Extreme Networks, Inc.

Good day and thank you for standing by. Welcome to the Xtreme Network second quarter FiscalGear 20C financial results. At this time all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 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 of Corporate Strategy and Investor Relations. Please go ahead.

Thank you, and welcome to the Xtreme Network's fiscal second quarter 2023 earnings conference call. I'm Stan Kovler, Vice President of Corporate Strategy and Investor Relations. With me today are Xtreme Network's President and CEO, Ed Meyercourt, and Interim CFO, Christina Tate. We just distributed a press release and filed an 8K detailing Xtreme's financial results for the quarter, and also an 8K detailing our CFO transition. For your convenience, a copy of the press release, which includes our gaps and non-gap reconciliations, our earnings presentation, are both available in the investor relations section of our website at XtremeNetworks.com. And I would like to remind you that during today's call, our discussion may include forward-looking statements about Xtreme'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 ended June 30, 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 Xtreme's President and CEO, Ed Myercord.

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 Xtreme solutions remains exceptionally strong with good visibility through fiscal year-end 23. 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 Xtreme 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, and we achieved EPS of 27 cents in Q2, up from 21 cents 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 Xtreme, 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 23 with over 90% coverage of our portfolio with the universal platform. This calendar quarter, we'll be announcing a set of unique innovations involving Extreme Cloud 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 a million dollars with Xtreme, up from 37 last quarter. This is another signal of how Xtreme continues to take share and move up markets. 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 6E fast, reliable, low-latency network that can be easily managed by Extreme Cloud 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 Xtreme versus our largest competitor, we're quick to capitalize on these opportunities to win new business. More customers and partners choose Xtreme 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 Brandt 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. As a result, we're raising our revenue outlook to the high end of our prior 10% to 15% guide and 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. So when our backlog shifts, it will also unleash subscription and maintenance services revenues over the next several years. Throughout calendar 23, 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 60 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 6C 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, Christina Tate, to the call. Christina is a proven and highly respected leader at Xtreme, and I expect a smooth transition as we enter this new growth phase. Remy 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 Christina 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 second quarter 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. SAS 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 27 cents 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. Then, 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. However, 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 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 Q1-23, 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 Q123. 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 five 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. Now 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 23. Against this backdrop, we expect for Q3 revenue to be in the range of $315 to $325 million, gross margin to be in the range of 58 to 60 percent, operating expenses to be in the range of $140 to $145 million, and earnings to be in the range of $31.1 to $38.4 million, or 23 to 29 cents per diluted share. We expect to cross the 60% gross margin threshold in Q4. For full fiscal year 23, 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 1 1 on your telephone and wait for your name to be announced. To draw your question, press star 1 1 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 Remy doing all the work. So welcome to the call, Christina. It couldn't have been just Remy. I knew it had to be somebody else. I was hoping you could talk a little bit more in depth about, you know, 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. So it sounds like the overall orders were actually a little bit ahead of forecast or ahead of what would have built a little bit of backlog. But 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. So The comment about backlog relatively stable implies somewhat of a change in the rate of backlog usage. Bookings would have to be, or orders would have to be a little bit stronger than what you'd suggested given the higher comments. So 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 Christina, jump in behind if you want to add another comment, but I think that's right. So this is, you know, for us, if we look at what happened, as Christina mentioned, that, you know, first half of last year, we grew 16% the first quarter, 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 first quarter. But our supply chain teams have done a great job. We talked about all the work that's going on behind the scenes. So we're seeing it loosen. So we've seen an acceleration of the release of products. And at the end of the day, we want to 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. So we have 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.

Just to be clear, that's product backlog you're talking about, right?

That's correct. That's correct.

So 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 from a bookings perspective, we talked about universal hardware platforms and those universal hardware platforms typically will have service attached and always subscription attached. So we have a backlog of subscription and services that will be released as we release the product backlog.

The 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?

Yeah, well, at a high level, we have obviously the older inventory shipping out, newer inventory coming in, which is going to come in at the higher COGS. And 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 Christina to comment overall on inventory.

