Extreme Networks, Inc.

Good day. Thank you for standing by and welcome to Extreme Network's second quarter fiscal year 2025 financial results call. At this time, all participants on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host. Stan Kovler, please go ahead.

Thank you, Livia. Good morning and welcome to Extreme Network's second quarter fiscal year 2025 earnings conference call. I'm Stan Kovler, Senior Vice President of Corporate Development and Investor Relations. With me today are Extreme Network's President and CEO, Ed Myercord, and EVP and CFO, Kevin Rhodes. We just distributed a press release and filed an 8K detailing Extreme Network's financial results for the quarter. For your convenience, a copy of the press release, which includes our GAAP and non-GAAP reconciliations, is available in the Investor Relations section of our website at extremenetworks.com along with our earnings presentation. Today's call and our discussion may include certain forward-looking statements based on our current expectations about Xtreme's future business, financial, and operational results, growth expectations, and strategies. All financial disclosures made on this call will be on a non-GAAP basis unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in the 10-K report for the period ended June 30, 2024, and the 10-Q report for the period ended September 30, 2024, filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them except as required by law. A reconciliation of our non-GAAP results can be found in the press release and financial presentation. Following our prepared remarks, we will take questions. And now I will turn the call over to Xtreme's president and CEO, Ed Myercord.

Thank you, Stan, and thank you all for joining us this morning. Our results in the second quarter were highlighted by a continued and broad-based recovery in the networking market. We grew revenues sequentially for the third quarter in a row, led by product revenues, and achieved our best quarter of product bookings in five quarters. Our competitive win rates continue to improve, especially with larger enterprise customers. In the quarter, 36 customers spent over a million dollars with Xtreme, up from 27 last quarter. We're seeing a promising recovery with larger customers, which is creating meaningful share gains across a variety of verticals, including healthcare, manufacturing, and higher ed. Our EMEA business grew significantly both sequentially and year-over-year. In the Americas, we continued our strong execution in the enterprise vertical. America's sequential growth was impacted by seasonality in the K-12 vertical. From what we see, we believe our customers love the simplicity and feature differentiation of our cloud networking platform. We're the only enterprise player that can deliver end-to-end networking solutions from the campus data center to the edge and across the wide area network from one cloud. In addition, our industry-leading enterprise campus fabric continues to be a significant factor in winning new deals because it offers zero-touch provisioning, provides the most resilience with sub-second convergence, significantly minimizing or eliminating downtime, and minimizes the potential blast radius of lateral cyber attacks on the network. Our competitors simply cannot match these features with their IP fabrics designed for data centers. This quarter, customers such as Munchen Clinic, the largest hospital network in Munich, Philadelphia International Airport, the city of Temple, Texas, invested in Xtreme Fabric for its ability to deliver seamless connectivity, reliability, and rapid recovery, ensuring uninterrupted operations across their high-demand environments. Our competitive displacement span a variety of verticals. We recently secured a multi-million dollar new logo win with the Pittsburgh Steelers to enhance their fan experience and optimize retail point-of-sale systems for greater stadium-wide efficiency. Taylor Wessing, a large law firm in EMEA with 28 offices, 1,200 employees, wanted to untangle themselves from the complex licensing structure of our largest competitor to simplify their operations. They chose Xtreme for the ease of use and scalability of Xtreme Cloud IQ and our industry-leading premier services. We're encouraged by the early traction of our newer commercial models. Bookings for our MSP pilot program have doubled quarter over quarter, and we currently have 37 MSP partners. These MSPs love the flexibility of the consumption-based billing program because it lowers their operational overhead and allows their own customers to scale at their own pace. This makes our offer sticky with upsell opportunities. We're also expanding our funnel with major customers with our private subscription-targeted large service providers. Last quarter, we secured several large global wins with long-term agreements that will drive high margin recurring revenue for Xtreme in the coming quarters. Xtreme Cloud Universal Zero Trust Network Access, uZTNA, is also gaining momentum. This SaaS solution integrates a mature network access control with zero trust remote application access. This quarter, a new aerospace customer upgraded their wired and wireless infrastructure with Xtreme and adopted uZTNA for enhanced security. They value the single policy engine and unified management of application and network access for both on-site and remote workers. Four years ago, we were the first in the industry to announce a universal platform for our unified wired and wireless portfolio. We combined the power of cloud management with next generation switches and access points that simplifies the deployment experience for customers, increases flexibility, and allows customers to gradually adopt new technologies or, change their desired use case by changing their OS or management system without a hardware upgrade. In December, we announced our vision for Xtreme Platform One, an innovative technology platform that integrates Xtreme's networking and security solutions by unifying all our applications into a single interface. The core of the platform includes AI models that will drive impactful advances in automation to the networking experience. We previewed the platform with several of our partners and customers and their response was overwhelmingly positive. They all highlighted the significant time savings their teams would experience by having everything integrated into a single platform powered by AI and with the support of our AI expert. Platform one will drive significant productivity gains for IT teams and network design, deployment, management, and commercial operations by reducing complex tasks from days to hours and hours to minutes. Shortly after our launch in December, CRN Magazine named Platform One one of the 10 hottest networking products of 2024. We have a lot of exciting plans to expand upon our Platform One story and capabilities, which we'll demonstrate at Connect, our annual user conference taking place in May in Paris, before it goes GA in our fiscal G1. We anticipate further market share gains and revenue growth for the full year and a better than seasonal third quarter. We expect this growth to be accompanied by increased margins and cash flow for the full year. And with that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.

