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			Q3 2016				Q2 2016				Q3 2015
Physical-layer sales		$	42,074			$	32,582			$	38,167
Protocol-layer sales			19,260				21,990				20,492
Foreign exchange losses on forward exchange contracts			(438	)			(975	)			(878	)
Total sales		$	60,896			$	53,597			$	57,781
Physical-layer bookings		$	41,797			$	34,873			$	38,534
Protocol-layer bookings			18,389				25,805				21,593
Foreign exchange losses on forward exchange contracts			(438	)			(975	)			(878	)
Total bookings		$	59,748			$	59,703			$	59,249
Book-to-bill ratio			0.98				1.11				1.03
Gross margin*		$	37,016			$	34,693			$	35,500
			60.8	%			64.7	%			61.4	%
Other selected information:
IFRS net earnings		$	919			$	3,963			$	563
Amortization of intangible assets		$	294			$	286			$	444
Stock-based compensation costs		$	386			$	314			$	374
Net income tax effect of the above items		$	(31	)		$	(30	)		$	(49	)
Foreign exchange (gain) loss		$	957			$	(1,101	)		$	175
Adjusted EBITDA*		$	5,301			$	5,280			$	4,462

 

 

 

 

 

 

 

 

 

*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 or loss.

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

 

 

		As at May 31, 2016				As at August 31, 2015
Assets
Current assets
Cash		$	42,273			$	25,864
Short-term investments			4,039				1,487
Accounts receivable
Trade			44,288				48,068
Other			2,510				2,384
Income taxes and tax credits recoverable			4,263				3,855
Inventories			34,939				27,951
Prepaid expenses			3,235				2,801
			135,547				112,410
Tax credits recoverable			34,320				35,625
Property, plant and equipment			36,007				35,695
Intangible assets			3,541				4,096
Goodwill			21,938				21,860
Deferred income tax assets			7,973				8,900
Other assets			691				416
		$	240,017			$	219,002
Liabilities
Current liabilities
Bank loan		$	455			$	–
Accounts payable and accrued liabilities			39,022				34,126
Provisions			336				427
Income taxes payable			421				779
Deferred revenue			10,729				7,647
			50,963				42,979
Deferred revenue			4,929				2,957
Deferred income tax liabilities			2,734				1,524
Other liabilities			195				791
			58,821				48,251
Shareholders' equity
Share capital (note 5)			86,826				86,045
Contributed surplus			17,635				17,778
Retained earnings			125,581				118,933
Accumulated other comprehensive loss			(48,846	)			(52,005	)
			181,196				170,751

$

240,017

$

219,002

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Sales		$	60,896			$	169,725			$	57,781			$	165,495
Cost of sales (1) (note 6)			23,880				62,921				22,281				63,064
Selling and administrative (note 6)			20,798				60,615				20,489				61,689
Net research and development (note 6)			11,303				31,398				10,923				33,087
Depreciation of property, plant and equipment (note 6)			958				2,857				1,163				3,664
Amortization of intangible assets (note 6)			294				880				444				2,561
Interest and other (income) expense			(309	)			(716	)			36				(216	)
Foreign exchange (gain) loss			957				(454	)			175				(4,787	)
Earnings before income taxes			3,015				12,224				2,270				6,433
Income taxes (note 7)			2,096				5,576				1,707				3,458
Net earnings for the period		$	919			$	6,648			$	563			$	2,975
Basic and diluted net earnings per share		$	0.02			$	0.12			$	0.01			$	0.05
Basic weighted average number of shares outstanding (000s)			53,940				53,894				53,861				57,804
Diluted weighted average number of shares outstanding (000s) (note 8)			54,813				54,655				54,549				58,453

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Net earnings for the period		$	919			$	6,648			$	563			$	2,975
Other comprehensive income (loss), net of income taxes
Items that will not be reclassified subsequently to net earnings
Foreign currency translation adjustment			5,488				775				802				(29,499	)
Items that may be reclassified subsequently to net earnings
Unrealized gains/losses on forward exchange contracts			1,045				825				38				(4,164	)
Reclassification of realized losses on forward exchange contracts in net earnings			666				2,383				938				1,438
Deferred income tax effect of gains/losses on forward exchange contracts			(434	)			(824	)			(270	)			725
Other comprehensive income (loss)			6,765				3,159				1,508				(31,500	)
Comprehensive income (loss) for the period		$	7,684			$	9,807			$	2,071			$	(28,525	)

