AI model itself. It is the combination of proprietary data and integrated workflow and distribution. On data, we have been applying AI within our platform since 2021, well before AI became a headline theme. Because we operate within employer-sponsored insurance, we have built a HIPAA-governed dataset tied directly to real underwriting activity and plan design structures, rather than relying on generic or publicly available healthcare data. As employer groups renew over time, we continuously incorporate new cohorts and real-world outcomes, which allows our models to improve through ongoing feedback loops embedded in actual production environments. On workflow, many solutions in the market focus on narrow point applications of AI, for example, automating a single administrative function or a discrete vendor process. While those tools can provide incremental efficiency, they do not address the broader structural inefficiencies in the system. What we have built is a fully integrated platform that connects underwriting, plan design, stop-loss, administration, and vendor coordination in a single workflow. This enables brokers to move from quote to bindable, execution-ready solutions significantly faster, while reducing fragmentation for employers. In other words, our AI is most valuable because it is embedded within an operating marketplace, not deployed as a stand-alone tool. On distribution, technology alone is not sufficient. Distribution is critical. We have established a growing network of brokers, TPAs, and carrier integrations actively using the platform, and that real-world usage drives continuous data generation, improves model performance, and increases platform stickiness over time. As we scale, the data becomes richer, the workflow becomes more efficient, and the competitive advantage compounds. Third, program development. We continue to advance our three-year rate stabilization program, which is designed to address one of the most persistent challenges in employer-sponsored healthcare: pricing volatility. Employers are increasingly focused on predictability, while brokers are seeking solutions to improve retention and simplify long-term planning. Our program is structured to provide greater pricing stability over a multiyear period, supported by a fixed remittance framework and stop-loss protection. Strategically, we believe this offering can deepen client relationships, improve retention, and support expansion into larger employer segments where budgeting stability is a critical decision factor. Now let's talk about 2026 strategic priorities and outlook. As we move into 2026, our priorities remain focused on scaling the platform and accelerating adoption. First, we will continue to expand our distribution footprint. Second, we are continuing to invest in platform development and AI capabilities, with a goal of evolving into a fully integrated marketplace that extends beyond underwriting to include claims administration, cost-containment solutions, and broader plan management capabilities. In January 2026, we enhanced the platform to offer more than 100 preconfigured, customized stop-loss programs, translating complex underwriting and plan design into a scalable, repeatable framework. This drives shorter sales cycles, improved conversion visibility, and greater scalability while maintaining flexibility for employer-specific needs. We are providing full year 2026 revenue guidance of $45,000,000 to $50,000,000, representing approximately 35% to 50% year-over-year growth. Our confidence is supported by our ability to compress time to revenue, enabling new features to scale within one to two quarters compared to 12 to 24 months in traditional insurance environments. We are also strengthening our technology foundation through our partnerships with Siclim, an AWS Advanced Tier Service Provider. We are building more integrated, AI-driven platforms. I will now turn the call over to Julia Qian, our CFO. Thanks, team. Julia Qian: Good afternoon, everybody. I appreciate you joining us today. I will work through our fourth quarter and the full year 2025 financial performance, then provide additional context around our operating model, margin profile, capital allocation priorities, and ongoing product investments. Before continuing to the numbers, I want to briefly address seasonality and timing dynamics. Employer decision cycles, particularly around renewals, do not always align cleanly with the calendar quarter, which can create some variance in quarterly results. As such, we believe year-over-year performance is a more meaningful way to evaluate the business rather than sequentially. On that basis, our trends remained strong throughout 2025. Importantly, our revenue model is contractually driven and recognized over a 12-month policy period, which supports forward-looking revenue visibility and an increased recurring revenue profile. Turning to revenue now. For the full year 2025, total revenue increased 71% year over year to $33,300,000. In the fourth quarter, revenue increased 53% to $7,500,000. This performance reflects continued adoption of our AI-enabled underwriting marketplace, supported by expansion in both distribution and