Good day, and thank you for standing by. Welcome to the Extreme Networks Q2 fiscal year 2023 financial results. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a Q&A session. To ask a question during this session, you'll need to press star one, one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one, one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stan Kovler, Vice President, Corporate Strategy and Investor Relations. Please go ahead.
Thank you, and welcome to the Extreme Networks fiscal Q2 2023 earnings conference call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Extreme Networks President and CEO, Ed Meyercord, and Interim CFO, Cristina Tate. We just distributed a press release and filed an 8-K detailing Extreme's financial results for the quarter and also an 8-K detailing our CFO transition. For your convenience, a copy of the press release, which includes our GAAP and non-GAAP reconciliations, our earnings presentation, are both available in the investor relations section of our website at extremenetworks.com. I would like to remind you that during today's call, our discussion may include forward-looking statements about Extreme's future business, financial, and operational results, growth expectations, and strategies. All financial disclosures on this call will be made 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 as described in our risk factors in our 10-K report for the period ending June 30th, 2022, as 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. Now it's my pleasure to turn the call over to Extreme's President and CEO, Ed Meyercord.
Thank you, Stan, and thank you all for joining us this morning. We had another record quarter as demand for cloud-driven networking and for Extreme solutions remains exceptionally strong with good visibility through fiscal year end 2023, leading us to raise our full year revenue outlook to the high end of our range. Our share gains are evident by a second consecutive quarter of double-digit revenue growth, 17% growth in product revenue, record-free cash flow, and a sizable backlog. The resiliency of our business, combined with the strong execution of our teams and focus on shareholder value, continues to position Extreme well for the long term.
The sequential increase in revenue and margins led to continued improvement in our operating model to record levels just shy of 15% operating margin. We achieved EPS of $0.27 in Q2, up from $0.21 in the year-ago quarter. We expect these bottom line earnings trends to continue. Both our Fabric and cloud solutions are driving significant differentiation for Extreme, particularly due to our ability to deliver network automation, hyper segmentation, unmatched security. Today, our Fabric solutions offer a simple way for customers to tie all the components of their network together from the branch, campus, data center to the cloud. It removes network complexity, speeds deployments, and streamlines operations. The transition to universal products has proven successful, with well over 60% of our bookings now on universal platforms for wired and wireless products.
We're on track to achieve this transition by year-end calendar 2023, with over 90% coverage of our portfolio with the universal platform. This calendar quarter, we'll be announcing a set of unique innovations involving ExtremeCloud SD-WAN and our widely deployed Extreme Fabric. These capabilities will enable our customers to improve visibility, management, application performance, and security at the edge of the network. This further extends our vision of one network, one cloud, one Extreme over the wide area network with a truly differentiated fabric technology. We're focused on helping our customers find new ways to deliver better outcomes across their organizations. During the quarter, 44 customers spent more than $1 million with Extreme, up from 37 last quarter. This is another signal of how Extreme continues to take share and move upmarket.
Some top wins for the quarter included a multinational bank in Hong Kong, where we beat two of our largest competitors to modernize the infrastructure for surveillance, digital cornerstone for safety and security. After using a competitor for many years, Extreme was able to bid on this project and win. A large school district just outside of Houston was looking to streamline management of its network, which sprawls across 92 buildings, supports 60,000 students. Our Fabric technology will provide full visibility across the network, simplifying and unifying network management, improving security at every site, and automating network configuration and provisioning to significantly reduce time spent on new deployments. A leading NHS Trust hospital and cancer research center in London upgraded their networks to continue to offer patients the most modern care.
