Extreme Networks Inc Q1 FY2026 Earnings Call

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Extreme Networks First Quarter FY '26 Financial Results Conference Call. I will now turn the call over to Stan Kovler, Senior Vice President of Finance and Corporate Development. Please go ahead.

Thank you, operator. Good morning, and welcome to the Extreme Networks First Quarter Fiscal Year 2026 Earnings Conference Call. I'm Stan Kovler, Senior Vice President of Finance and Corporate Development. With me today are Extreme Networks' President and CEO, Ed Meyercord; and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the quarter, first quarter 2026. A copy of the press release, which includes our GAAP to non-GAAP reconciliations in our earnings presentation is available in the IR section at extremetworks.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 may reflect our analysis as of today. We have no plans to update them except as required by law. And following our prepared remarks, we will take your questions. And now I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Thank you, Stan, and thank you all for joining us this morning. The first quarter marked our sixth consecutive quarter of revenue growth and third straight quarter of double-digit year-over-year increases. Strong execution and our differentiated technology solutions are fueling market share gains, driving growth in the Americas and expansion across EMEA and Asia Pacific. Revenue reached $310 million, up 15% year-over-year, driven by competitive wins with large customers across all verticals. Product revenue increased double digits year-over-year for the third consecutive quarter. Sustained growth in our cloud subscription drove SaaS ARR up 24% year-over-year to $216 million. One of the important growth engines with large enterprise customers continues to be Extreme Fabric, which is uniquely designed for enterprise campus environments. We deliver unmatched automation of service delivery with zero-touch provisioning, unique security benefits, and millisecond convergence that supports greater resiliency that our competitors can't replicate. There's strong interest in our new Extreme Platform ONE, which uses agentic conversational and multimodal AI to transform networking, cutting routine tasks from hours to minutes. We're also seeing increased adoption of our WiFi 7 solutions, which boost network efficiency, minimize downtime, and support the demand of modern business applications. Given our momentum in technology innovation, IDC recently recognized Extreme as a leader in its 2025 market scape, highlighting our fabric, Extreme Platform ONE, flexible deployment by universal hardware, and expertise in high-density environments as key differentiators. We're also seeing strong growth across our commercial models with our MSP program partners and bookings, both nearly doubling year-over-year and bookings up nearly 30% sequentially. Our consumption-based billing eliminates upfront costs, while poolable licensing lets MSPs easily allocate licenses across devices, locations, and customers supporting scalable growth. In the quarter, we expanded our footprint within a major government in Asia Pacific, where we displaced a leading competitor. The project will create a network connecting all government offices nationwide with extreme fabric over SD-WAN. Our proven execution with government agencies in the region is opening very large and valuable new partner relationships and expanding market opportunities, including new sovereign cloud capabilities that enable highly regulated customers to leverage our AI-powered networking innovations. This is a major factor in our ability to win larger deals and move up market. Other wins in the quarter included T-Mobile Center, a premier multipurpose arena in Kansas City, that chose Extreme for our proven expertise in deploying next-generation wireless and high-density venues. X-Sight, a EUR 5 billion global leader based in Germany, specializing in clean room technology and complex plant engineering has standardized exclusively on Extreme for LAN, wireless LAN, network access control, all managed by ExtremeCloud IQ. Burgers' Zoo in the Netherlands, at over 111 acres, recently deployed Extreme wired and wireless solutions managed by Extreme Platform ONE to ensure reliable connectivity for security cameras, ticketing, guest WiFi, mobile point-of-sale systems, and smart habitats. Global health care organizations like University Hospital, Birmingham NHS Foundation Trust and Henry Ford Health are deploying Extreme's WiFi 7 to enhance bedside patient access, keep critical medical devices online with real-time data transmission, and support advanced applications such as real-time imaging and secure clinician mobility. Gateshead Council in England deployed Extreme Fabric to modernize and secure its network across roughly 200 sites, creating a unified, secure, and agile digital foundation managed through Extreme Platform ONE. In September, we announced an extension of our relationship with the NFL through 2028. Now in our 13th season as a partner, Gary Brantley, the CIO of the NFL, said partnering with Extreme Networks has been transformative for the NFL, elevating both our stadium operations and the way fans experience the game. We're the only vendor in our space offering true cloud choice and deployment flexibility. Customers can choose our cloud solutions across public, private, or hybrid environments, and we include AWS, GCP, and Microsoft Azure in our public cloud menu. In contrast, many of our competitors are locked into public cloud-only and expensive purpose-built architectures, creating major hurdles as they attempt to build the flexible deployment models that customers demand. These capabilities are driving growing interest in Extreme and competitive wins. Extreme Platform ONE, which became generally available in the first quarter, is earning positive customer feedback for AI-powered automation that cuts routine IT tasks from hours to minutes, improving efficiency and accelerating issue resolution, especially with the addition of our innovative service agent. Previously, IT teams had to manually gather logs for multiple devices, correlate alerts, run diagnostics, and then create support cases, often taking hours or even days per issue. Our service agent assigns automated tasks to subagents with complete visibility to its reasoning at each step with an emphasis on human involvement. It diagnoses problems, collects the necessary evidence, and creates support cases in minutes, allowing IT teams to resolve issues far more quickly and efficiently. Extreme's Agentic AI architecture goes well beyond our competitors' older first generation and limited AI features. Extreme Platform ONE's simple interface, our AI Canvas that is truly unique in the industry, removes the complexity of navigating multiple applications, copying data between systems, and manually tracking device lifecycle, subscriptions, and compliance. Now all this can be customized with a composable single interface with automated tracking and real-time alerts, delivering unmatched visibility, efficiency, and faster, more reliable IT operations. On November 13, we'll host an AI Summit in New York City to share trends, strategy, expert insights, and our vision for the next wave of AI-driven innovations. You should tune into this event to better understand the future of enterprise networking. Finally, we recently released our corporate responsibility report for fiscal '25. Since 2021, we've reduced our emissions by 34% and cut our office footprint in half, lowering electricity, natural gas, and water usage. Looking ahead, we aim to source 50% of electricity from renewables and cut emissions by 50%. Given this success, Newsweek recently recognized Extreme as one of America's greenest companies. For the remainder of fiscal '26, we expect revenue growth to accelerate to 10%. Given the growing volume of large opportunities and our increasing winning percentage, we believe this fiscal year will mark an inflection point in our company's growth trajectory. Now let me turn the call over to Kevin to discuss financial results and guidance.

