Extreme Networks, Inc.

Hello. Thank you for joining us and welcome to the Extreme Networks Q2 Fiscal Year 2016.

Corporate Development. With me today are Xtreme Networks President and CEO, Ed Myercord, and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8K detailing Xtreme Networks financial results for the second quarter of 2026. A copy of the press release, which includes our gap to non-gap reconciliations, and our earnings presentation is available in the IR section at XtremeNetworks.com. Today's call and Q&A may include certain forward-looking statements based on current expectations about Extreme's future financial and operational results, growth expectations, new product introductions, 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 that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in our 10-K and 10-Q filings. Any forward-looking statements made on this call reflect our analysis as of today. We have no plans to update them except as required by law. Following our prepared remarks, we will take questions. And now I will turn the call over to Xtreme's President and CEO, Ed Myercourt.

Thank you, Stan, and thank you all for joining us this morning. The second quarter marked our seventh straight quarter of revenue growth, driven by strong demand for our AI power platform, fueling share gains and double-digit year-over-year growth. Over the past 12 months, we've grown three times faster than our largest competitors in the enterprise networking space, highlighting the fact that we're winning market share. Our revenue is $318 million this quarter, exceeding our guidance and up 14% year-over-year, driven by continued competitive wins with large customers across all verticals. Product revenue increased double digits year-over-year for the fourth consecutive quarter and Cloud subscription momentum lifted SaaS ARR to 25% year-over-year growth, landing at 227 million. And finally, we experienced our strongest subscription bookings on record with Extreme Platform One leading the way. Our technology differentiation and the quality of our team's execution are driving growth and enabling us to move upmarket and win larger enterprise networking projects. This quarter, we closed 34 deals over a million dollars, highlighting confidence in our differentiated technology and our ability to win in highly contested head-to-head competitive situations. Our innovation is translating into purpose-built solutions for larger, more demanding enterprise environments. Why are we winning? Competitors can't match the capabilities of our end-to-end campus fabric. which continues to be a major driver of large enterprise wins, differentiated by capabilities like zero-touch provisioning, sub-second convergence, and the creation of hyper-segmented networks that hide IP addresses and thereby limit the blast radius of lateral cyber attacks, a major security benefit. For those of you who recall our investor day, a Fortune 100 customer remarked that what takes Cisco six hours takes Xtreme six minutes. And this is the power of our fabric. Platform one is unique with a true agentic AI core. Our AI agents can autonomously diagnose issues, guide resolution, and provide clear, actionable insights. Our platform is particularly useful in troubleshooting, evidence collecting, and solving complicated network issues, turning days and hours of work into minutes. We're the only vendor that delivers true cloud choice, whether public, private, or hybrid, including sovereign cloud solutions. We meet the data residency, compliance, and security demands of regulated environments, unlike competitive solutions that are locked into public cloud only and expensive purpose-built architectures. And no one delivers complex Wi-Fi solutions better than Xtreme. And this is why we're the preferred Wi-Fi vendor for dense environments like the NFL and Major League Baseball stadiums, as well as large, highly distributed environments like Kroger, FedEx, and other large retailers. Given this ongoing innovation and strong competitive differentiation, we expect to accelerate our leadership position and continue to drive share gains. In the quarter, we had several large wins across verticals and geos, including a multimillion-dollar sale of Platform One to a large retail customer to centrally manage their network across 3,000 stores, Baylor University, Henry Ford Health, University Hospital, Birmingham