Kevin Rhodes Thank you, Ed. Our second quarter marked the third quarter in a row of sequential growth. And our strong gross margin performance and operating expense control demonstrated the strong operating leverage in our model. We achieved earnings per share of 21 cents, up 24% from the previous quarter, and just above the high end of our guidance range. Customer demand trends continue to improve gradually, particularly with large customers. Second quarter revenue of $279.4 million grew 4% sequentially. based on 6% growth in product sales and attached subscription and support contracts. Professional services was down slightly year over year. On a geographic basis, our EMEA business grew quarter over quarter and year over year based on share gains and diversifying our business to enterprise verticals. America's revenue declined sequentially owing to difficult comparisons of significant deals that we closed earlier than expected in the first quarter. We do expect Americas to grow sequentially in the third quarter, and our APAC region grew 5% sequentially. Overall, this was the best bookings quarter in the last five quarters. Trends were in line with our revenue during the quarter, and the product backlog was once again within our expected range. Channel inventory continued to improve to pre-pandemic levels, and sellout was higher than sell-in. On a product basis, bookings were ahead of the prior four quarters with sequential strength in data center and double digit growth in wireless. Total subscription and support revenue was $107.1 million, consistent with the first quarter. Our recurring revenue growth has been driven by the strength of our cloud subscription revenue. Total recurring revenue was 37% on higher product revenue, and a predictable revenue stream for our business. Our subscription deferred revenue was up 18% year over year to $290 million, and our total deferred revenue was $589 million, up 7.5% year over year. We expect subscription and support revenue to grow sequentially in the second half of the year. This reflects the difficult comparisons to the low product growth we experienced in the second half of fiscal 2024. Gross margin of 63.4% was relatively stable, down 30 basis points sequentially, largely due to product and subscription mix, but it was up 90 basis points year over year on improvement and standard costs. The combination of higher product revenue versus subscription and support drove the sequential results. We expect our gross margin to be in the range of 62 to 63%, and the second half of fiscal 2025, also owing to mix. Second quarter operating expenses were $136 million, down $2 million sequentially, and down $5 million from the year-ago quarter. We continue to focus on driving improvement in operating margin and higher profitability for the year. We expect our operating expenses to increase to a range of $140 to $146 million in the second half of the year. slightly better than our previous expectations despite a consistently positive revenue outlook. Sales productivity and better efficiency from our new commercial models is driving this updated outlook. Operating profit for the second quarter was $41.2 million for 14.7% margin, up from $33.5 million or 12.4% of revenue in the prior quarter. Second quarter earnings per share was 21 cents and grew from 17 cents last quarter, all above our guidance range. We ended the quarter with $170.3 million in cash and net debt of $15 million. Our inventory position also improved by $11 million sequentially, and we continue to target an inventory balance closer to $100 million on hand by year end. $16 million in free cash flow in the quarter reflects higher revenue and solid profitability. We expect a continued recovery in cash flow in the second half of fiscal 2025 as we grow revenue and improve profitability. Now turning to guidance. We are encouraged by the level of customer engagement and growth in the funnel we are seeing, which should bode well for us heading into the second half of the year. As a result of our improved visibility, we are increasing our whole year guidance and providing a slightly narrower revenue range for the next quarter. For the third quarter, we expect guidance as follows. Revenue to be in a range of $276 million to $284 million. Gross margin to be in a range of 62% to 63%. Operating margin to be in a range of 12% to 13.7%. And earnings per share to be in a range of 16% to 20%. Our fully diluted share count is expected to be around 134.7 million shares. The improving cash generation and profitability we are achieving this year will allow us to restart our practice of offsetting dilution from stock-based compensation. For the full fiscal year 2025, we expect revenue to be in a range of $1,120,000,000 to $1,138,000,000. And with that, I'll now turn the call back to the operator to begin the question and answer session.