Yes. So the inventory I see is another sign of the improvement in the supply chain. So we were able to get more parts in, and we're able to have more finished goods. So 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 relative to the inventory that was 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?

So 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, and Alice, I think another consideration is that there are two other key things that happen. So as a percentage of mixed wireless was up in the quarter, and so 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. And 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. And so 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. So what are you assuming parts costs are exiting the year, you know, above normal? Thanks.

So parts costs are roughly, I would say, two to three percentage points above the normal percentage of revenue. as part of the standard COGS. And right now we're not seeing, 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 FY24 language. I want to make sure I'm understanding this. I think last quarter you talked about FY24 growth in a range of 15% to 17%. And this quarter, at least in the press release, the language is accelerated growth. So I 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%. And so it's that sort of mid to high teens number and we're very confident of that number going into 24. And 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 24. Okay.

And then you talked about the health of the pipeline. I was wondering if you could take that down to your geographic levels and talk about USA, EMEA, and APAC pipeline.

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 other companies talking about it, kind of macro tech in general. So we've drilled down, and we've been doing – RD-level calls across all regions. And interestingly, across the board globally, our teams are calling strength. And 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. And we have this AI tool that we use that helps us call it. So I'm going to call it across the board. There's not specific 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 we felt that this quarter. But 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 question.

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. So there was a lot of positive commentary on the subscription and, you know, SAS revenue growth. But the subscription growth went down to 30 from 60 the quarter before. So can we just get more color on were there tough comps or timing issues? And, you know, what do you expect in the second half of the year on that subscription growth?

Yeah, so thanks, Mike. Yeah, subscription growth, if we look at quarter-over-quarter subscription growth, year-over-year subscription growth, the trends have been somewhat consistent. What we've called is a long-term range where we've said you're going to see a 30% to 40% subscription growth. we have a lot of, as you're well aware, we have a lot of our subscription and backlog. So it's a function of the timing of the release of backlog. And 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. So one of the things Christina 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. And 33 falls right in the middle there. But we would expect that to continue. Christina, I don't know if you want to add other color to that.

Yep. It is in line with our guidance, long-term guidance. And so that is according to expectations. And there is a bit of a timing with regards to attached product as well. So 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. And then, 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 24 gross margins versus fiscal 23 gross margins, I'd love to get your thoughts on that. 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 24?

Yeah. I'll take a shot at this, Mike, and then open it up for the rest of the team. But we continue to see this 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 campus switching and data center switching, certainly. And then 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. So as a result, that's why we've tempered our outlook for the rest of the year. But we're very confident in crossing over that 60%.

gross margin number as we head into our fourth quarter of this year and we expect we expect the 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 23 so roughly about a percent half a percentage point to a percentage point of improvement each quarter and we expect that trend to continue in fiscal year 24. 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 FY24. So roughly, I would say that we expect gross margin to improve roughly three to four points by the end of fiscal year 24.

Thank you. Thanks so much. Thank you.

One moment for our next question. We have a question from Greg Mesnoff with West Park Capital. Your line is open.

Yes, thank you, and 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? costs particularly in switching and in campus switching and areas where you know it's kind of component heavy if you will um any any insights on that would i think be kind of 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 i'll 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. And there's a question of our resiliency around availability and supply chain constraints. And 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. And the qualification process that was solely focused on availability will be turned towards driving and improving gross margins as we go forward. So 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. And if you look there, we talked about DSO in the 44-day range. It's on page 14 of our guide. Okay.

Okay. Got it. Thank you. Thank you.

Thanks, Greg.

Thank you. And our next question comes from Dave Kang with B Reilly. Your line is open.

Thank you. Good morning. My first question is on your key verticals. I assume they're still positive. Any verticals that is turning negative?

Hi, Dave. I think we have 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 probably heard that more broadly in the marketplace. We have some very targeted service provider customers and 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 healthier demand coming from our service provider team in terms of the call for the second half. But 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. So 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. So I would say in general, pretty steady across the board in terms of the verticals. 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.

And 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 $100 million in 5G despite Erickson's comments?