New bandwidth-heavy applications, telehealth visits, and medical devices are crucial for patient monitoring and require a Wi-Fi 6 fast, reliable, low latency network that can be easily managed by ExtremeCloud IQ. Our competitive position has never been stronger. Given our relative size, even small share gains have a large impact on Extreme's top line. We remain the fastest-growing company in our space. Third-party analysts, industry press, and partner community have taken notice, and we've received numerous accolades and awards for our solutions and service. For the fifth consecutive year, we were named a leader in the Gartner Magic Quadrant for wired and wireless local area network infrastructure. Our innovation, vision, and continued execution with solutions like Fabric and Digital Twin were significant factors in our ranking. Our new customer logo wins contributed a higher percentage of our bookings.
About half of our new logo wins are coming because of fatigue and lack of innovation from some of the largest players in the industry. We're taking advantage of these market dislocations, and when customers realize they'll benefit from interoperability between platforms, simpler licensing structures, productivity from Extreme versus our largest competitor, we're quick to capitalize on these opportunities to win new business. More customers and partners choose Extreme because of our ability to offer unlimited end-to-end network that can be managed within a single cloud platform. Customers also love our universal hardware that offers choice of both cloud-based and on-premise deployments. As product lead times continue to improve, we expect our share gains to accelerate. Last quarter, we strengthened our go-to-market organization by appointing Pete Brant as Senior Vice President of U.S. Sales.
Pete is a proven sales leader focused on taking share and building SaaS organizations, coming from leading networking and security companies such as F5 and Fortinet. We ended Q2 with ARR growth of 29% year-over-year, while SaaS deferred revenue grew at 38% year-over-year. Our innovative cloud solutions are pulling through product sales, and we believe the level of organic subscription growth we're seeing is sustainable. In addition, the improvement in supply chain, our ability to deliver products, most notably Wireless LAN this quarter, supported a strong pull-through of software subscription for the next several years. On the supply chain side, our ability to pull in components enable us to achieve revenue upside, which we believe is sustainable into the second half of the year.
We're raising our revenue outlook to the high end of our prior 10% to 15% guidance range. We continue to be laser-focused on tactical execution to meet our customers' needs. This quarter alone, we qualified an additional 37 component suppliers and significantly reduced our part shortages. Based on all the actions we've taken with our supply chain over the past year, we now have visibility and confidence that the ramp of our product deliveries will continue to improve and reduce lead times. With a strong outlook for bookings growth and the gradual improvement of supply, we expect backlog to remain relatively stable for the next several quarters. We're in the beginning stages of an accelerated wave of product shipments and revenue growth over multiple quarters. The majority of our backlog consists of the latest generation universal products that pull through subscription and services bookings.
When our backlog shifts, it will also unleash subscription and maintenance services revenues over the next several years. Throughout calendar 2023, we have several universal product innovations coming to market that will drive better outcomes for our customers. In addition to the 5720 switches designed for higher data throughput, such as our Wi-Fi 6E access points, we'll be coming to market with new industrial switches for hardened environments and smart city deployments, new distribution switches to support the higher Power over Ethernet and density requirements of Wi-Fi 6E and Wi-Fi 7 in the future. Several new data center and core products will also launch throughout the year. Lastly, I want to welcome our Interim CFO, Cristina Tate, to the call. Cristina is a proven and highly respected leader at Extreme, and I expect a smooth transition as we enter this new growth phase.
Rémi accepted a new opportunity with a privately owned software company and will stay on with us through the middle of next month to oversee the transition. He was a great partner and leader and has set the company up for success. With that, I will turn the call over to Cristina to cover the financials.
Thanks, Ed. Q2 results highlight solid execution by the team, as well as an improvement in the supply chain environment. Our ability to deliver product resulted in record revenue and continued the trend of double-digit revenue growth we have achieved in seven of the last eight quarters. Our SaaS ARR continued to rise. We improved our margins sequentially, and we generated record cash flow, which enabled us to repurchase 2.6 million shares of our common stock. Our Q2 revenue of $318.3 million grew 13% year-over-year and 7% quarter-over-quarter, which was above the high end of our expectations entering the quarter. With a product book-to-bill ratio of 0.9x for the quarter, our backlog stands at $542 million, equivalent to two and a half quarters of product revenue.