Thank you. Ladies and gentlemen, to ask a question at this time, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1 again. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Ryan Kuntz with NETAM. Your line is open.

Great. Thanks for the questions. Really nice quarter, guys. With U.S. being down, you attributed that to K through 12, and then EMEA being up. Any particular verticals you'd point to there? Can you expand maybe on those trends and the geographies? Thanks.

Kevin, I'll jump in, and then you can come behind. At K through 12, revenue, Ryan, is usually – impacted by E-rate and then just the general building cycle where K-12 schools, they don't want to build while kids and classes in session. And so I think it's a normal seasonality as it relates to K-12 and E-rate. And that's where we felt it. We did see a recovery, and I would say in broader Europe. I will highlight, however, that we are still you know, we are still being negatively impacted by a lack of government in Germany. As many people may be aware, we have a lot of business there. A large percentage of our media business is concentrated in the German market. And a lot of those government customers and a lot of those frame contracts are on hold while the government sorts itself out. So When that happens, we expect pent-up demand to release from that market. So, yes, it's an encouraging step in the right direction overall in EMEA, but there's more to come there. And then as it relates to K-12 back in the U.S., I think you'll see that recover as well.

Got it. Sorry, read into that UK. Maybe it's getting a little better.

Yes, that's right.

Got it. And in terms of FX, any impacts from FX? Do you guys hedge? Can you remind us?

We do hedge, Ryan. And what we're trying to do is just offset any currency fluctuations, really minor adjustments from one quarter to another. We don't report anything on a, you know, FX adjusted basis just because we do hedge and we keep it pretty solid, pretty even.

Got it. And just in closing up, any thoughts about the latest gyrations in HP Juniper and regulatory approval there?

I mean, look, I think our view, Ryan, is that that combination is that we would be a net beneficiary of those two companies coming together. And our expectation would be long term that it would happen. Delays just creates more risk around the transaction. And quite frankly, if you're a partner or you're a customer out there making a buying decision in the enterprise space, you've got to be cautious about the potential risk. And so we think delays probably help us somewhat. We had heard that the deal was going to close in March. Previously, we had heard the deal was going to close in December, and now it looks like there's a fresh round of news throwing doubt on the deal. We think both HP and Juniper want to proceed. There's a pretty hefty breakup fee that we know HP doesn't want to pay, and we're also not exactly sure how a change in administration could affect this.

Right. Okay, super helpful. Congrats again. I'll pass it.

Thanks, Ryan. Thanks, Ryan.

Thank you. Our next question, coming from the lineup, Christian Stott with Crick Palum Capital, Yolanda Smallfin.

Great, fantastic quarter, guys. Well, my question has to do with Wi-Fi 7. Can you give us an update when you think that it has the opportunity to have a more meaningful, positive impact on your business?

well i i let me jump in christian and thanks for the question and then i'll i'll let uh kevin i'll i'll let you chime in because you're going to talk about more specifics than what we're saying um you know it it your wi-fi 7 for us is starting to to ramp i think christian you're well aware that your wi-fi 7 brings a lot of benefits in terms of you know it's faster it's more bandwidth And in particular, it's about enhanced reliability and the fact that a lot of enterprise customers today who may not have thought about Wi-Fi for certain applications, mission-critical applications, now are feeling more comfortable given the performance of Wi-Fi 7. So we're expecting strong adoption of Wi-Fi 7. Xtreme was one of the first to market with Wi-Fi 7, and we would expect continued ramp also as we build out our portfolio of Wi-Fi 7 products. Kevin, do you want to add any more specifics or is there anything else to say?

I think the only thing I would add, Ed, is that Gartner says that nearly half of the APs being sold in 2027 are expected to be Wi-Fi 7, right? And then we're seeing some adoption here at about 12% of our access points that we're selling right now are in the Wi-Fi 7 category. Great. No other questions. Thanks, guys.

Thanks, Christian.