Thanks, Ed. I'm very pleased to report strong first quarter execution and financial results with revenue exceeding the high end of our guidance range. We achieved earnings per share of $0.22, exceeding the midpoint of our guidance range and consensus of $0.21 per share. Earnings per share was up 29% from $0.17 per share in the year-ago period. Total revenue in the quarter was $310 million, and that grew 15% year-over-year. This marks our sixth consecutive quarter of growth and the third consecutive quarter of double-digit year-over-year revenue growth as well. SaaS ARR once again grew 24% year-over-year, driven by recent large wins, adoption of our new Platform ONE, and from expansion of our new commercial models. The adoption of Extreme Platform ONE was well ahead of our expectations in the quarter, and the sales pipeline is looking very strong. Bookings in the quarter grew 21% year-over-year, reflecting strong customer demand across our portfolio. Our year-over-year bookings growth across all regions is a testament to the success of our new commercial models, large customer wins in Asia Pacific and EMEA this quarter. Our new commercial models are contributing about 14% of our total new subscription bookings, and we expect this to grow over time. Product bookings were comfortably ahead of our product revenue in the quarter as book-to-bill ratios were strong. Product revenue of $194 million grew 20% year-over-year and was up 1% sequentially in a traditionally seasonal slower quarter. Driven by strong demand for Extreme solutions, we continue to move upmarket and grab market share. We achieved our sixth sequential quarter of product revenue growth, which is driving subscription attach and ARR growth. Geographically, we saw particularly strong performance in Asia Pacific and EMEA as we continue to benefit from recent larger new customer wins. We continue to gain traction in the region as a strategic alternative to incumbents, particularly in the public sector and hospitality. In the first quarter, 36 customers spent over $1 million with Extreme, up from 34 last quarter and 27 in the prior year quarter. Total subscription and support revenue was $116 million, up 9% year-over-year. Total recurring revenue grew 8% year-over-year, representing 36% of total revenue. As a result of our growth in SaaS ARR, SaaS deferred revenue jumped 16% year-over-year to $327 million and recurring revenue growth brought the total deferred revenue up to $618 million. This growing base of contracted future revenue provides strong visibility into our recurring revenue and healthy margins. Non-GAAP gross margin was 61.3% in the quarter and was impacted by industry-wide increases in component costs, such as memory, metals, including copper and aluminum, and other semiconductor parts. We do expect margins to recover over time as we recently implemented some price increases like others in our industry to mitigate the higher costs and drive margin recovery over the course of fiscal 2026. In addition, discount trends have been stable across our business. We expect to exit with gross margins up 100 bps to 200 bps from current levels. Our first quarter operating expenses were $149 million, which were primarily driven by higher one-time sales commission expense due to accelerators for large deals we recently closed. Operating margin was 13.3%, up from 12.4% in the prior year quarter. We expect to continue to achieve operating leverage throughout the rest of fiscal 2026. I'm pleased to report that we generated $45 million in EBITDA, up 21% year-over-year as we continue to drive profitability ahead of revenue growth. Free cash flow usage of $21 million was largely due to one-time payments associated with certain legal matters, which are now behind us. Turning to capital management. During the first quarter, we repurchased 577,000 shares for a total of $12 million. We ended the quarter with $209 million in cash and had a positive net cash position. We continue to improve our cash conversion cycle down to 60 days from 81 days in the previous quarter as we continue to improve and lower inventory balances. We expect a recovery in cash flow during the rest of this fiscal year as we continue to grow revenue and improve profitability. Now turning to guidance. For the second quarter of fiscal 2026, we expect guidance as follows: revenue to be in the range of $309 million to $315 million; gross margin to be in a range of 61.4% to 62%; operating margin to be in the range of 13.4% to 14.6%; and earnings per share to be in the range of $0.23 to $0.25. Our fully diluted share count is expected to be around 136 million shares. For the full fiscal year 2026, we expect revenue to be in the range of $1.247 billion to $1.264 billion with some normal seasonality in Q3, followed by sequential growth in the fourth quarter. The midpoint of this range suggests 10% growth year-over-year. Our goal for SaaS ARR continues to be in the low 20% range for year-over-year growth. Recurring revenue is expected to be about 35% of total revenue in fiscal 2026.