enrolled employees. Our distribution network grew to 885 brokers, TPAs, and agencies, an increase of 34% year over year. Enrolled employees increased to 22,515, up 23% year over year. As more partners onboarded to the platform, we are seeing increased quoting activity, higher bind ratio, and improved conversion efficiency, reinforcing the scalability of our model. As Tim mentioned, we are providing full year 2026 revenue guidance of $45,000,000 to $50,000,000, representing about 35% to 50% growth year over year. This is supported by the visibility in how our recurring revenue flows through from the prior year and the remainder of the year, as well as strong distribution and fully deployed platform capability. When we look at profitability, we continue to demonstrate operating leverage as the business scales. Adjusted EBITDA for the full year was $4,100,000, which is about 12.3% of revenue, an increase of 81% year over year. Net income, our most comparable GAAP measure for the full year, was $1,200,000, representing about 4% of revenue, an increase of 91% year over year. For the fourth quarter, adjusted EBITDA was $300,000, compared to $500,000 in the prior year. Net income for the fourth quarter was negative $300,000, compared with negative $100,000 in the prior year. Again, our GAAP results and the reconciliation of GAAP to non-GAAP measures can be found in our earnings release. The fourth quarter reflects planned reinvestment in go-to-market initiatives, broker engagement, and program development, along with peak enrollment activity as well as investments supporting new product launches. Full year pre-tax income was $1,700,000. Fourth quarter pre-tax loss was $400,000, reflecting the timing of investments. Turning to operating expenses, we continue to drive improved operating efficiency while maintaining disciplined investment in growth initiatives. Total operating expenses were $19,400,000 for the full year, representing 58% of revenue, a 16% improvement year over year. In the fourth quarter, operating expenses were $4,300,000, or 57% of revenue. Breaking these down, for the full year, sales and marketing expenses were $4,200,000, about 13% of revenue, reflecting our efficiency in the distribution-led go-to-market strategy. General and administrative expenses were $13,700,000, 41% of revenue, improved year over year as we scale. Research and development investment included $3,200,000 in capitalized software development and $1,600,000 expensed, representing approximately 5% of revenue. Our R&D investments are focused on platform expansion, underwriting automation, and scalability across the marketplace ecosystem. As we think about growth beyond 2025, we are continuing to increase high-value capability into our existing platform. We plan to initiate the beta test of a new data-driven solution that integrates physiological and claims data to generate actionable value insights. We believe these represent a very meaningful step forward, enhancing decision-making across underwriting and plan management. More broadly, these initiatives reflect our strategy of building additional value-added services on top of an already commercialized, scalable platform, which we expect to support the durability of growth and increase operating leverage even further. AI remains a core investment initiative alongside our other programs. We believe that applying AI within a regulated employer-sponsored insurance environment can materially improve the speed, consistency, and decision quality across both underwriting and member-facing work. We will continue investing in AI-driven automation and underwriting support, while maintaining proper human oversight where it matters most. From a financial perspective, when these investments are directly aligned with our model, they support faster adoption, higher retention, improved efficiency, and greater operating leverage as we scale. Turning to cash flow and the balance sheet. For the full year 2025, we generated $3,100,000 of positive operating cash flow. Accounts receivable days reduced to 14 days in 2025 from an already efficient 29 days in 2024, demonstrating the predictability and efficiency of cash collection in our business model. We invested $3,200,000 in platform development software and still generated positive cash flow from operations, ending the year with $7,700,000 in cash and cash equivalents. With that, I now turn back to the Operator for Q&A. Tim Johnson: Thank you. Operator: We will now begin the question-and-answer session. The first question will come from Allen Klee with Maxim Group. Please go ahead. Allen Klee: Yes, hi. Good quarter. I wanted to start with your larger employer offering you have rolled out. Could you give us the feedback you have gotten and what you are hearing from your partners that are involved in selling it? Thank you. Julia Qian: Sure, Allen. I can cover that. Yes, Tim can talk about the business part, and I can talk about the financials. We announced the entry to the large employer space last year. The financial contribution is very fresh in 2025 because that is starting in the fourth quarter and officially launched this September, and you will see more benefits in 2026. So