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EXFO Reports Second-Quarter Results for Fiscal 2016

§	Sales increase 5.1% year-over-year to US$53.6 million

§	Bookings improve 9.2% year-over-year to US$59.7 million, book-to-bill ratio of 1.11

§	Gross margin reaches 64.7%, highest level in four years

§	Adjusted EBITDA totals US$5.3 million, 9.9% of sales

QUEBEC CITY, CANADA, March 29, 2016 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF) reported today financial results for the second quarter ended February 29, 2016.

Sales reached US$53.6 million in the second quarter of fiscal 2016 compared to US$51.0 million in the second quarter of 2015 and US$55.2 million in the first quarter of 2016. At the halfway mark of fiscal 2016, sales increased 1.0% year-over-year to US$108.8 million.

Bookings attained US$59.7 million in the second quarter of fiscal 2016 compared to US$54.7 million in the same period last year and US$58.5 million in the first quarter of 2016. The company's book-to-bill ratio was 1.11 in the second quarter of 2016 and 1.09 at the halfway mark of 2016, leading to year-over-year bookings growth of 8.5% after two quarters.

Gross margin before depreciation and amortization^* amounted to 64.7% of sales in the second quarter of fiscal 2016 compared to 61.7% in the second quarter of 2015 and 63.5% in the first quarter of 2016. After six months into fiscal 2016, gross margin accounted for 64.1% of sales compared to 62.1% for the same period in 2015.

IFRS net earnings in the second quarter of fiscal 2016 totaled US$4.0 million, or US$0.07 per diluted share, compared US$0.9 million, or US$0.02 per diluted share, in the same period last year and US$1.8 million, or US$0.03 per diluted share, in the first quarter of 2016. IFRS net earnings in the second quarter of 2016 included US$0.3 million in after-tax amortization of intangible assets, US$0.3 million in stock-based compensation costs and a foreign exchange gain of US$1.1 million. IFRS net earnings totaled US$5.7 million in the first half of fiscal 2016 compared to US$2.4 million in the first half of 2015.

Adjusted EBITDA^* totaled US$5.3 million, or 9.9% of sales, in the second quarter of fiscal 2016 compared to US$1.2 million, or 2.3% of sales, in the second quarter of 2015 and US$5.3 million, or 9.6% of sales, in the first quarter of 2016. At the halfway point of fiscal 2016, adjusted EBITDA totaled US$10.6 million, or 9.7% of sales, compared to US$4.4 million, or 4.0% of sales, in the same period in 2015.

EXFO's cash and short-term investments amounted to US$44.4 million at the end of the second quarter of fiscal 2016, compared to US$29.4 million in the previous quarter, mainly due to US$15.3 million in cash flows from operating activities.

"EXFO's first half of fiscal 2016 provides clear evidence that key transformations implemented last year are delivering robust results as reflected by strong bookings growth and book-to-bill ratio, along with significant improvements to our gross margin and adjusted EBITDA," said Germain Lamonde, EXFO's Chairman, President and CEO. "Our growth engine, with significant earnings leverage, is back in place for both our Physical and Protocol product groups which are demonstrating strong market traction. We should also continue to benefit from our leadership in fiber-optic and 100G network testing, driven by surging demand for high-speed optical networking in core, metro, Web 2.0 and data center networks. Considering our solid book-to bill ratio in the first half of 2016 and the fact our second half is typically stronger, we are well positioned to surpass our US$20 million adjusted EBITDA target for the full fiscal year."

 

 

 

 

Selected Financial Information

(In thousands of US dollars)

Operating Expenses

Selling and administrative expenses totaled US$19.6 million, or 36.5% of sales in the second quarter of fiscal 2016 compared to US$20.2 million, or 39.6% of sales, in the same period last year and US$20.3 million, or 36.7% of sales, in the first quarter of 2016.

Net R&D expenses totaled US$10.2 million, or 19.0% of sales, in the second quarter of fiscal 2016 compared to US$10.5 million, or 20.6% of sales, in the second quarter of 2015 and US$9.9 million, or 18.0% of sales, in the first quarter of 2016.