The slight decrease in backlog primarily reflects accelerated product shipments. Product revenue grew a healthy 17% year-over-year and 8% sequentially, attributable to both campus switching and Wireless LAN, partially offset by a decline in data center. The ongoing loosening of the supply of access points resulted in Wireless LAN revenue accounting for 34% of product revenue, up from 30% in Q1. Subscription bookings grew by 30% year-over-year, in line with the long-term guidance of 25% to 35% growth provided at Investor Day last May. SaaS ARR grew 29% to $115 million, up from $89 million in the year ago quarter. Subscription deferred revenue was up 38% year-over-year, and 9% quarter-over-quarter to $187 million.
Q2 earnings per share was $0.27 above the high end of our guidance entering the quarter. Revenue on a geographic basis once again reflects the timing of product shipments to our distributors across the regions. Regarding our bookings performance, recall that we experienced very strong demand in Q1, resulting from pull-ins of deals from Q2 ahead of the list price increases as of October 1st. During Q2, we saw less of a year-end budget flush than we normally see in a tight supply environment. This resulted in a slight decrease in bookings in Q2. For the first half as a whole, bookings grew low single digits year-over-year. As a reminder, last year in the first half, our bookings grew in the mid-teens year-over-year.
From a vertical standpoint, our mix did not change meaningfully this quarter, with government and education accounting for over 40% of the total, healthcare at a bit over 10%, manufacturing at approximately 10%, and retail, transportation and logistics approaching 10%. Services and subscription revenue was $94.9 million, up 6% year-over-year. This growth was largely driven by the strength of cloud subscriptions, up 33% year-over-year. Total Q2 recurring revenue, including maintenance, managed services and subscriptions, was at $88 million or 28% of total company revenue. The growth of cloud subscriptions and maintenance drove the total deferred revenue to $446 million, up 19% from the year ago quarter and 5% sequentially.
Our gross margin came in at 58.5%, up 90 basis points sequentially and 30 basis points from the year-ago quarter. This was mainly attributable to our product gross margin, which benefited from higher revenue and an improvement in supply chain and distribution costs, partially offset by a change in the product mix with higher contribution from wireless. Our services and subscription gross margin was at 67% in Q2, consistent with the both the prior year and prior quarter periods. Q2 operating expenses were $139 million, up from $127 million in the year-ago quarter, and from $135 million in Q1 2023, reflecting higher R&D investment and sales and marketing expense to support higher revenue growth.
Total operating expense as a percentage of revenue was 43.7%, down 1.7 percentage points versus last quarter. All in all, our operating margin was 14.9%, the highest level ever achieved, up from 13.1% in the year ago quarter and 12.1% in Q1 '23. This quarter, we enjoyed record free cash flow of $67.5 million, driven by the strong increase in our EBITDA, as well as a reduction in operating working capital due primarily to strong collections. Our cash conversion cycle rose 5 days sequentially to 24 days. This strong cash flow enabled us to complete $50 million worth of share buybacks while also reducing our net debt by $14 million to $59.5 million. Turning to guidance.
As we enter the second half, our confidence in the revenue outlook is supported by our product backlog of $542 million, our services and subscription deferred revenue balance of $446 million, as well as a product pipeline that is up double digits year-over-year. We continue to expect that the reduction in expedite fees and shipping costs, combined with the full impact of our recent pricing actions, will lead to a continued progressive recovery in gross margin throughout fiscal year 2023.
Against this backdrop, we expect for Q3 revenue to be in the range of $315 million to $325 million, gross margin to be in the range of 58% to 60%, operating expenses to be in the range of $140 million to $145 million, earnings to be in the range of $31.1 million to $38.4 million or $0.23 to $0.29 per diluted share. We expect to cross the 60% gross margin threshold in Q4. For full fiscal year 2023, we expect revenue growth towards the high end of our 10% to 15% outlook with an operating margin in the mid-teens. With that, I will now turn it over to the operator to begin the question and answer session.
Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Alex Henderson with Needham & Company. Your line is open.
Great. Thank you very much. I knew there had to be somebody behind Rémi doing all the work, so welcome to the call, Cristina. It couldn't have been just Rémi. I knew it had to be somebody else. I was hoping you could talk a little bit more in depth about, you know, your commentary around backlog
I think you had said that you thought it would be up slightly in the December quarter, but obviously on a lower revenue guide. It sounds like the overall orders were actually a little bit ahead of forecast or ahead of what would've built a little bit of backlog. I think you'd also said that the March quarter, you would expect it to be flat to down a hair, and then the June quarter down a little bit more. The comment about, you know, backlog relatively stable implies somewhat of a change in the rate of backlog usage or bookings would have to be or orders would have to be a little bit stronger than what you had suggested given the higher comments.
Am I reading that correctly, that you're actually a little bit more confident on new orders, based off of what you said about the flatness of the backlog going into the June quarter?
Alex, this is Ed, and then Cristina, jump in behind if you wanna add another comment, but I think that's right. This is, you know, for us, if we look at what happened, as Cristina mentioned that, you know, first half of last year, we grew 16%, the first half of the year, and then we were up low single digits the first half of this year, and then a lot of it got pulled into the Q1. Our supply chain teams have done a great job. We talked about, you know, all the work that's going on behind the scenes, we're seeing it loosen. We've seen, you know, an acceleration of the release of product.
At the end of the day, we wanna take care of our customers with some of that older aged, backlog that's out there. You know, we took advantage of that. The second half for us, as you know, we see a lot of demand, and we're really confident and our teams are very confident of that demand. Yeah, booking strength we see in the second half of the year, and that should hold that backlog, that should hold the backlog very, you know, very stable through the second half of the year.
Ed, just to be clear, that's product backlog you're talking about, right?
That's correct. That's correct.
That also results in an increase in your services backlog as a result of the release of services on those bookings.
It does. I mean, the other thing that's happened here is that we have, and you can see it, you know, from a bookings perspective, we talked about universal hardware platforms and, you know, those universal hardware platforms typically will have service attached and always subscription attached. You know, we have a backlog of subscription and services that will be released as we release the product backlog.
Second question I have for you is on the inventory side of things. There's certainly a lot of costs that were inflated over the last year as a result of the supply constraints. When I look at your inventory, up considerably over the last two years, is there some higher priced inventory in there that needs to be worked down before the full leverage of the upside to universal and lower parts costs plays through? How do we think about the improved availability causing that inventory to come down, driving up cash flow?
At a high level, we have obviously the older inventory shipping out, newer inventory coming in, which is gonna come in at the higher COGS. We are building up supply, and the inventory is correlated to getting more supply, and we're anticipating getting more supply. I think there's a correlation there, and maybe I'll ask Cristina to comment, you know, overall inventory.
Yeah. At the inventory I see is another sign of the improvement in the supply chain. We're able to get more parts in, and we're able to have more finished goods. I think it will definitely lead to being able to ship more of the backlog, and that's a good sign from the supply chain.
Yeah. The question really is on the cost of goods sold
Mm-hmm.
relative to the inventory that was, you know, maybe inflated, part costs to it. Is that in inventory and therefore has to be worked through before you get the benefit of falling parts costs as a result of improved supply chain?
The benefit that we'll see in our supply chain costs is really related to those incremental expedite fees and higher logistics costs that we've experienced through this challenging supply chain environment. The component costs themselves, we have seen inflation of that, and we're not seeing that yet, come back down.
I see. I see.
Yeah. Alex, I think another consideration is that, you know, there are two other key things that happened. As a percentage of mix, wireless was up in the quarter.
Right.