Tim can answer business-related questions. Tim Johnson: Yes. As Julia said, the sales cycles on those are pretty long, so we are just now really starting to pick up some sales through it. We have a product launch coming up at the end of next month where it really helps speed the process up for the large groups. Right now, we just agreed to underwrite large group, bring them in to make sure that we had a really good process, and then the system that we have built is coming up next month. We have tested it a lot with a lot of brokers and internally, and the speed with which it is performing is really helpful for anybody that uses it. Allen Klee: Okay. Thank you. And then for the three-year rate stabilization offering, which is extremely valuable in today's market, what is the feedback? You are in beta right now. So anything you can say about the feedback and how you're thinking about potential interest and when? When that interest—I know you said second half—but any thoughts of how you think about the inflection of how that might ramp? Tim Johnson: Yes. It is really an attention-grabber for government entities, municipalities, these entities that rely on budgeting heavily. So they have to understand, through a tax base, what they have to budget for. When you can do that for three years, there are a lot of cities, states, governments, counties—they are all interested in looking at it, and we are right now just starting to put together some information so we can gather some of their submission data, start to put some programs together for them, making sure that it looks right and fine-tune it. So there is a lot of attention around it. Seriously, we just got it started a month, month and a half ago, where we could go out and talk about it with our partner—our insurance carrier—that was putting it up and we are working with. So there is a lot of attention around it, but you are right. We have not really started the quoting process yet where we have got much going on that we can put some business on the books. Julia Qian: Yes. So, Allen, that is exactly what we said before. We anticipate it is going to go well. The beta test has a lot of traction. It should be officially launched and announced with all the partners involved in the second half of the year. I think it is still on track. Yes. We will try to see whether we can do a Q3. Allen Klee: Third quarter. Julia Qian: Hopefully the end of second quarter and the beginning of third quarter. This is something we are looking at. Allen Klee: Maybe just following up on my first two questions, what are your thoughts in terms of the amount of renewals you think will be available for both the large employer and the three-year rate stabilization? Do you think that most of it will come more at the end of 2026 when plans renew, or do you think that there is good opportunity in 2026? Julia Qian: So, Allen, today we do not have renewals in the large group business. Most of our business is small- and medium-sized groups, but we only started last year, September, and when we have functionality going on, we start to pick up some pace this year. So we do not really have a renewal from any prior-year business book, but we can see we gain share from other places. So we get new customers. Those will be all new customers. Allen Klee: Three-year both, three-year in the large group. Yes. But what I meant is that plans—if most plans renew in January—does that mean that there will not be a lot available that you can sell to? Tim Johnson: You are correct. July 1 and January 1 are, especially for municipalities, their effective dates. They start on July and January. So again, we are probably not going to get a lot of business on July with the municipalities in that. We will pick up some other clients. But January is clearly going to be the biggest effective date for us on that. Allen Klee: Okay. That is great. And then just one more, then I will get back in the queue. You mentioned you initiated beta testing of physiological data and claims data to get insights. Could you just expand on that a little more? Julia Qian: Yes. So physiological data is when people wear devices to track their physiological information—heart rate and blood pressure—and then we have, as claims data, a lot associated with individuals’ health information. So when we get the data, hopefully it can produce insights. We just got to the start and the beta test for this year. That is something the product will watch for. It can be very interesting. And on the data part, it will really help the user get more additional insights on the correlation of their health condition versus their medical condition. So we just got to the beta test, and we will share with the market the due cost. Allen Klee: Thank you so much. Operator: The next question will come from M Marin with Zacks. Please go ahead. M Marin: Thank you. So I am wondering, you were talking a little bit about your entrance now into the large organizations spectrum of sales. And the sales cycle, as you said, is long. Do you expect that there will be any difference versus smaller organizations in terms of stickiness or retention, or from what you know about the overall industry, do you