NHS, and the Pittsburgh Steelers, all leveraging Xtreme's Wi-Fi 7 solutions. TJ Regional Health in Kentucky, and Group Joliment, a large healthcare provider in Belgium, complete modernization of their networks with Xtreme Fabric to deliver reliable, high-quality patient care. One of the largest school districts in the United States selected Xtreme over Juniper after a head-to-head evaluation and a multimillion-dollar full network refresh of wired, wireless SD-WAN, and importantly, our AI platforms. And SK Bioscience, a leading South Korean biotech company deploying platform one to support rapid growth across its expanded offices and new R&D center. We continue to see strong momentum across our commercial models with MSP partners nearly doubling in billings up more than three times year over year. Our consumption-based billing eliminates upfront costs while poolable licensing enables MSPs to easily scale across devices, locations, and customers. In addition to product innovation, we're helping partners make more money with enhanced commercial terms. Last week, we launched Extreme Partner First, our new partner program which simplifies deal registration, delivers transparent pricing and rebates, and embeds AI directly into the partner experience. We help partners access critical sales content in seconds, close deals faster, and scale profitably with role-based dashboards, faster approvals, real-time deal visibility, and accelerated rewards. Partners can make 20% more profit at Xtreme than our competitors. And we've dramatically simplified the way customers are buying from us with a single bundled license that offers AI, fabric, hardware, and security. Platform 1 keeps getting stronger with continuous updates that materially increase customer value. Today, we're attracting highly sought-after talent from across the industry, and our retention remains at all-time highs. Recently, we were able to recruit top-level talent from Juniper who see tremendous opportunity at Xtreme, including two at the SVP level, leadership positions in Global Channel and EMEA Sales. Looking ahead, the strength of our funnel reflects a robust demand environment across all our industry verticals with double-digit pipeline growth in state, local, and education, and continued momentum across manufacturing, healthcare, and general enterprise. On top of these dynamics, a return of government spending in Europe, expansion in APAC, and continued momentum in Americas underpin these trends. A major end-of-life refresh cycle and changes to the partner program at Cisco are creating a significant multi-year growth opportunity for Xtreme worth billions in total addressable market. And the HB Juniper merger is creating share gain tailwinds for us as well. These market trends create openings for Xtreme as new AI requirements, aging hardware and next generation technologies like Wi-Fi 7 are driving customers to reassess their vendor choice. Many are turning to Xtreme to modernize their networks. As it pertains to supply chain, networking is mission critical. It's not a nice to have. Everything our customers run depends on the network, which means demand remains strong even in a higher-cost environment. Net-net, our experience and industry analyst shows low elasticity of demand for networking infrastructure, giving us price flexibility to protect our margins. And this is an industry phenomenon. Given our operational agility, we're confident in our ability to meet customer demand going forward. One of the ways we've solved for component shortages has been a replacement strategy. In the COVID era, for example, our teams replaced over 125 components in a year, 10x the normal rate. And most recently, we identified and swapped out a new source of DDR4 memory chips that Broadcom has already qualified. Our teams are nimble and get us in front of the curve. In the case of component scarcity, our size and scale can be an advantage as we are chasing lower volumes and can be more focused. For the remainder of fiscal 26, we expect to continue to grow profit faster than revenue with expected profitability growth of around 20% on double-digit revenue growth for the year. We're set up with a solid foundation exiting the second quarter with well over $200 million of annualized EBITDA at a healthy net cash position. Now let me turn the call over to Kevin to discuss financial results and guidance.