Thank you. And as a reminder, if you'd like to ask a question, please press star 1-1 on your touch-tone phone and wait for your name to be announced. Our next question, coming from the line of Timothy Horan with Oppenheimer. Your line is now open. Hey, guys.

I know you're going to elaborate at your customer event, but Can you elaborate just a little bit more on platform one? Just maybe a little more color, how differentiated is in the market? How much of an improvement is it versus what you had previously? And just what do you think it means for the business model? Do you think this will start to drive better share gains? How do you think about the TAM or average contract size and you know, openly what to do for margins. I know that's a long question.

It's okay, Kevin. It's top of mind for a lot of people. We came out in December really with our vision for Platform One, and there's a huge amount of work going on inside of Xtreme right now in developing Platform One. But if you think about the applications that we run supporting our business, everything from wireless and wired We have something called Site Engine, which gives us the multi-domain capability to manage our competitor gears. We have SD-WAN. We have UZTNA. So if you package all of Xtreme's solutions, you can access them through XIQ through the cloud, but effectively you're going into a different application. So the big task that's being undertaken here is that we're unifying and consolidating all the applications into a single user interface that we call Workspace. And so I think for the field and for our partners, the big game changer there is going to be the fact that our fabric, which is our hottest technology because it's so differentiated and none of our competitors have it for the campus, you are going to be able to observe from a visibility standpoint, manage and orchestrate fabric from the platform in the cloud. And that's been a huge ask from our field and for our partners. So there'll be this unified solution with common user interfaces, common services, ultimately common data. And in addition, we're also building in the capability for commercials. So you'll be able from the same platform to manage licensing and service, et cetera. And so it's a comprehensive platform that is truly unique in networking and it's broader than just this network management. The other important thing to mention is that we built AI into the core of the platform so that you're going to be able to query, you know, you're going to be able to interface with platform one in a way that really hasn't been done before. And it's everything from starting off with querying If you're looking for configuration information both inside the network and you're looking for client performance or are we meeting all of our SLAs, you're going to be able to interface with the platform for some of these basic functions. And it's going to make it a lot easier to do that. As we move along, the idea is to add automation and build automation into this. As we find certain network issues that happen all the time, we can recommend a mitigation. And over time, you can just automate that function. And so these are some of the things that we're building into the platform that we feel are fundamentally going to change how people are interfacing with the network. So this is... Yeah, we talked about limited availability this quarter, and then GA happening in our fiscal Q1. We would expect over the next three years that we will migrate all of our base onto this extreme platform one, and that, you know, all new customers would be signing up and joining the platform. If you take our cloud management platform, which is very popular, If you take that and then you look at what you get from Extreme Platform One, everyone who's in our cloud is going to want to make that move. And ultimately, what we will see is that there's greater value. And with greater value, we would expect to have the combination of our service and subscription revenue grow at a higher rate than where we are today, both in terms of new as well as renewal rates. for a subscription license. At the end of the day, we want to make it incredibly simple for people that go on this journey and to fundamentally change their networking experience. Kevin, do you want to add anything?

Ed, I think you covered it all very well. I mean, to us, right, this is a platform that kind of leapfrogs what we're seeing in the marketplace today. And like you said, a lot of customers are very eager to jump on it. And then the AI is going to bring us to another level we haven't seen it's not just ai ops but it's also you know it really you know enables them to see better into their network and and all the activity that's happening with their network and it combines the security as well so i think all the above is what you said and will customers uh will this cost them more initially or is it more the increase in revenue kind of comes from them adding more and more products and services that's already on the platform

Yeah, I think the value is going to come from the new capabilities of the platform and people wanting to, you know, people getting more value and wanting to trade up for the value. So it's not a big step, but we would expect incremental revenue from the combined offering of platform one, which would include service. compared to the standard XIQ license and service today. Thank you.

Thank you. Our next question, coming from the line of Dave Kang with B. Riley. Your line is now open.

Thank you. Good morning. First question is just wondering if you can talk about opportunities with your service providers like Verizon. Can we get an update there?