As the wireless mix goes up, that tends to have a little bit of a drag on gross margin. As you know, campus switching is slightly higher margin in terms of mix. I think underlying your question is also timing of when we sell out some of the aged inventory that we took orders before some of the price increases. That will help us as we move forward. I think that's what you were underlying your question there.
As we move forward with newer orders that we've taken from customers, they'll reflect more of the price increase, and that'll create that tailwind for gross margin going forward.
I see. What are you assuming parts costs are exiting the year, you know, above normal? Thanks.
Parts costs are roughly, I would say, 2 to 3 percentage points above the normal percentage of revenue as part of the standard COGS. Right now, we're basically expecting that trend to stay flat and then come down progressively through the next, I would say, three to four quarters.
Thank you very much.
Thanks, Alex.
Thank you. One moment. We have a question from Eric Martinuzzi with Lake Street Capital. Your line is open.
Yeah. Congrats on the strong quarter. My question has to do with the FY 2024 language. I wanna make sure I'm understanding this. I think last quarter you talked about FY 2024 growth in a range of 15% to 17%. This, this quarter, at least in the press release, the language is accelerated growth. Wanted to know if that 15% to 17% is still what you're talking about when you say accelerated growth or if it's something different?
Yeah, Eric, I think at this stage of the game, we'll hang on to the long-term CAGR that we put out there as far as 14% to 17%. So it's that sort of mid to high teens number, and we're very confident of that number going into 2024. The call here, given the acceleration of supply and what we've seen here, so the combination of strength of demand that we're forecasting as far as bookings, as well as the supply release, we're calling the high end of that 10 to 15 range for the second half of the year, but we do expect it to go up in fiscal 2024.
Okay. You talked about the health of the pipeline. I was wondering if you could take that down to your geographic levels and talk about U.S.A., EMEA and APAC pipeline.
Yeah, it's interesting, Eric. It's strong across the board. We've been getting a lot of questions about, you know, are we seeing softness? We've heard, you know, other companies talking about it, kind of macro tech in general. We've drilled down and we've been doing R&D level calls across all regions. Interestingly, across the board globally, our teams are calling strength. It shows up in terms of the leadership, and then the directors and literally our direct sellers are rolling up in what they're calling in terms of the pipeline and our funnel analytics. We've got very good visibility, and we're getting much better at calling numbers. We have this AI tool that we use that helps us call it.
There, I'm gonna call it across the board. There's not specific this strength or weakness to call out other than the recovery in APAC, Asia Pacific and some of our markets there have been hit by currency, other issues and that, you know, we felt that this quarter. The teams have a plan, and we have new leadership and markets, and we're expecting a really strong recovery in Asia Pacific.
Got it. Thanks for taking my questions.
Thank you. One moment for our next question. Our next question comes from Mike Genovese with Rosenblatt Securities. Your line is open.
Great. Thanks a lot. There was a lot of positive commentary on the subscription, and, you know, SaaS revenue growth. The subscription growth went down to 30% from 60% the quarter before. Can we just get more color on, were there tough comps or timing issues? You know, what do you expect in the second half of the year on that subscription growth?
Yeah. Thanks, Mike. Yeah, subscription growth, you know, If we look at quarter-over-quarter subscription growth, year-over-year subscription growth, the trends have been somewhat consistent. You know, what we've called is a long-term range, you know, where we've said you're gonna see a 30% to 40% subscription growth. We have a lot of our. As you're well aware, we have a lot of our subscription in backlog, so it's a function of the timing of the release of backlog. It's the timing of the release of backlog, and then, as you know, when we release subscription, you get, you know, there's a delay in terms of how you recognize revenue, because of the accrual.
One of the things Cristina commented on was the 38% growth in terms of the accrued subscription revenue, deferred revenue, and then we think you'll see that roll out. The long-term model is, I'm sorry, 25% to 35%. And that's the normalized level that I know we put out for our long-term guidance. 33 falls kinda right in the middle there. We would expect that to continue. Cristina, I don't know if you wanna add other color to that.