Thanks, Ed. Total revenue of $318 million grew 14% year over year and exceeded the high end of our guidance range. And as Ed mentioned, this is our seventh consecutive quarter on revenue growth. Earnings per share of 26 cents also exceeded the high end of our guidance range. Earnings per share grew from 21 cents in the prior year quarter, a 24% year-over-year improvement. So our profit growth rate outpaced our revenue growth rate by 10 percentage points. SAS ARR also accelerated to 25% growth on a year-over-year basis, driven by our success with Platform 1 subscriptions. Platform 1 bookings were well ahead, even twice the amount of our target, resulting in accelerating year-over-year performance in subscription bookings. The expected acceleration in growth for the high margin subscription revenue we laid out at our investor day in November is playing out as expected. We are excited about the continued growth in our recurring revenue base, up 12% year-over-year, and we have a strong pipeline for platform one sales. Geographically, we had a strong year-over-year revenue growth across all regions. This speaks to our improved alignment between our go-to-market teams, a robust demand environment for critical IT infrastructure, and our ability to target larger partners in fields across the globe. We continue to gain traction with new, larger partners and associated new customers when it comes to our new logo lens. Subscription and support revenue reached $120 million, up 12% year-over-year and up 3% sequentially. Our staff deferred revenue continued to grow to $334 million, a 15% year-over-year increase. Overall, deferred recurring revenue climbed to $628 million, a 9% year-over-year improvement. We are pleased with the predictability that this high margin revenue gives us. Non-GAAP gross margin was 62%, an increase of 70 basis points from the last quarter and at the high end of our guidance range, which we highlighted at our investor day. Product margin increased due to mitigating actions that we have taken to offset higher component costs, including a price increase we implemented last quarter. Higher support margins were driven by improved product quality and lower warranty costs. and subscription margins also rose on higher revenue, which also helped our mix. Our teams are doing a great job managing an ever-evolving supply chain environment, taking actions to mitigate component price increases and qualifying other third parties, and continue to proactively secure our forward supply needs. In addition, we have the flexibility to further increase prices to offset any increases and memory or other components. We are confident in our ability to meet customer demand and deliver critical networking products without disruption. One item I'd like to point out, which is built into our guidance this quarter, is that we have several multi-million dollar deployments at large venues, which we will deliver during the third and the fourth quarter. These customers have asked Xtreme to run the point on the installation with our professional services team. Installation services carry a much lower margin profile than our traditional subscription and support margins, and we expect these implementations to impact our mix during that third and fourth quarter timeframe. We expect a combination of the actions that we have taken and a vigilant approach to supply chain planning to result in further improvement in our gross margins over time. we're still very confident in our ability to achieve our long-term gross margin goal of 64% to 56%. Turning to the second quarter operating expenses, they were flat from last quarter at $149 million, and down with the percentage of revenue from last quarter and the last year, providing further operating leverage. This was despite higher than expected sales submissions due to higher revenues. Operating margin was 15%, up from 13.3% last quarter, and 14.7% in the prior year quarter. I'm pleased to report that we generated $52.4 million in adjusted EBITDA, and our adjusted EBITDA margin was 16.5%. We generated $43 million in free cash flow in the second quarter, and continued to reduce inventory levels in days on hand. This demonstrates our continued focus on working capital management. Now turning to guidance. We expect our third quarter revenue to be in a range of $309 million to $314 million. This reflects normal seasonality in our underlying business, which we expect to carry forward. As I mentioned earlier, we expect third quarter gross margins to be impacted by these larger professional services deployments And therefore, gross margin is expected to be in a range of 61% to 61.4%. We do expect improvement in product gross margin in the third quarter and expect it to carry forward for the remainder of the fiscal year. Operating market is expected to be in a range of 13.6% to 14.8%. And earnings per share in the third quarter is expected to be in a range of 23 cents to 25 cents. Our fully diluted share count is expected to be around 136 million shares. For the full fiscal year 26, we expect guidance and solves. Revenue is now increasing another $10 million at the midpoint from our last quarter to be in a range of $1,262,000,000 to $1,270,000,000. The midpoint of this range suggests 11% growth year over year. We expect earnings per share in a range of 98 cents to $1.02. And with that, I now turn the call over to the operator to begin the question and answer session.