Your first question comes from the line of Mike Genovese with Rosenblatt Securities.

Guys, can you talk about more about these component price increases hitting the gross margin, sort of what's going on there? And then also touch on plans to kind of lift ASPs through Extreme Platform ONE or price increases. So gross margins now and sort of the plan to improve them going forward?

I can jump in high level. And then, Kevin, why don't you come back and follow up? Mike, yes, we've seen prices in memory and optics shoot up in the near term. And Kevin mentioned in his remarks that we put in place a price increase to recover those expenses. I'd say in addition to what would be a mid-single-digit price increase where we would really feel those – feel the impact there in Q3 and Q4, we've got a variety of other tactical initiatives from the supply chain teams to help us drive the gross margins back up over that 63% number. Kevin, do you want to add to that?

I think you're right, Ed. I mean, we had talked about this pretty openly in Q4. We had about $1.5 million of incremental costs, right? We were waiting a little bit there, Mike, around what was the industry going to do from a price increase perspective. We saw industry price increases go into effect across Cisco and HPE and Juniper. And so that gave us, if you will, the license to also raise price on our end as well to recover some of those costs that we saw. And naturally, we'll see those come into the business over the next couple of few quarters, and that's why we're guiding up to get to 63% by the end of the year with 100 bps to 200 bps improvement. On the ASP question that you asked, I mean, we are expecting an increase in average selling price, especially on the cloud applications that we have, in particular with Platform ONE. And we're already seeing that already with the bookings that we're seeing. We've talked about a 10% to 15% increase in what we're seeing there. And so that we're still on track for that.