Yep. It is in line with our guidance, long-term guidance, and so that is according to expectations. There is a bit of a timing with regards to attached product as well. Some of our subscription bookings are attached to wireless bookings, and so there will be a little bit of fluctuation quarter to quarter due to that.
Okay, great. Thanks. You know, I know this is hard to call out at this time, and make an accurate forecast, but, you know, in terms of fiscal 2024 gross margins versus fiscal 2023 gross margins, I'd love to get your thoughts on, you know, roughly how many points of improvement that supply chain and other factors like, you know, software mix could drive in the gross margin for 2024.
Yeah. I'll take a shot at this, Mike, and then open it up for the rest of the team. We continue to see the step function. You know, we're seeing a slightly higher concentration when we look at mix. Wireless comes in with a lower gross margin than, you know, campus switching and data center switching, certainly. Because of the strength of product that we're seeing, we wind up with more product mix, which has lower gross margin than our subscription and service revenue. As a result, that's why we tempered our outlook for the rest of the year.
We're very confident in crossing over that 60% gross margin number as we head into our Q4 this year, and we expect this step function to continue into fiscal 24.
Exactly. We expect to hit 60% in Q4. We've seen a gradual progressive improvement in our gross margin throughout fiscal year 2023, so roughly about 1%, half a percentage point to 1 percentage point of improvement each quarter. We expect that trend to continue in fiscal year 2024. I mentioned that unusual or inflated costs related to the supply chain environment, such as expedite fees, and higher than normal freight costs, we expect those to gradually come down and continue to come down through FY 2024. Roughly I would say that we expect gross margin to improve roughly 3 to 4 points by the end of fiscal year 2024.
Perfect. Thanks so much.
Thank you. One moment for our next question. We have a question from Greg Mesniaeff with WestPark Capital. Your line is open.
Yes, thank you. Congrats on a good quarter. I have an R&D question for you guys. As you look at your product mix, and you look at component costs, the fact that they've gone up and they've remained sticky, what kind of initiatives do you have in place right now to basically engineer out some of the hardware component costs, particularly in switching, in campus switching in areas where, you know, it's kinda component heavy, if you will? Any insights on that would, I think, be kinda helpful to see how you can essentially move beyond some of the higher component costs that go into the products and the switches. Thanks.
Yeah. Well, yeah. Greg, thanks for the question. I'll lead off. One of the things that I mentioned is that during the quarter that we qualified an additional 37 component suppliers. There's a question of our resiliency around availability and supply chain constraints. Then there's also the question around how we drive a gross margin through the qualification of new suppliers and new components and new parts. One of the lessons learned for us is that we have the ability to enhance this qualification process. The qualification process that was solely focused on availability, will be turned towards driving and improving gross margins as we go forward. It's a good question. I can tell you it's something that we're very focused on.
Great. Also, did you guys give a DSO number for the quarter?
Yeah, Greg, that should be in the presentation. If you look there, we talked about DSO in the 44-day range. It's on page 14 of our deck.
Okay. Okay. Got it. Thank you. Thank you.
Thanks, Greg.
Thank you. Our next question comes from Dave Kang with B. Riley. Your line is open.
Thank you. Good morning. Just, my first question is on your key verticals. I assume they are still positive. Any verticals that is turning negative?
Hi, Dave. I think we have, you know, the one area which for us is a small percentage of our business, but you have seen some softness in service provider. I think you've probably heard that more broadly in the marketplace. We have some very targeted service provider customers and, yeah, through the quarter, we think that some of the capital spending programs with some of the larger end users has slowed down a bit. That being said, as we forecast the second half of the year, we're seeing a healthier demand coming from our service provider team in terms of the call for the second half. That would be the one to call out. Otherwise, I would say relative strength for us.