We do. We do. We still see strength. We don't think 5G is going away. We think there is a pause with some of the buyers as they're tightening their budget. But the long-term opportunity is a resounding yes. The service providers are going to upgrade their infrastructure And fortunately, we're in a very strong position as part of that infrastructure upgrade. And so we think that's the case. The other thing is that they're more, with Ericsson, they have more service providers that are in the queue. So in terms of the number of proof of concepts and then proof of concepts turning into meaningful go-live launches, that funnel continues to build nicely.

And 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. And what I would say is we see more opportunities with both of those customers. As we look at service provider, we have a cell two from a traditional IT perspective. We have a sell with where we're part of their solution from an OEM. And now we see opportunities to sell through to be their partner, their enterprise partner. And so 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.

And 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 wire and wireless?

We don't break it down, Dave. I'm not sure we've broken that down. We give a general number, 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.

And, 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. So those are the newer products that we have come out to market with. So we did talk about that.

Got it. Thank you.

Thank you. As a reminder, to ask a question, you'll need to press star 1 1. Our next question comes from Christian Schwab with Craig Hallam. Your line is open.

Hey, guys. This is Tyler on behalf of Christian. Thanks for letting us ask a question. So 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 take multiple years to return to normalized levels. And it probably won't be back to a 50 to 100 million type normalized level until fiscal 26. 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 25. And then sort of being normal as we enter 26. So that's how we've modeled it, and that's how we've seen it. And it's a combination of strength of demand because we continue to see strong bookings. And then also just 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. And it looks like we have a follow-up. One moment from Alex Henderson with Needham & Company. Your line is open.

Great, thanks. So I 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. But the realization of those prices, even as supply is starting to – to improve seems a little less than what we would have expected. And it sounds like there's probably a little bit more discounting going on as the economy is weakened, particularly out of your competitors. So can you talk a little bit about what you're seeing in the pricing arena and how much of the price benefits that you've announced or increases you've announced are now being discounted out?

You know, that's always the phenomenon, Alex. There's always a price increase and then a portion of the price increase gets discounted away. And so 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 backlogs, we have different vintage orders that have different levels of pricing in them, if that makes sense. So one of the things that we have done last quarter and that we're looking to do this quarter is release much older backlog. And that older backlog will not have as many of the pricing moves, if you will, or the price increases in the ASP. So 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 the step function. Right now, given the mixed 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%.

I get it on the margin side, and you were 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 within both the December quarter and back half outlook?

Yeah, I think we would point to low to mid single digits for that pricing number. The other comment that I'd make, Alex, is that the largest competitor in the industry has raised price. And 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. It 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, any sense of the June quarter would be great as well.

Christine, I'll let you jump in on that one.

Yes, thank you. So we expect interest expense to remain fairly stable as we do bring down our debt. So we don't see a large increase in that. And we're basically affecting our non-GAAP results with roughly an 18% to 19% effective tax rate.

So 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?

should be higher than that for both interest and tax.

That's what you posted in the, no, no, no, just in the interest line.

Oh, yes, that's right. Let's call it roughly $3 to $3.5 million, something in that range.

And is there a reason why that's not coming down as cash balances are getting better returns?

So rates are increasing as the balance goes down.

Okay, so the floating rate on the debt is going up and offsetting the floating rate on the cash balances.

Right.

Okay, I got it. And the taxes you already gave me. Thanks.

Alex, the other thing I would just mention is that the share count, you'll see a a drop in share count based on the share repurchases during the second quarter. Great. Thank you.

Actually, before I get off, one last question. What are you seeing in terms of employee retention and employee wage rates and inflation?

Well, this is the quarter where we have From a benefits perspective and from a merit increase, this is when that gets swizzled into our numbers. But 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 work. evaluation and analysis. And our voluntary turnover is incredibly low. And 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. So Xtreme has been hiring and our turnover has been 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.

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. And the momentum as it relates to our bookings and our customer growth continues to be very strong. So we have a lot of different people listening in 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. And as I said before, there's never been a better time to be at Xtreme, either employee, partner, customer, investor. And another welcome to Christina 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.