We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, please press star one again. Please pick up your handset when asking a question. If you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mike Genovese with Rosenblatt Securities. Mike, your line is now open.

Great. Thanks very much. Congratulations on the good quarter. I think you guys gave some compelling metrics about... about share gain. Can you talk more about that, though? The evidence that you use to show that you're gaining share and to prove that you're gaining share, and also restructuring that you did in the go-to-market model during the quarter, whether that You know, in terms of putting Norm in charge and other types of restructuring, you know, how you approach share gain, whether that had an impact in the quarter or whether that impact is more in front of us. Thank you.

Thanks, Mike. I'll take that. Yeah, we don't make up the numbers in terms of share gains. We use third-party analysts, and we look at like 650 Group and Del Oro, et cetera. When you look at Xtreme and you compare us to Cisco or now HPE, they have a lot of other businesses. They play in a lot of other market segments. So it could be difficult to you know, dive in and really understand what's happening, you know, in the enterprise market, which is where we play. So the analysts do a really nice job of getting the information and kind of zeroing in on how competition is performing, you know, where we compete. And so when I say, you know, we're growing at three times the market, we're using third-party industry data looking at you know, looking at, you know, the enterprise deployments, which is campus, enterprise data, et cetera, data center, et cetera. So that's how we get the data. In terms of how we know we're winning, I think everybody here knows we compete every day head-to-head with now HP and Juniper is turning into HP, and they've got their hands full. And then you know, Cisco. So we have hands-on information of our competitive wins and win rates, and we understand kind of how and why we're taking share from that standpoint in terms of winning new customers from those larger accounts. To your point, Mike, Norman has been in charge. Norman Rice, we put him in charge of sales. It's hard to believe it's been two years since But he's brought a lot of discipline into the process in terms of how we forecast, driving accountability, and then making a lot of changes in terms of the personnel and leadership. And so I would say we have more confidence today than we've ever had in our booking outlook, in our booking forecast, with, I would say, top grades across the channel and our direct selling organization. We also brought in Monica Kumar a couple years ago, our chief marketing officer, who has done a phenomenal job overhauling our marketing team and effort. And we've created very targeted markets. We call them pods. We have 19 of them where we have our direct sales team partnered with localized event marketing teams, partnered with channel resources companies, focused on events and activities that drive funnel and then focused on how we drive and convert that funnel. So it's a concerted effort. Obviously, all of this connected with our product teams and our service and support teams, but working together. So we have 19 different pods that we forecast each quarter in terms of funnel creation in terms of conversion. And obviously that gets down and ties the bottoms up bookings forecast from our sales team. So we've come a long way. We have a lot of confidence in the demand outlook and we're really confident in our ability to take share. And as we talk about move up market, we're excited about what we have in the funnel and that especially with some of these larger opportunities, that would be meaningful share gains for us at Xtreme.

Great. That was such an extensive answer that I almost still have an intent to ask a follow-up just for time's sake and other analysts, but I will ask a follow-up. I don't think that you guys mentioned, if we looked at AI mentions on this conference call, there probably weren't a ton of them. So in terms of sort of you know, agentic offerings or, you know, enterprise switching upgrade cycles and confidence that that's going to happen. Can you just talk about, you know, the importance of AI and what you're seeing, you know, from your offerings and from your customers' activity related to AI? And then I'll pass it on. Thank you.

Sure. Well, look, AI continues to be top of mind for all of our customers. Everyone's trying to figure out, hey, what's the use case for AI? How can I use modern AI technology in my environment to drive better business outcomes? And we're all over that. We had our AI summit in Major League Baseball headquarters in the fall with a great, great response. We are probably the only networking vendor that has an agentic AI platform where our AI sits at the core of the platform. And it's something that gives us a real advantage when we're having conversations today. As people are contemplating AI, they want to look at players that have developed platforms. And This is, again, a place where our size becomes an advantage for Xtreme because of the capabilities that we've built and then what we're going to be able to do in terms of integrating our network capabilities with ecosystem partners of our customers. When we start looking at AI agents, creating an agent exchange, creating the ability to create workflows, and drive outcomes for customers. So we've always been a leader in cloud. We've been a leader in AI, kind of Gen 1, if you will, I'd say alongside of Juniper Mist and Meraki. Now we feel like we're in a position to pull ahead because we've created this platform. And again, as I said, it's the only one with a pure agentic AI core. And we think this is going to give us enhanced capabilities as we go forward. And so, yeah, it's top of mind for customers. Everybody wants to know about it. This is an advantage for Xtreme. I will say we doubled our forecast for subscription bookings for Xtreme Platform 1, which is our AI platform. So things are going really well. Our sellers are having a great time with this out in the market.