Great. I have two more questions that I'll ask together, even though they're not related. First, I didn't hear any mention of a potential federal government shutdown, and I don't see it reflected in the revenues here. I want to inquire about any federal exposure and what you're observing regarding the shutdown. Secondly, regarding the competitive landscape between Cisco and Juniper, are you noticing more momentum against one as opposed to the other?

Yes, I'll...

Maybe we'll take them in order, Kevin, and we'll cover the federal question first. Mike, given how small our market share is in the federal space and given that we've just recently certified our portfolio, and we're now in a position where we can bring fabric, we can bring cloud, we've really opened the door to the federal market. And I would say that the shutdown for us has had little to no impact on our business. If anything, we're seeing much larger opportunities open up on the federal side with the growth and the expansion of our certifications. As far as E-Rate business, we really see no impact on our E-Rate business, and we've got a very healthy E-Rate cycle. Kevin, I don't know if you want to add to that before we go competitive.

No, I think that makes sense. That's it.

On the competitive front, we've observed two distinct developments. First, HPE's acquisition of Juniper has taken longer than expected for them to implement their plans. We've benefited from this delay by hiring exceptional talent, which will support our efforts to move upmarket. These new hires have valuable connections in the channel, with customers, and with managed service providers, which will help us accelerate our upward movement. Additionally, we've received feedback from the channel and customers expressing confusion about the technology roadmap and its direction. There seems to be a discrepancy between corporate messaging and what is communicated in the field, which presents us with an advantage. In contrast, Cisco is making significant changes to their partner program, which is likely to cause disruption for both partners and customers. This transition is set to begin in early November. We've been informed about some of the changes being implemented, and overall, they appear to benefit only the top Cisco partners, with whom we conduct minimal business. As a result, we believe that mid-tier and smaller partners may feel sidelined and be on the lookout for alternatives, generating opportunities for us that we haven't encountered in a long time. Regarding HPE and Juniper, the challenges related to their cloud offerings and the need for cloud choice and flexibility—particularly concerning data sovereignty—signal new opportunities for us as they align their portfolios and solutions.

I think you nailed it all. Yes. And obviously, Cisco's publicly announced their refresh opportunity, which is our refresh opportunity as well to go after them. I think the competitive markets right now are very frothy for us in terms of being able to take some of the competitive dynamics and turn them to our favor right now. So I think we're seeing that reflected in our financial results and our revenue growth as well.

I want to ask about Platform ONE and where you are in terms of that commercial introduction. I know it's a new product. And can you share any kind of metrics you have or any kind of qualitative feedback from customers on renewals and what kind of traction you're seeing there with Platform ONE? That would be great.

Sure, Ryan. On Investor Day, we will provide much more detail, and you will hear directly from our PLM and engineering teams. Additionally, we have our AI Summit, which focuses on the future and our vision for the Agentic AI platform. At this point, it's too early for us to present specific metrics. As you might recall, we launched Platform ONE at the beginning of the first quarter. Commercially, we are selling Platform ONE, but our customers can still use XIQ, Site Engine, and all the applications they previously used. When they purchase a new license, it's backwards compatible. This decision has proven to be very popular. Essentially, customers can buy the license and work within the platform, allowing them to familiarize themselves with Platform ONE as we complete the first wave of releases, expected by the end of November and December. We anticipate that customers will begin fully migrating to the new platform around that time. Based on our measurements, we are closely tracking this and have observed high adoption and enthusiasm for the capabilities we've introduced. We have just launched our service agent, which offers significant benefits to customers, and there is considerable excitement about that, along with the unique features we are bringing to market compared to existing Gen 1 AIOps solutions.

And Ed, I would just add to that, that it was ahead of our expectations in the quarter, which is obviously a good thing.

Yes. Got it. And maybe another if I could follow up. Relative to your TAM of TAM growth, I assume is kind of mid-single digits. How should investors think about your long-term revenue growth prospects relative to your share gains and your strength of markets you're seeing?