think it will be pretty much comparable to what you have already experienced in your business? Tim Johnson: Yes, I think that the stickiness will come because of the ease of use of the system—the tool, EDIBS. It is extremely easy and efficient. It is easier for a broker to provide a submission to an underwriter through the system. The system uses a lot of AI technology to organize all of that and parses the data into an organized fashion for the underwriter. It is a layup for the underwriter to, when it eventually comes out the other end of the system, underwrite and do their job, which is all they want to do. So once we can show that the turnaround time on getting the information in, understanding the information, and then getting a proposal back—we are really trying to reduce that timeframe significantly. And if you are in this business, you know that a lot of times it takes a long time for various reasons. But the system that we have built, we really think we can dramatically—I say we are going to easily cut it in half, if not more. M Marin: Okay. And so I know it is very early in the process because you just really completed the beta testing not that long ago, but are you surprised at the level of interest or potential interest that you are expecting or seeing in your pipeline amongst that sector of the overall customer base? Tim Johnson: Yes. We were just talking about that earlier today. In fact, the way that we have positioned ourselves and the people that we are already talking to about it—just trying to get feedback and get through all the beta—you know, internally, my underwriter can now look at and quote up to 20 groups in a week. She used to be able to do that in a month, and now she does it in a week. And just conversations like that around other people in that space, in the underwriting space, they are very excited to see it and test it out. So yes, we hope it is going to be a big splash. M Marin: Switching gears a little bit, over the past several quarters you have announced a number of different partnerships or business affiliations to expand the services you can offer or expand distribution. Do you have an ongoing pipeline of other potential affiliations that you are looking at and considering in order to further expand your service offerings? Tim Johnson: Yes. The tool itself has really expanded who we traditionally thought our market was. So now, besides just brokers and TPAs using the system to quote groups, we are looking at other industries or other vendors within our industry that want to use the tool because it makes their job even easier. We are all in this business, and we designed the product to help us, because we underwrite—we do all these things. But it is expanding beyond just us to where other people want to use the tool. And that kind of goes back to my other answer on the other question you asked. But yes, it is expanding a lot. Julia Qian: Yes. That is multiple. We are looking at these as multiple different legs to grow for the company. So in terms of sales distribution, just to remind everybody, there are 1,100,000 of these sales agents in the country, and we only scratched the surface. So whatever works, we will continue to build a high-functional sales team, continue to acquire brokers, and provide education. One part of entering the large group space will help us to get the larger brokerage houses, because the more product offered, the more stickiness—people are more inclined to deal with one system to use it. So this is part of the strategy for us to offer more services and try to get more brokers onboard. We do not have some particular list, because now we consider the entire universe is 1,100,000, and there are particular things we want to think about and where our high-functional salespeople have the most relationships. Then we would go down the list of the rest in the country. We really do not have particular things. Additionally, the new functionality we are building, we are surprised to see, can be offered as additional sales to generate more revenue, as the capability is needed by other users as well. Mhmm. M Marin: Which would also further enhance your operating leverage, you think? Julia Qian: Yes, definitely. Look, when we started, I often say we are the Amazon selling the bookstore and sell the books at our bookstore, and then we realized people really like to put the store online. So we are like, okay. Now, with a lot of functionality we are developing for our own internal use—because we are part of the customer zero, using the functionality to deal with the manual process, make our automation, make that easier, simpler, use AI—and then we realized a lot of companies like ours on the market also suffer from the manual process. Then we can offer that as an additional service. M Marin: Okay. Thanks so much. Thanks for taking my questions. Operator: The next question is a follow-up from Allen Klee of Maxim Group. Please go ahead. Allen Klee: Yes, hi. You talked about how you want to expand to roll out cost containment and claims paying. Is the business model here that kind of what you said of the—like, you are the store, and these are the different things that get added—and you would