Yeah. Dave, as you know, we have very targeted opportunities with Verizon, Ericsson. These are our largest service provider customers. What we've talked about with new commercial models is a private subscription offer and the opportunity to work with them more like an MSP or in that capacity to leverage the MSP platform that we're building. The MSP platform that we're building was designed in something we call Workspace, which is ultimately the platform that Xtreme Platform will be built on and is being built on. we see an opportunity to expand our relationships with these larger service providers that are in, they have relationships with networking providers that the businesses are not very profitable. We think we can unlock profitability with our new platform and the new commercial model with a private subscription offer. And we believe the economics are meaningful enough to want to pick off and get some of them to move. It's a much longer-term sales process. We are in the middle of that having productive conversations, but I would say that's the latest. We've had some large wins that we mentioned that we'll come into, and you'll start to see them feather into our results as we close out our fiscal 25 and turn into fiscal 26. Anything else, Kevin?

Yeah, no, I think you hit it. That's the update.

Okay. Just wondering if you can kind of make a prediction, you know, how should we think about the trajectory, like maybe 10% of revenue? I mean, maybe not this fiscal year, but can we see that like towards the end of the calendar year or more like next calendar year? Any thoughts there?

Yeah, Dave, I wouldn't want to get into a projection at this point for 26 or beyond around what that looks like. It's obviously in our pipeline, and as we look at opportunities coming through, we can give updated guidance on what we think revenue mixes will look like in 26 and beyond once we get a little bit closer to your end.

Got it. And my second question is, you mentioned data center. How big is it? Are you working with any hyperscalers, or is it more of a smaller data center operators? And what's driving this trend?

Well, David, we have very specific use cases for Ericsson and their platform that supports wireless players. Think about that as almost like an OEM relationship. And then in the case of Verizon, we're supporting their services platform and their back office as well as a direct customer. So those are very specific use cases. And that's where we're focused. As you know, we have not been active in investing in these hyperscale data center solutions. The margins in that segment have been getting squeezed. There's a lot of larger players that are aggressively going after that as well as white box players that are going after that market. We do think with some of the announcements that have recently been made, for us, we view them favorably because it's encouraging with the idea that some of these AI workspace workloads and use cases can be built and be applied to smaller enterprise customers in a way that's affordable. And this is something, obviously, it's early innings here, but we had already begun looking at how do we support our customers to the extent that some of these AI workloads come back on-prem that are more suitable to our solution. So it's early innings on that. You'll hear more about that later. it's a response to the broader question.

Got it. Thank you.

Thank you. And our next question, coming from the line of David Bilt with UBS. The line is now open.

Great. Thanks, guys, for taking my questions. Maybe, Ed, the first one for you, can you maybe speak to kind of the type of exposure or how you're thinking about sort of the way the U.S. is going about, at least on the federal government side, funding the federal government and what it might mean for states and local municipalities and how that might be sort of filtering into your business over the next couple of quarters, just to kind of get a sense for how we should think about it. And then maybe one for Kevin, I'll give you both up front. You know, Kevin, when I think about your services and subscription business, particularly on the recurring side, if we adjust for the product, if we subtract out the professional services, you know, that business has been around 100, well, 100 million, How do we think about that from an attach rate going forward as product revenue growth should continue to grow going forward? Is there kind of a good algorithm that we should think about going forward or it's a little bit more complicated than that?

Okay, we can, yeah. I'll answer the first question.

Yes, so most of it, David, most of our spend on the government side is in the state and local domain as well as in the education domain. At this stage of the game, it is early innings, but we're not aware of any impact to the budgets that we're supporting in terms of the networking building for schools, K-12 and higher ed schools, and also our state and local government customers. Our federal spend customers are very well established government entities. And here again, we don't expect at this stage, we're not anticipating any impact on the projects that we have underway or that are in our funnel. Great, thanks.

And just to answer the second part of your question with regard to subscription and support and the outlook for that, right? There's really, you know, I'd call it four factors that are really going to help that. One, just increase in product sales. as we've recovered right from Q3 and Q4 of last year, where we had lower product revenue coming into this year. Remember, subscription and support is kind of a lagging indicator against those product sales. You sell the product, you get the attach, and then you've got the growth rate coming behind that. So there's a little bit of lag right now, and we're kind of feeling a little bit of the pain from Q3 and Q4 last year in the growth rate here. It's still 14%. It's still what we're expecting to be in the kind of mid-teens growth on the subscription side, but nevertheless, a little bit lower than what we experienced. But platform, so higher growth, you know, growth in product is going to help us, which we're calling, you know, in the second half of the year. The second part of that would be, you know, Platform 1 and Platform 1 Attach. It's a little bit higher ASP, but also we're going to get more and more of the customers, you know, to renew in Platform 1, and we'll get not only XIQ, but also we'll add other features to that, including the support to it, and we'll get all of that to renew at the same time with enterprise agreements with these customers. So that's going to be new as well. Three, we've got the extreme subscription private offer, which we just talked about earlier with the service providers. The service providers are really Fortune 100 companies. That continues to do well, and we believe that we will get more and more subscription revenue associated with that. And then the last one is MSPs. and driving these MSPs, which, again, 100% attach for every deal that closes within an MSP. And so it's a combination of a better attach rate, but it's more product sales, and it's these new go-to-market motions that we have that both have 100% attach rate as well on the MSP side and the ESMO side.