Well, what we've talked about is repointing the year-over-year growth to 10%. And what we're also looking at is the growth of Extreme Platform ONE and the kind of services that we can bring to bear and the solutions that we can bring to bear. If you look at the traditional TAM for Extreme and we look at our largest win in the quarter, the largest win in the quarter was also our largest SD-WAN win ever, in which case, in a very innovative solution, we're bringing our fabric technology across the wide area network and creating a very unique solutions for government customers. This has also spawned a lot of other opportunities. And I would argue that this is TAM expanding for us. I've also mentioned the fact that we've turned up certifications that are allowing us now to have hunting licenses to go play in the federal markets. And we're doing some things in terms of cloud ops and making investments in Europe that will also open up new government opportunities in those markets. The last area to comment on are those commercial models where historically, we haven't played in the MSP space, and we're getting traction. I think we would all say that the MSP evolution has taken a little longer than we thought to get rolling, but it seems to be hitting its stride, and the growth metrics, obviously, for this quarter were very strong. So as we look at the overall market, we see Extreme taking share, and we look at ourselves longer term as a double-digit player with higher growth and more emphasis now on services and solutions that will evolve from Platform ONE and that subscription line. Kevin, do you want to add?

No, I think when we consider the new commercial models, including Platform ONE, we expect this to drive growth in our annual recurring revenue, particularly on the SaaS ARR side. Currently, we are experiencing a 24% year-over-year growth in that area. This growth will continue as we focus on enhancing that segment of the business. It's a comprehensive solution that combines both hardware and software, and we are increasingly adding more software solutions. The company is undergoing a transformational journey aimed at generating more recurring revenue, which in turn improves our margins and enhances our overall profitability. We offer a complete solution, and I believe people are beginning to see the advantages of our diverse product offerings, which is enabling us to compete more effectively and move into higher market segments.

Got it. Just a quick follow-up there on your MSP traction there. Do you have new MSP count? I know you disclosed that in the past.

Yes, we're at 61 now.

Your next question comes from the line of Dave Kang with B. Riley.

My first question is regarding Cisco's recent partnership with NVIDIA. So just wondering what your countermeasure would be?

Yes, I think if you consider our focus, we are not competing in the space of building networks specifically for AI systems. Instead, we are focused on integrating AI into networking. We are utilizing AI tools and have discussed our conversational multimodal Agentic platform. We’ve established a robust Agentic structure and have launched our service agent. We will share more about our AI Summit and Investor Day, highlighting the rollout of various agents and new services we plan to introduce. This is where Extreme is leading. It’s crucial to distinguish between constructing networks for AI systems and utilizing AI technology to enhance performance, visibility, and capabilities for users delivering a networking experience. This is our focus, and Extreme stands out as a leader here. We are in a strong position, and our size gives us some competitive advantages over larger players, enabling us to make an impact in the market.

Got it. And my second question is regarding gross margin. Kevin, I'm trying to understand if the increase in component prices had roughly about a 100 basis points impact.

Yes. I mean probably about that somewhere in that range. I mean there's a combination of things here, right? Dave, around we expedited some of our deliveries for some of these larger customer wins. So there were more expedite fees there. We also have just component costs that are higher than we expected. The 100% China tariffs kicked in, in some of those component costs as well. And then also just the cost of copper and aluminum and some of these metals as well just went up throughout the quarter as well. So those are some of the costs that we had experienced, and we had talked about $1.5 million in Q4. We continue to see about roughly the same amount in Q1. And now we've raised price to basically offset that into Q2 and beyond and then Q3, Q4 as well.

And I think you said you're going to raise prices by mid-single digits. Did I hear that correctly?

Yes. We looked at all the different SKUs. Some are in the low single digits, some in the mid-single digits, but we looked at the SKUs across some we didn't change at all. But I mean, at the end of the day, we kind of looked at it and then we kind of followed the industry pattern for what HPE, Juniper, and Cisco did.

Got it. And my last question is, was there any FX impact?

Very little. We hedge our balance sheet, and so we don't have a lot of FX issues.

Your next question comes from the line of Chris Schwab with Craig-Hallum.