Second-Quarter Highlights

·

Profitability. Adjusted EBITDA increased more than 350% year-over-year to US$5.3 million in the second quarter of 2016. At the halfway mark of fiscal 2016, EXFO delivered US$10.6 million in adjusted EBITDA, up 143% year-over-year, placing the company in a good position with regard to its US$20 million annual target. EXFO generated US$15.3 million in cash flows from operating activities in the second quarter of 2016 and US$18.6 million in the first half of the fiscal year.

 

 

 

 

 

·

Innovation. EXFO launched five new solutions during the second quarter of 2016 including TestFlow, a revolutionary, cloud-based field test automation solution that allows network operators to automate complex, labor-intensive activities like fiber-to-the antenna (FTTA), distributed antenna system (DAS) and small cell deployments. The company also introduced a whole new family of optical time domain reflectometers (OTDRs), a segment in which it owns 48% of global market share, establishing new industry standards for specifications and time savings in characterizing optical networks. Other new product introductions consist of solutions for data center and enterprise network testing; an industry-first, high-resolution, wavelength-tunable OTDR for single-ended network troubleshooting; and the telecom industry's first G.fast handheld test set for the roll out of ultra-broadband services on copper links. Following the quarter-end, EXFO unveiled its new test strategy and platform for the lab market at the Optical Fiber Conference (OFC) in Anaheim.

Business Outlook

EXFO forecasts sales between US$59.0 million and US$64.0 million for the third quarter of fiscal 2016, while IFRS net earnings are expected to range between US$0.03 and US$0.07 per diluted share. IFRS net earnings include US$0.01 per diluted share in after-tax amortization of intangible assets and stock-based compensation costs as well as US$0.01 per diluted share for foreign exchange losses based on current exchange rates.

This guidance was established by management based on existing backlog as of the date of this press release, seasonality, expected bookings for the remaining of the quarter, as well as exchange rates as of the day of this press release.

Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to review second-quarter results for fiscal 2016. To listen to the conference call and participate in the question period via telephone, dial 1-704-288-0432. Please take note the following conference ID number will be required: 58439462. Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CPA, CA, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available two hours after the event until 11:59 p.m. on April 5, 2016. The replay number is 1-855-859-2056 and the conference ID number is 58439462. The audio Webcast and replay of the conference call will also be available on EXFO's Website at www.EXFO.com, under the Investors section.

About EXFO

 

 

 

 

 

 

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statement that refers to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty as well as capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures with anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test and service assurance industry and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regards to timing and nature of customer orders; longer sales cycles for complex systems involving customers' acceptances delaying revenue recognition; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully expand international operations; our ability to successfully integrate businesses that we acquire; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.

*NON-IFRS MEASURES

EXFO provides non-IFRS measures (constant currency data, gross margin before depreciation and amortization, and adjusted EBITDA) as supplemental information regarding its operational performance. The company uses these measures for the purpose of evaluating historical and prospective financial performance, as well as its performance relative to competitors. These measures also help the company to plan and forecast for future periods as well as to make operational and strategic decisions. EXFO believes that providing this information, in addition to IFRS measures, allows investors to see the company's results through the eyes of management, and to better understand its historical and future financial performance.

The presentation of this additional information is not prepared in accordance with IFRS. Therefore, the information may not necessarily be comparable to that of other companies and should be considered as a supplement to, not a substitute for, the corresponding measures calculated in accordance with IFRS.

Constant currency data represents data before foreign currency impact. Data for the current period is translated using foreign exchange rates of the corresponding period from the preceding year.

Gross margin before depreciation and amortization represents sales less cost of sales, excluding depreciation and amortization.

Adjusted EBITDA represents net earnings before interest, income taxes, depreciation and amortization, stock-based compensation costs and foreign exchange gain.

 

 

 

 

 

The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings, in thousands of US dollars:

Adjusted EBITDA (unaudited)

 

For more information

Vance Oliver

Director, Investor Relations

(418) 683-0913, Ext. 23733

vance.oliver@exfo.com

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EXFO Inc.