The other high-level comment that I would make is that we are in a position from being a somewhat smaller player with a lot of other larger players in the industry for us to take share. In some of the verticals, and we'll be coming out and announcing some wins that we've got, we've been able to win significant share in some of these markets where there's a meaningful share shift that sort of transcends what's going on and maybe more the general macro sense, which we'll be coming out with. I would say in general, pretty steady across the board in terms of the verticals and service provider, which was soft with our very focused applications, we see strengthening from where we were in the first half through the second half.
Speaking of service providers, Ericsson, they talked about the 5G market a little bit choppy this year, especially first half. Do you still expect to achieve your target of $50 million to $100 million in 5G, despite Ericsson's comments?
We do. We do. We still see strength. We don't think 5G is going away. We think there is, there's a pause with some of the buyers, as they're tightening their budget. The long-term opportunity is a resounding yes. The service providers are going to upgrade their infrastructure. Fortunately, we're in a very strong position as part of that infrastructure upgrade. We think that's the case. The other thing is that there are more. With Ericsson, they have more service providers that are in the queue. In terms of the number of proof of concepts and then proof of concepts turning into a meaningful go live launches, that funnel continues to build nicely.
Any other potential customers in the pipeline that you can talk about, or is it still the, you know, North America service provider and the European equipment vendor?
Yeah, those are I mean, they remain the big two. What I would say is we see more opportunities with both of those customers. As we look at service provider, we have a sell to from a traditional IT perspective. We have a sell with, where we're part of their solution from an OEM. Now we see opportunities to sell through to be their partner, their enterprise partner. These are the three prongs that we're attacking the service provider market with, and there are significant growth opportunities that we see in the market.
My last question is, I may have missed it, but did you give out the backlog composition, the mix?
I don't believe we did give the composition of backlog mix. When you're saying mix, you're referring to?
Wired and wireless.
We don't break it down, Dave. you know.
I'm not sure we've broken that down.
We give a general number.
Okay.
Yeah.
Yeah. Yeah.
Thank you.
I think I would say that we would expect it to be fairly consistent with, the overall business mix that we report.
Dave, I would just add that, you know, we did say in our prepared remarks that the backlog has a good contribution from universal platform products. Those are the newer products that we have come out to market with. We did talk about that.
Got it. Thank you.
Thank you. As a reminder, to ask a question, you'll need to press star one one. Our next question comes from Christian Schwab with Craig-Hallum. Your line is open.
Hey, guys. This is Tyler on behalf of Christian. Thanks for letting us ask a question. I didn't hear, and I was wondering if you could give any update. I think you said last quarter that you expected your backlog would, you know, take multiple years to return to normalized levels, and it probably won't be back to a $50 million to $100 million type normalized level until fiscal 2026. I guess any update or reiteration of that?
Yeah, we still have the same outlook, and the way we've guided that is that we see backlog returning to normal by the last quarter of fiscal 2025, and then sort of being normal as we enter 2026. That's, that's how we've, that's how we've modeled it, and that's how we've seen it. It's a combination of strength of demand because we continue to see strong bookings, and then also just this the release of backlog in terms of how we forecast supply chain.
Perfect. That's great. That's all for us. Thanks, guys.
Okay.
Thank you. It looks like we have a follow-up. One moment from Alex Henderson with Needham and Company. Your line is open.
Great, thanks. Wanted to ask a question around the realized pricing and discounting. There was a lot of discussion about very steep price hikes over the last 18 months, pretty much out of everybody in the category as components were going up. The realization of those prices, even as supply is starting to improve, seems a little less than what we would have expected. It sounds like there's probably a little bit more discounting going on as the economy is, you know, weakened, particularly out of your competitors. Can you talk a little bit about what you're seeing in the pricing arena and, you know, how much of the price benefits that you've announced or increases you've announced are now being discounted out?
Yeah, you know, that's always the phenomenon, Alex. There's always, you know, a price increase and then a portion of the price increase gets discounted away. It really is. It's kind of a combination of art and a science and trying to handicap and forecast that. One thing that I can say is that the supply chain environment has complicated things because as we sell and we put orders into backlog, we have different vintage orders that have, you know, different levels of pricing in them, if that makes sense.