Congratulations on a strong quarter. I would like some clarification on the gross margin, considering the rising prices of various commodities and the measures taken to counter that, along with the expected improvement in the second half of this fiscal year. Can you remind us what the target gross margins will be as we move into the next fiscal year, particularly considering the growth of Platform ONE and services and subscriptions? Are we aiming for a gross margin of 62% to 64%, or should we anticipate something around 62% plus or minus?

Yes. Maybe we can hold that for the Analyst Day here on November 10 because I think we will walk through what the long-term model looks like beyond this year as we think about the next 2 or 3 years. I don't think there's going to be a lot of change from the 64% to 66% range that we've talked about in the past. It's really these kind of more acute component costs that we've seen recently, where we've had to raise price against them that have caught us a little bit unexpectedly over the last year or so that we're just basically making the price changes to combat that. But I do believe that from a long-term perspective, the SaaS subscription revenue growth engine in the business is going to continue to help us drive those margins in the future. So we're still very optimistic about the financial model in the future.

I would just chime in, Kevin and Christian, I would just say we haven't changed our long-term outlook for gross margins. And mix will factor into the equation. We are expecting a very significant ramp in Extreme Platform ONE, and there will be margin benefits there. Keep in mind, there's a combination of that service element to our solution set along with the subscription and enhanced new services. So that really starts to come into play in fiscal '27 and fiscal '28. What we see happening with gross margin currently, these are sort of more near-term tacticals that will correct. We've been in this movie before, and we know how to correct these things. So as Kevin mentioned earlier, we'll get ourselves back up to that 63-plus percent and then get back on track to the longer-term goal. I think we have a 64% to 66%.

That's right. That's right.

Great. And then my last question, and maybe give you a chance here. The 10% top line growth exceeding the TAM of the industry, as we talked about federal markets, Europe, Platform ONE, Services Solutions, but the bookings continue to be very strong. Is there anything else going on in the marketplace regarding total cost of ownership, just making a better product that is driving that? Or is it pretty much everything we've already discussed?

Christian, I think it's pretty much everything we discussed. Look, if you just look at Extreme, we've continued to invest in our fabric technology. It's one of the quivers that we have from a competitive standpoint. But we're the only ones that have this, and we have unique capabilities for enterprise campus solutions. I think larger enterprise customers are surprised when we get into proof of concepts and all of a sudden, we're starting to demonstrate our capabilities that our competitors just can't match. And one of the very largest defense contractors in the world who's actively looking at Extreme said, wow, what you guys do in 6 minutes is taking Cisco 6 hours to do. And we actually had this time-lapse video where we show this. But when we talk about the automation and the capability, the delivery of services, the security benefits that we bring with this technology, how that produces a very different kind of wide area network, SD-WAN solution when we apply Fabric, when we look at the subsecond and millisecond convergence as far as resiliency of the network, the large players can't replicate it. So this is something where we're moving upmarket and we're winning and we go toe to toe. Now when you add on top of that Extreme Platform ONE and the fact that we'll be bringing these capabilities into the platform with enhanced visibility and having one single place to drive our multi-vendor capability, that's something that quite frankly, we bring choice and flexibility and new capabilities and we go toe to toe and we win against the larger competitors. So I think we have technology differentiation more so now than we've had. Yes, we're out in front with WiFi 7. Yes, we have these new commercial models and ways to win and new certifications, et cetera, we're staying out in front of that. But we have real differentiation today, and our teams are executing well. Our sellers are executing well, and the channel is picking up on it. We see this in our funnel. We see this with the close collaboration of our marketing teams and our sales teams as we look at these opportunities and we look at higher win rates. And then the last factor is what was brought up earlier by Mike, where it's a bit of a mess at HPE-Juniper right now. And there's a lot of confusion. There's a lot of people changing. Now they're setting up overlay teams and who's covering the channel, who's covering the customer. There's just a lot of unknowns that create opportunities for us. And then the same thing is true with Cisco talking about their refresh, but then also talking about making it really difficult for partners below partner #50 to make money. And they have thousands and thousands of partners. So there's just a lot of disruption right now with the largest players that have 75% of the market that are causing people to take a look at Extreme. And when they take a look at Extreme, they're kind of blown away by our technology, our differentiation. And keep in mind, we always win very high marks for the level of our customer support and how people work with Extreme and they feel like there's a different level of customer intimacy that we bring to the equation.