Condensed Unaudited Interim Consolidated Statements of Earnings

 

(in thousands of US dollars, except share and per share data)

 

 

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Sales		$	53,597			$	108,829			$	50,990			$	107,714
Cost of sales (1) (note 6)			18,904				39,041				19,546				40,783
Selling and administrative (note 6)			19,565				39,817				20,168				41,200
Net research and development (note 6)			10,162				20,095				10,506				22,164
Depreciation of property, plant and equipment (note 6)			924				1,899				1,256				2,501
Amortization of intangible assets (note 6)			286				586				1,019				2,117
Interest and other income			(470	)			(407	)			(35	)			(252	)
Foreign exchange gain			(1,101	)			(1,411	)			(2,987	)			(4,962	)
Earnings before income taxes			5,327				9,209				1,517				4,163
Income taxes (note 7)			1,364				3,480				586				1,751
Net earnings for the period		$	3,963			$	5,729			$	931			$	2,412
Basic net earnings per share		$	0.07			$	0.11			$	0.02			$	0.04
Diluted net earnings per share		$	0.07			$	0.10			$	0.02			$	0.04
Basic weighted average number of shares outstanding (000's)			53,927				53,870				59,216				59,775
Diluted weighted average number of shares outstanding (000's) (note 8)			54,615				54,575				59,813				60,396

 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

 

 

EXFO Inc.

Notes to Condensed Unaudited Interim Consolidated Financial Statements

 

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 

	Expiry dates		Contractual amounts				Weighted average contractual forward rates
	March 2016 to August 2016		$	12,600				1.1976
	September 2016 to August 2017			19,800				1.2779
	September 2017 to August 2018			9,300				1.3402
	September 2018 to December 2018			1,900				1.3639
	Total		$	43,600				1.2717

	Expiry dates		Contractual amounts				Weighted average contractual forward rates
	March 2016 to August 2016		$	3,100				67.92
	September 2016 to February 2017			1,400				71.12
	Total		$	4,500				68.91

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Losses on forward exchange contracts		$	975			$	1,849			$	600			$	892

		Six months ended February 28, 2015
		Multiple voting shares								Subordinate voting shares
		Number				Amount				Number				Amount				Total Amount
Balance as at September 1, 2014			31,643,000			$	1				28,703,750			$	111,490			$	111,491
Redemption of restricted share units			−				−				115,669				−				−
Redemption of share capital			−				−				(236,486	)			(919	)			(919	)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			−				−				−				443				443
Balance as at November 30, 2014			31,643,000				1				28,582,933				111,014				111,015
Redemption of restricted share units			−				−				107,099				−				−
Redemption of deferred share units			−				−				48,697				−				−
Redemption of share capital			−				−				(6,521,739	)			(25,395	)			(25,395	)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			–				–				–				907				907
Balance as at February 28, 2015			31,643,000			$	1				22,216,990			$	86,526			$	86,527

		Six months ended February 29, 2016
		Multiple voting shares								Subordinate voting shares
		Number				Amount				Number				Amount				Total amount
Balance as at September 1, 2015			31,643,000			$	1				22,092,034			$	86,044			$	86,045
Redemption of restricted share units			−				−				155,784				−				−
Redemption of deferred share units			−				−				653				−				−
Redemption of share capital			−				−				(200	)			(1	)			(1	)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			−				−				−				723				723
Balance as at November 30, 2015			31,643,000				1				22,248,271				86,766				86,767
Redemption of restricted share units			−				−				119,973				−				−
Redemption of share capital			−				−				(62,442	)			(243	)			(243	)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			−				−				−				507				507
Balance as at February 29, 2016			31,643,000			$	1				22,305,802			$	87,030			$	87,031

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Inventory write-down for the period		$	609			$	1,456			$	1,046			$	1,979

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Cost of sales
Depreciation of property, plant and equipment		$	312			$	635			$	374			$	769
Amortization of intangible assets			168				345				441				1,112
			480				980				815				1,881
Selling and administrative expenses
Depreciation of property, plant and equipment			114				260				135				277
Amortization of intangible assets			18				36				338				702
			132				296				473				979
Net research and development expenses
Depreciation of property, plant and equipment			498				1,004				747				1,455
Amortization of intangible assets			100				205				240				303
			598				1,209				987				1,758
		$	1,210			$	2,485			$	2,275			$	4,618
Depreciation of property, plant and equipment		$	924			$	1,899			$	1,256			$	2,501
Amortization of intangible assets			286				586				1,019				2,117
Total depreciation and amortization expenses for the period		$	1,210			$	2,485			$	2,275			$	4,618

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Salaries and benefits		$	27,794			$	54,758			$	29,097			$	59,307
Stock-based compensation costs			314				690				388				788
Total employee compensation for the period		$	28,108			$	55,448			$	29,485			$	60,095