Helpful. And can I catch up a little more? And I think I heard you say Q3 would be better seasonality this year. Can you maybe talk about kind of what's driving that? Is it what markets, what products, just general improvement in the networking backdrop, just kind of get a sense of what's going on there?

Yeah, that's right. So what we have is normally what you would see in our seasonality patterns and trends is a dip in March and then a nice step in the June quarter. And what we're calling here is a flat March quarter and then a nice step in June. So normally instead of seeing, you would see a downtick and the strength in the market and our outlook and the opportunities that we have in our funnel and what we're seeing is that we're confident in calling a flat quarter. So that's why it's a seasonally stronger quarter because we're not expecting the dip in March that we would normally get. And yes, it's the broader market recovery. It's our commercial models that are adding and gaining momentum. We think that our competitive positioning continues to favor us and will continue to create opportunities for Xtreme. And as I mentioned, some of our markets in specific, like in Germany, in Europe, we continue to be negatively impacted by a lack of spend in that particular market. And we are expecting to have a new government and we're expecting to have budgets. And when that happens, we think spending will be unlocked and that'll be the tailwind for us. Great.

Thank you.

Thank you. And our next question coming from the line of Eric Martinuzzi with Lexter Capital Markets. Your line is now open.

Yeah, I'm trying to get a feel for industry growth rates. You know, given your own action over the last, you know, call it 12 months or so, it's been hard to get a feel for just the overall industry growth rate. But is this an industry that you see kind of a high single digits growth rate, mid single digits growth? Because you've got the puts and takes with the competitive landscape, your own product launches, and then the channel issues from a year ago.

Yeah, Eric, I think our view of the industry is that it's a mid-single-digit grower and that we're in a share-gain position. And when you think about extreme long-term, you think about extreme in the high single-digits trending to the double-digit territory. Okay. Kevin, I'll open the door for you here.

Yeah, no, I think you're right, Ed. I mean, that's exactly what we would say. And actually, you know, the larger companies like Asysco might even, in their networking business, have low, you know, single digits. But I think that's what we're positioning ourselves for from a long-range, you know, expectation.

Okay. And then I just wanted to go a layer deeper on the slight step down in the gross margin outlook to Q3 versus Q4. You know, you finished out at 63.4% on the non-GAAP gross margin for Q2, and the midpoint for Q3, actually for the back half, is 62.5%. So I understand that it's based on mix, but in particular, what product is pulling that mix down?

pulling that margin down yeah it's just a function of the actual product gross margin is lower than subscription and support gross margin right and so the growth that we see coming back here in the second half of the year is primarily going to be on the product side and so that's the mixed shift that we're owing to the the slightly lower margin you know at the end of the day there's a little bit of you know we also have taxes being reset here in January. And so we've got some COGS expenses as well as operating expenses that will be affected by the FICA limits being reset. And so that's a little bit of a drag on gross margins as well. We still feel comfortable, I would say, Eric, in terms of the 64 to 66 kind of long-term range for gross margin. And obviously, we'll try and overachieve that. you know, as we continue to drive, you know, here for the second half of the year with the 62 to 63% range. But I would say, you know, it's certainly, that's what it is. It's primarily just product in general being a higher mix of revenue in the third and fourth quarter.

Got it. Thanks for the clarification.

Thank you. Nancy, there are no further questions in the queue at this time. I will now turn the call back over to Mr. Ed Myercourt for any closing remarks.

Okay, Lydia, thank you very much. Thanks, everybody, for joining the call today. We appreciate your support, and we have a lot of exciting things going on at Xtreme. Certainly, as we go through this quarter and head to May for our user conference with Connect, I want to thank our employees, customers, partners who are dialed in. We're excited about the opportunities that lie ahead. I know we've also opened the door to investors to come to Paris where we're showcasing our new technology, and we look forward to seeing you there. Thanks, everybody, and have a great day. Thank you.

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