Your next question comes from the line of David Vogt with UBS.

I want to return to the gross margin question. I apologize for reiterating, but we've seen a significant increase in memory and optics, as you've noted. Ed, I understand the cyclical nature of those markets if history is any indicator, but the magnitude of the rise is quite concerning. I would like to better understand your pricing strategy for the remainder of the year in light of this situation. While I appreciate the price increases you've mentioned, is there a possibility of implementing further price adjustments if necessary? Or do you believe the announced increases, ranging from low to mid-single digits, will suffice for the rest of the year, even if conditions become more challenging? My second question is directed to you, Kevin, regarding the subscription side. SaaS has been a strong performer, and you've done well there. I'm trying to grasp the gross margin dynamics for subscription support, as it appears to be a bit weaker compared to Q4, showing a sequential decline. Can you explain what's happening there? I would have expected subscription gross margins to increase sequentially, especially considering that support services or installation might be generating lower revenue. Any insights you could provide would be appreciated.

Yes.

Yes, yes. I'm happy to. So we are investing a little bit on the subscription side with Platform ONE on the Agentic AI. So there's some increased, I'll call it, cloud spend that we have on our end. Please don't take that as like that's going to be forever more. These are just upfront investments as we launch Platform ONE to have a more robust, right, Agentic AI agent experience for the customers. We fully expect all the pricing that we have and the bookings that we're getting from Platform ONE. Remember, when we get a booking for Platform ONE, it gets recognized over time. So you're not even seeing today in our first quarter results, even the total bookings that we had in the quarter being reflected in the revenue so far. So we are optimistic about the subscription revenue, the subscription margins that we will have and that they will continue to play out to be very strong in the 80% range. So I'm feeling good about what our subscription revenues. And then I would also add is, we are seeing continued positive momentum on these new commercial models like MSP and others, and those have a higher margin impact as well. And those will play out into the model over the next year or so. So I'm very bullish about the subscription margin story that we have as a company and our focus there for several quarters and even years out at this point. I feel like we were in a very good path there. And we'll recover these costs that we've seen these one-time costs, if you will, that have come in on the components over the next couple of quarters. But I do believe, as we said earlier, we'll get back to that 64% to 66% gross margin targeted.

Can I ask one follow-up, Ed? Have you shared with the market kind of the BOM that's related to either optics and/or memory? Is it like 5% to 10% of like a typical switch BOM that is impacted by these rising component costs?

We haven't shared that. I'm sure I can get it for you, Dave, and circle back separately on it. But we haven't shared what the percentage of the BOM is for memory for components, et cetera. I don't know if we'll share it, but we'll certainly look into it for you.

Your next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets.

I wanted to revisit the guidance for the second quarter, particularly noting that the lower end would actually be sequentially down from the first quarter revenue. I was curious if there were any large deals that were pulled forward from the second quarter into the first quarter.

Not on the revenue side, Eric. We had some bookings that came in at the end of the quarter ahead of the price increases. Those didn't make their way into the revenue actually. So it's kind of made its way more into backlog.

Okay. Historically, you would expect an increase in the September quarter compared to December. Was there some conservatism in the outlook and consideration of that?

Well, I mean, at the midpoint, you've got to increase, right? So at $312 million versus the $310 million, I think you're referring to the range of $309 million versus $315 million?

At this time, there are no further questions. I will now turn the call back over to Ed Meyercord for closing remarks.

Thank you, Rebecca, and thank you, everyone, for joining the call. As always, I know we have employees, customers, and partners that also kind of join in here, and we appreciate the partnership and the continued growth in our relationships. We're excited to continue to build on our success. We're really looking forward to updating everybody at our Investor Day on November 10. And we're going to be able to take a deeper dive into the markets where we're playing in, our technology and our execution, and we'll be able to field all questions there. So we look forward to your participation there. Thanks, everybody, and have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.