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Cost of sales		$	24			$	55			$	38			$	83
Selling and administrative expenses			224				490				260				523
Net research and development expenses			66				145				90				182
Total stock-based compensation for the period		$	314			$	690			$	388			$	788

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Income tax provision (recovery) at combined Canadian federal and provincial statutory tax rate (27%)		$	1,438			$	2,486			$	410			$	1,124
Increase (decrease) due to:
Foreign income taxed at different rates			(242	)			(400	)			582				577
Non-taxable (income)/loss			(274	)			(70	)			243				1,074
Non-deductible expenses			145				315				172				374
Foreign exchange effect of translation of foreign subsidiaries in the functional currency			251				101				(2,126	)			(3,119	)
Utilization of previously unrecognized deferred income tax assets			(32	)			(32	)			(80	)			(80	)
Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses			330				1,342				1,379				1,983
Other			(252	)			(262	)			6				(182	)
Income tax provision for the period		$	1,364			$	3,480			$	586			$	1,751

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Current		$	1,263			$	2,806			$	597			$	2,094
Deferred			101				674				(11	)			(343	)
		$	1,364			$	3,480			$	586			$	1,751

		Three months ended February 29, 2016				Six months ended February 29, 2016				Three months ended February 28, 2015				Six months ended February 28, 2015
Basic weighted average number of shares outstanding (000's)			53,927				53,870				59,216				59,775
Plus dilutive effect of (000's):
Restricted share units			563				585				492				510
Deferred share units			125				120				105				111
Diluted weighted average number of shares outstanding (000's)			54,615				54,575				59,813				60,396
Stock awards excluded from the calculation of diluted weighted average number of shares because their exercise price was greater than the average market price of the common shares (000's)			244				152				67				88

 

Management's Discussion and Analysis of Financial Condition

and Results of Operations

This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty as well as capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures with anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test, service assurance and network visibility markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regards to the timing and nature of customer orders; delay in revenue recognition due to longer sales cycles for complex systems involving customers' acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully expand international operations; our ability to successfully integrate businesses that we acquire; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document. This discussion and analysis should be read in conjunction with the consolidated financial statements.

The following discussion and analysis of financial condition and results of operations is dated March 29, 2016.

All dollar amounts are expressed in US dollars, except as otherwise noted.

COMPANY OVERVIEW AND RECENT DEVELOPMENTS

We provide communications service providers (CSPs) with test orchestration and performance intelligence solutions to ensure the smooth deployment, maintenance and management of next-generation, physical, virtual, fixed and mobile networks. We have also forged strong relationships with network solution vendors (NSVs) to develop deep expertise that migrates from the lab to the field and beyond. Our key differentiation comes from combining intelligent, automated and cloud-based test and monitoring solutions with real-time analytics to deliver unmatched end-to-end visibility and assurance—from a network, services and end-user level.

 

 

We launched five new solutions in the second quarter of fiscal 2016 including TestFlow, a cloud-based field test automation solution that allows network operators to automate complex, labor-intensive activities like fiber-to-the antenna (FTTA), distributed antenna system (DAS) and small cell deployments. We also introduced a whole new family of optical time domain reflectometers (OTDRs), establishing new industry standards for specifications and time savings in characterizing optical networks. Other new product introductions consist of solutions for data center and enterprise network testing; an industry-first, high-resolution, wavelength-tunable OTDR for single-ended network troubleshooting; and the telecom industry's first G.fast handheld test set for the roll out of ultra-broadband services on copper links. Following the quarter-end, we unveiled our new test strategy and platform for the lab market.

Our sales increased 5.1% to $53.6 million in the second quarter of fiscal 2016 compared to $51.0 million for the same period last year, despite a significant headwind from a stronger US dollar versus other currencies. In constant currency, our sales would have increased about 8% year-over-year in the second quarter of fiscal 2016. Bookings increased 9.2% to $59.7 million in the second quarter of fiscal 2016, for a book-to-bill ratio of 1.11, from $54.7 million for the same period last year, despite a stronger US dollar versus other currencies.

 

 

RESULTS OF OPERATIONS

(in thousands of US dollars, except per share data, and as a percentage of sales for the periods indicated)