Perfect. Thanks again. Thanks, Mike.

Your next question comes from Tomer Zilberman from the Bank of America. Tomer, your line is now open.

Great. Hey, guys. Good morning. Maybe going back on the share gain question. When you look at the opportunity that you're seeing from these competitive displacements, are you coming in all at once replacing both the Wi-Fi piece and the switching piece? Or are you seeing it start in one area, kind of landing in one or the other, and then further expanding? And then I have a follow-up.

Yeah, Tomer, each project will have a life of its own. So, you know, we'll... we'll have a unique opportunity because we're the only player that can provide data sovereignty. So cloud choice becomes an issue in Germany where a customer has data sovereignty requirements and we bring a unique solution with our cloud choice. So the lead-in becomes cloud choice. Interestingly, our fabric over SD-WAN won the day with the Japanese government and the huge wins that we've had over there. So it was really about the differentiation of our fabric technology and the fact that we were able to bring fabric over the wide area network with SD-WAN to create this unique solution that none of our competitors could replicate. And therefore, it opened up the channel and opened up huge opportunities in Japan. The hottest technology for us today is our fabric. Everybody has an IP fabric in the industry. And IP fabrics for data centers, that's great. Nobody has a fabric for campus that's layer two, and that's what we have. And so when we get into beauty contests where customers, let's look at this Cisco refresh, and now it's time to upgrade the network, and now a customer says, all right, well, let's bring in a few other competitors. people are blown away. My comment, what takes Cisco six hours takes extreme six seconds. That is a real quote from a Fortune 100 customer. The agility and the speed of turning up network and provisioning network, as well as the delivery of service, as well as the resiliency of the platform, the ability to create networks in a network. Again, this is, you know, Miami-Dade County, I can go across to huge government customers around the world, huge manufacturers, healthcare providers. When we get into a head-to-head competition, we physically show customers what we can do and let them play with the technology and our competitors can't replicate it. So all of a sudden, extreme goes from maybe a distant third or fourth right into contention as a finalist. and our teams are doing a great job executing and winning in some of these competitive projects.

Got it. Maybe as a follow-up, talking about memory prices, you started talking about it last quarter, and I think in between, or maybe it was last quarter, you implemented a mid-single-digit price increase. So my question is, first, how did customers react to that? And since we've seen memory prices continue to rise You know, what's the signal for another price increase, and are you seeing any decommitments from suppliers?

Yeah, Tom, a great question. And, yeah, we're well aware that, you know, supply chain and component availability is top of mind for everybody out there. Yeah, we implemented the price increase earlier, 7% price increase, and I can say, you know, it's like a tree falling in the forest, a total non-issue. You know, I mentioned the price inelasticity of networking. If you think about an organization, think about your organization, there's There's no discussion about whether or not you need a network and that you need a modern network with modern networking tools. So this is true for all of our customers. So it's kind of a non-negotiable. So I'd say our customers are very resilient from a pricing perspective. Going forward, we will evaluate price increases as we go forward and use that where we need to. We're very good at it as a company, and I'd say we're very good at it as an industry. Specifically, meeting demand for things like DDR4 memory. I believe size is an advantage for Xtreme here. First of all, we have a very, very strong team. It's the same team that we've had going back into the COVID era. And supply chain disruption is normal for us and our business. And so our teams are very strong. We have excellent vendor relationships. So I'd say we get out in front of these things before our competitors. Size is an advantage. We're solving for fewer problems. We're solving for enterprise networking, switches, and access points. Our competitors have much bigger portfolios that they're trying to solve for. And then what we need, what we're chasing for is lower volume. So in a way, it's easier for us to get our hands on it. So these are some points that allow us to be kind of resilient in that environment. I'll give you an example with DDR4 memory chips. We were working with a vendor, and, yes, prices are going up. We talked about raising price, but we talked about how we can find other sources of supply, and we were able to unlock DDR4 chips that had been – designed and developed for another industry. And they were actually aging inventory for another industry. We were able to pull in the chip, bring it to our vendor, bring it to Broadcom, work closely with them, and they certified the chip. And that opened up a new source of supply, for example, of memory. That's the kind of thing that Xtreme does that I think is a little different from our competitors. And so our teams are out there very creative finding ways to replace components and find alternative sources of supply in the market. And again, our size is somewhat of an advantage for us to meet demand.