Yep.
One of the things that we have done, you know, last quarter and that we're looking to do this quarter is release, you know, much older backlog. That older backlog will not have as many of the pricing moves, if you will, or the price increases, you know, in the ASP. That's part of kind of what we have to balance. Our view is that the margins are going to come, and we fully expect to see that, you know, the step function right now, given the mix issues that we talked about in the quarter and in the March quarter, we see it stepping into the June quarter before we cross over 60%.
All right.
But,
I get it on the margin side then. You're pretty clear on your guidance there. I guess my question really is how much of the revenue growth is a function of price versus volume, you know, within the December quarter and back half outlook?
Yeah, I think we would point to low to mid single digits for that pricing number.
Great.
The other comment that I would make, Alex, is that the largest competitor in the industry has raised price. Fortunately for us, it creates an umbrella, and gives us the flexibility to consider potential pricing moves as well.
How much do you think Cisco's prices are up?
We think in the high single digit, low double digit range.
Wow. Any thoughts on the trajectory of interest income and tax lines for the next couple of quarters? Obviously, your cash position is improving, your debt's coming down. Makes it a little hard for us to calculate that number. What is the March expectation for interest and other income? And for that matter, if any sense on the June quarter would be great as well.
So-
Cristina, I'll let you jump in on that one.
Yes. Thank you. We expect interest expense to remain fairly stable, as we do bring down our debt. We don't see a large increase in that. We're basically affecting our non-GAAP results with roughly an 18% to 19% effective tax rate.
The net of the numbers, because we don't see the components of it, the net of the number on the interest and other income line should be continuing at around $2.9 million expense. Is that what you're saying?
It should be higher than that for both interest and tax.
That's what you posted in the, no, no. Just in the interest line.
Oh, yes, that's right. Let's call it roughly $3 million to $3.5 million, something in that range.
Is there a reason why that's not coming down as cash balances are getting better returns than?
Rates, you know, rates are increasing as the balance goes down.
Okay. The floating rate on the debt is going up and offsetting the floating rate on the cash balances.
Right.
Okay, I got it. The taxes, you already gave me. Thanks.
Mm-hmm.
Alex, the other thing I would just mention is that the share count, you'll see a drop in share count based on the share repurchases during the Q2.
Great. Thank you. Actually, before I get off, one last question. What are you seeing in terms of employee retention and employee wage rates, you know, in inflation?
Well, this is the quarter where we have, you know, from a, from a, from a benefits perspective and from a merit increase, this is when that gets swizzled into our numbers. You're familiar with that because that's always the March quarter. We are in a really strong position and really fortunate. We have, first of all, our turnover is very low. It's the lowest among the tech industry peers. We do a lot of comparison, evaluation, and analysis. Our voluntary turnover is incredibly low.
Along with that, we're in the market and we're hiring because we're investing in growth because we have this unique growth opportunity over the next several years, and we have a lot of different growth opportunities that we can invest in. Extreme has been hiring and our turnover has been low.
Great. Thank you.
Yeah.
I'm showing no other questions. I'd like to turn the call back over to management for closing remarks.
Thank you. I'd like to thank everybody for participating in the call today. Obviously it's a record quarter for Extreme, record revenue, record cash flow. We just missed that 15% operating income number. The momentum as it relates to our bookings and our customer growth continues to be very strong. We have a lot of different people listening to the call, so shout out to all the Extreme employees, our partner community, that's helping us drive growth, our end users out there, and of course, all the investors for participating on the call today. We would encourage everyone to participate in the upcoming investor conferences over the next couple of months. As I said before, there's never been a better time to be at Extreme, either employee, partner, customer, investor.
Another welcome to Cristina for joining us today on the call and stepping into her new role. Thanks, everybody. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.