take a fee or a percent? How do you envision—like, you are partnering with other firms—or how do you envision how you get paid on it? Julia Qian: So, Allen, we are building—we are the marketplace. So today, the marketplace does two things: create self-funded products, self-funded programs, and put programs together, and also does the underwriting and bundles together through the AI process. In the near future, as the marketplace function expands, we will offer that as a service for other carriers, other MGUs, other people who want to come to the marketplace—not just purchase the product. They also want to use the functionality doing their underwriting. They want to create their customized product. So these are the things we are thinking about, which we already get quite a lot of traction on. It has not launched currently, has not launched this year, has not been in the business model last year. But with more and more traction, we think we will make that available in the very near future. We have not thought about the pricing because there are so many different pricing models we can charge. We can have set pricing. We can have different features, different pricing. There are so many ways people are willing to pay for different functionality. So since this has not been launched and we have not finalized the price, we have a lot of ideas through the conversation with potential customers. Allen Klee: Okay. You announced a partnership on the prescription side, I think. Could you talk about what that can do for your offering? What I am referring to is the Vertical Art Administrators. Tim Johnson: Oh, yes. They are a TPA. They just happen to be owned by a PBM. So it is just another distribution source for us. Allen Klee: Okay. So on the prescription side, that is not an area of focus right now, I assume, right? Tim Johnson: Not really. I mean, we are going to do what we can to manage the drug costs, but as you recently saw, the government is stepping in to try to make some corrections. So it is kind of in flux right now. We do not want to commit to anything and then have something taken away from us. So we are just going to sit back and watch what happens for a while. Allen Klee: Okay. That makes sense. Is there any feedback on the conference you held in Davos and any relationships that you got out of it, or just thoughts on how it went? Tim Johnson: Yes. I thought it went great. We met a lot of good people. Those relationships are still fruitioning. We are trying to figure out how we take advantage of all of them. We got a lot of good attention from that. A lot of people are still talking about it, in fact. Tim Johnson: Okay. Allen Klee: And then maybe lastly on the AI side, just in terms of how you are looking to apply it in 2026, what would you say the biggest initiatives will be? Tim Johnson: The biggest initiatives for AI in 2026? Yes. It is going to be continually improving our own processes. We are really the proof of concept for a lot of these things, and we test it before we take it out. But our system continually needs improvement. We are talking about the claims—I want to clarify—those are the stop-loss claims. Those are not first-dollar TPA claims that we are looking at. We are looking at how MGUs intake claims, and how AI can be used to make that more efficient, because it is a very manual process. So everything we touch, we are looking at applying AI to it to see if we can solve the issue by speeding it up or eliminating intervention by having people get in the middle of it. There are all sorts of different ways that we are looking at AI, but it is improving that entire process of getting information: how you get it, when you get it, what you do with it, where it goes, and where it is stored, and how fast can I get access to it? Allen Klee: Okay. Great. Thank you so much. Tim Johnson: Thanks, Allen. Operator: Thank you. Seeing no more in the queue, let me turn the call back to Mr. Johnson for closing remarks. Tim Johnson: Thank you, Operator, and I thank all of you. I appreciate everyone joining the call today. If anyone has any follow-up questions, please do not hesitate to reach out to us. We appreciate your interest and look forward to keeping the dialogue open. Thanks, everyone. Operator: Thank you all again. This concludes the call. You may now disconnect.
AI threat to software firms may be overstated by markets. Middle East conflict unlikely to have major negative impact on AI development.
Private credit markets are increasingly exhibiting signs reminiscent of the pre-Great Financial Crisis subprime turmoil. Redemption restrictions, or 'gating,' have proliferated, reminding some investors of the famous passage in the song 'Hotel California.
As of March 25, 2026, two stocks in the communication services sector could be flashing a real warning to investors who value momentum as a key criteria in their trading decisions.
The most oversold stocks in the information technology sector presents an opportunity to buy into undervalued companies.
Risks in Qatar's energy infrastructure presents a "big opportunity" for U.S.-based providers, says Simon Lack. Some companies on his radar: Cheniere Energy (LNG) and Venture Global (VG).