Got it. Thank you.

Your next question comes from Ryan Coons from Needham & Co. Ryan, your line is now open. Thank you.

Great, thanks. Nice quarter, guys, and nice to have Outlook hanging in there strong. Maybe unpacking the ARR bit, the cloud ARR in the quarter a bit, can you maybe talk about, you know, put some takes where you're seeing, you know, strength in selling subscription and areas you're still working on within that sales process?

Yeah, thanks, Ryan. I mean, the strength has been with platform one. Ryan, I mentioned that we don't disclose our internal plans, but we had an internal plan for Platform 1 that we more than doubled in the quarter. And the way that we've structured our commercial terms is that our customers can buy Platform 1, and then they can move at their own pace and migrate from XIQ and our cloud platforms. And so customers have really embraced that. And so I'd say that's where we're seeing most demand. Kevin, do you want to comment?

Yeah, I think you're right. And we laid this out the analyst day, right, that we expected, you know, mid to high 20s growth rates. And we're seeing that now with the 25% growth rate in AR. It is absolutely just a product of demand. a really good platform, a simple licensing model, you know, that includes the cloud management, includes the agentic AI, it includes, you know, the support contracts and everything that we talked about. And people like that model. It's simple for them. It's easy. They understand what the pricing is. They're not going to have hidden costs in the future, et cetera. And then our customers really enjoy the agentic AI and how that's, you know, making their network operations that much more efficient. It's like adding an extra engineer to their team is what they're saying.

That's great. Thanks for that, Collar. And you guys had some really strong results in EMEA. It looked like a record from what I could tell or close to it, but at least for several years. Can you maybe unpack what's behind that strength? We heard from kind of a private networking peer last night that also had very strong EMEA sales and noted that there were some regulatory issues requirements around sovereignty coming down from the EU. Maybe you can explain if there was any impact on some of your sales due to regulatory.

Yeah, and Ryan, I'd say I don't think we've seen the benefit of that yet, but I think that portends good things to come for extreme. When you talk about data sovereignty, If you talk to the Gartner group, they'll tell you that Xtreme is the only player in the networking space that can deliver a data-sovereign solution in networking. And that goes back to cloud choice. And when you look at our competitors in a public cloud, it doesn't quite get you there. Or you have a purpose-built cloud that isn't built and operated in-country yet. this is an area where we have an opportunity. I will say we are seeing as governments, government coalitions in Europe form and get organized and get united around creating budgets and spending. For us, I'd say it's taken longer than we've expected for spending to be unlocked, but we're starting to see government spend come back. We put that in our comments. So we're We expect Europe to be a tailwind for us going forward. Kevin, do you want to add anything?

No, I think you covered it. The only other thing I'd add is we just added a new leader to our sales group, and he's come in, and he's been very impressed. with the opportunities that are in the EMEA market, and he's very excited. So I think that we've got the right team in place, and there's plenty more opportunity there in EMEA for us to continue as well.

Super appreciate the commentary. Yeah, that's right.

Your next question comes from Dave King from B Reilly. Dave, your line is now open.

Thank you. Good morning. Just a question on the rumor about this ruckus, and you guys just wanted to hear from you directly.

Yeah, thanks, Dave. Yeah, I would just say, you know, at Xtreme, our policy, if assets or businesses are, potentially for sale or if, if potentially available in the marketplace, um, we're always going to have a look. So at, at extreme, you'll, you'll always see us. Um, and I would say we're always in the market looking at different assets, be it adjacencies or being at, or being players in our direct space. So, um, uh, yeah, I think you could always expect us to be engaged in dialogue to get smarter and to learn. Um, and, uh, And I would say to the extent that there's an opportunity that presents itself, we will always, we have the condition that anything that we do would be accretive. But I would say, you know, at this point, you know, that's conjecture. There's really nothing, there's really nothing for us to comment on on that front.

Got it. And my follow-up is the Tarek situation. any changes, anything that we should be concerned about?

No, I mean, you know, David goes back to, you know, supply chain, et cetera. Changing tariffs is a way of life for all of us, especially with the current administration in the U.S. So this is a core competency at Xtreme, so we're well-versed in manipulating and managing through a changing tariff environment. So At this stage, I'd say it's a non-issue for us at Xtreme. Got it. Thank you.

Your next question comes from Christian Swab at Craig Hallam. Christian, your line is now open.

Great to take in my questions. Thanks for the guidance for fiscal year 26, but as we look a little bit longer term, Ed, given market share gains in conjunction with you know, we'll call it better solutions, as well as the disruption by two of your leading competitors and recent strong sales strength. Is it safe to assume that, you know, we should expect a continuation of double digit top line growth in 27 over 26 without any unforeseen, you know, macroeconomic dislocation?

Yeah, and I don't know if Kevin and Stan have provided you, Christian, as far as the outlook for 27. What you're saying makes a lot of sense to me because we're seeing this continuation of not only demand in the marketplace, but the strengthening of our competitive position, especially considering what's going on with the larger suppliers. Us nibbling away in small share gains for extreme has a big impact on our top line. Kevin, I might let you jump in and comment on the official response here.

Yeah, I mean, my comment would be, you know, we feel confident and positive about all the improvements we've made from the go-to-market perspective. I say we feel comfortable with the FY27 setup. Obviously, we are not guiding to 27 yet. We still have plenty of time. And I would say this market is pretty dynamic right now. And so it's really hard to get, you know, that far out a year and a half from now. we feel really good about our guidance for FY26. And I think, you know, we'll circle back, you know, on 27 in the coming quarters. Just don't want to comment too much about that far out, given where we are in the market.

That's fair. And unfortunately, I'm going to ask another long-term question. You know, given the gross margin headwinds in the near term, You know, given the big installation of large steel contracts, but still restating the goal of 64 to 60 percent margins. I won't ask you to give me the level of improvement with clarity, but is, you know, and your ability to raise prices, which is. appear to be currently happily absorbed by the customers, given their networking technology needs, given memory component costs in particular. Should we expect gross margins in aggregate to improve, you know, in 27 over 26 as we begin to march towards that 64% to 66% goal?

I mean, I think that the take that... you know, to say that we will expect improvement. Just a reminder, the product growth margins coming out in Q3 and Q4 will improve, Christian, right? So you've got the product margin improvement happening there already. It's really just these lower margin, you know, professional services that will overhang in the third and fourth quarter, you know, as we do those installations. And those are just, you know, that's higher installation revenue than we normally have there. But, you know, naturally in 27, and I can't predict how many installations we might have in 27 at this moment, but naturally if we have a normalized amount of professional services revenue in 27, you would certainly see a mixed improvement in March in 27. Okay.

Yeah, that's a fantastic answer. Congrats again on the great results and outlook. Thank you. Yeah, sure.

Your next question comes from Eric Martinuzzi from Lake Street Capital Markets, LLC. Eric, your line is now open.

Also wanted to focus on the gross margin color that you gave. Just at the bottom line, the 98 cents to $1.02 for FY26, relatively in line with where you were before. Is that to say, then, that there's not a substantial incremental contribution from the professional services? In other words, are we talking no margin on the professional services that we're taking on? Because I would have expected, given the beat for Q2, that the guide for the EPS for the year would have risen significantly.

Sure. I mean, you would expect, Eric, right, that the overall deal is a good margin deal, right, but that we do tend to price the professional services installation with a much lower margin than our subscription and support, which tends to be in the 70% range, and it's just low margin. And these all have a different margin profile to them, but I would say they're in the you know, 15% to 20% range, you know, of margin, not certainly at the 70% level like you see, you know, in subscriptions. And so that's where I would comment that that's why you see a mixed shift in the third and fourth quarter being a little bit overall lower margin, but again, product margins improving in the second half of the year.

Yeah, I guess I jump in and add. I would just jump in and add, Eric, like in some cases we get involved and a customer says, we'd really like you to do the cabling work, for example, and then we'll bring in a contractor and market up 10, 15%, right? And that's not, you know, our traditional business, but it's almost like us doing a favor for a customer in a large, complicated project. And we have We have some large, complicated projects going on right now where customers have said, we'd feel more comfortable if you would manage this through your professional services organization. So, again, where we have subscription at an 80% margin and we have support and other services in the 60%, 70% range, it gets pulled down when we get pulled into some of these large projects. It's the right thing for us to do for customers today. And it has a near-term effect. Over the long term, you know, once we've deployed, once we're in the stadium, then obviously those margins go up as we continue to work with those customers.

That's right. Got it. Thanks for taking my question.

Your final question comes from David Vaught from UBS. David, your line is now open.

Great, guys. Thanks for squeezing in. I have actually kind of a three-part question here, Ed and Kevin. I appreciate all the detail. But the question I have is on sort of pricing, demand, and margin. And I'm just trying to triangulate all the comments that you made in your prepared remarks and in response to questions. So maybe, Ed, just from a demand perspective, obviously, we understand that you took prices up 5%, 6%, 7%. Are you suggesting that the price increases are not filtering into revenues or this year in fiscal 26 relative to where you thought you'd be, you know, three months ago or six months ago, given Kevin mentioned you have several multimillion dollar deployments in the outlook going forward, and is the guidance raised just those multimillion dollar deployments? And I'll give you the second question along that. So even if I take that into consideration, the low margin of the installments, it sounds like gross margins on a pure product basis adjusted for the installments are down relative to where you were. Three months ago, can you talk to, like, what that dynamic looks like if the pricing is not going to affect us yet? And then the final point I would ask is, when I think about 27, I know it's quite a ways away, would you imagine that that pricing has a much bigger impact on margin next year and demand versus where we sit here in 2026?

Kevin, if you want, I can jump in, and then you can. Yeah, go ahead. And then I'll follow up. Yeah. David, the pricing comes in pretty quickly. So you'll see the impact. Kevin mentioned that our product margins are going up. So our product margins are up this quarter over last quarter and will be in the second half of the year. There are just a few of these large projects that have professional services that drive the margin down, but on the services side, but on the product side, we're expecting growing product margins in this environment. The other thing that I'll say is as we go forward, we still have the ability to use pricing as a lever. And so you'll see us and you'll see the other players in our industry passing through pricing as we make adjustments for what's happening in the supply chain. Kevin, do you want to add?

that just from a timing perspective that right we put some price increases through in the second quarter we had minimal effect on our on our results in the second quarter we expect more to flow through in the third and fourth quarter from those price increases we made in november and can i just clarification is the guidance range for 26

updated reflecting the multi-million dollar installment revenue in Q3 and Q4, or are you seeing a price increase driven revenue uplift in the guide or a combination of the two?

Our guide reflects, you know, A, the installation revenue and the lower margin relates to that, and B, all of the decisions we've made so far on pricing to date. You know, we haven't made any other decisions yet, and so we can't reflect anything in our guide that hasn't happened.

Great. All right. Thank you, guys. Yeah, sure.

There are no further questions at this time. I will now turn the call back to Ed Myercord, President and CEO, for closing remarks.

Thank you. Thanks everyone for participating on the call. We appreciate it. And we always appreciate the questions. We also want to thank employees tuning in and customers and partners who, who are listening in and more importantly to them for the partnership in driving an excellent quarter. So we're looking forward to continuing on the journey in terms of our innovative solutions, driving growth and, and, We'll look forward to meetings upcoming and delivering on another quarter. Thanks, everybody.

This concludes today's call. Thank you for attending. You may now disconnect.