		Nine months ended May 31, 2015
		Share capital				Contributed surplus				Retained earnings				Accumulated other comprehensive loss				Total shareholders' equity
Balance as at September 1, 2014		$	111,491			$	16,503			$	113,635			$	(10,259	)		$	231,370
Redemption of share capital (note 5)			(26,396	)			1,222				–				–				(25,174	)
Reclassification of stock-based compensation costs (note 5)			1,376				(1,376	)			–				–				–
Stock-based compensation costs			–				1,175				–				–				1,175
Net earnings for the period			–				–				2,975				–				2,975
Other comprehensive loss
Foreign currency translation adjustment			–				–				–				(29,499	)			(29,499	)
Changes in unrealized losses on forward exchange contracts, net of deferred income taxes of $725			–				–				–				(2,001	)			(2,001	)
Total comprehensive loss for the period																			(28,525	)
Balance as at May 31, 2015		$	86,471			$	17,524			$	116,610			$	(41,759	)		$	178,846

		Nine months ended May 31, 2016
		Share capital				Contributed surplus				Retained earnings				Accumulated other comprehensive loss				Total shareholders' equity
Balance as at September 1, 2015		$	86,045			$	17,778			$	118,933			$	(52,005	)		$	170,751
Redemption of share capital (note 5)			(457	)			55				–				–				(402	)
Reclassification of stock-based compensation costs (note 5)			1,238				(1,238	)			–				–				–
Stock-based compensation costs			–				1,040				–				–				1,040
Net earnings for the period			–				–				6,648				–				6,648
Other comprehensive income
Foreign currency translation adjustment			–				–				–				775				775
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $824			–				–				–				2,384				2,384
Total comprehensive income for the period																			9,807
Balance as at May 31, 2016		$	86,826			$	17,635			$	125,581			$	(48,846	)		$	181,196

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Cash flows from operating activities
Net earnings for the period		$	919			$	6,648			$	563			$	2,975
Add (deduct) items not affecting cash
Stock-based compensation costs			386				1,076				374				1,162
Depreciation and amortization			1,252				3,737				1,607				6,225
Deferred revenue			1,203				4,876				854				1,358
Deferred income taxes			611				1,285				542				199
Changes in foreign exchange gain/loss			626				(333	)			(77	)			(2,875	)
			4,997				17,289				3,863				9,044
Changes in non-cash operating items
Accounts receivable			(5,887	)			3,394				(6,494	)			(7,811	)
Income taxes and tax credits			(301	)			632				(541	)			(1,964	)
Inventories			(759	)			(6,627	)			950				(983	)
Prepaid expenses			(452	)			(418	)			(374	)			(875	)
Other assets		‒					203				30				29
Accounts payable, accrued liabilities and provisions			4,675				6,406				1,334				8,994
Other liabilities			(5	)			(59	)			(30	)			(62	)
			2,268				20,820				(1,262	)			6,372
Cash flows from investing activities
Additions to short-term investments			(3,109	)			(3,130	)		‒					(19,509	)
Proceeds from disposal and maturity of short-term investments		‒					501				1,619				23,685
Purchases capital assets			(1,138	)			(3,374	)			(1,826	)			(4,625	)
			(4,247	)			(6,003	)			(207	)			(449	)
Cash flows from financing activities
Bank loan		‒					468			‒				‒
Redemption of share capital (note 5)			(215	)			(402	)			(71	)			(25,174	)
			(215	)			66				(71	)			(25,174	)
Effect of foreign exchange rate changes on cash			1,049				1,526				78				(5,975	)
Change in cash			(1,145	)			16,409				(1,462	)			(25,226	)
Cash – Beginning of the period			43,418				25,864				30,357				54,121
Cash – End of the period		$	42,273			$	42,273			$	28,895			$	28,895
Supplementary information
Income taxes paid		$	505			$	1,621			$	350			$	1,174
Additions to capital assets		$	1,011			$	3,386			$	1,700			$	4,638

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Losses on forward exchange contracts		$	438			$	2,287			$	878			$	1,770

		Nine months ended May 31, 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
Redemption of restricted share units			−				−				5,636				−				−
Redemption of share capital			−				−				(21,154	)			(82	)			(82	)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			–				–				–				26				26
Balance as at May 31, 2015			31,643,000			$	1				22,201,472			$	86,470			$	86,471

 

		Nine months ended May 31, 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
Redemption of restricted share units			−				−				1,807				−				−
Redemption of share capital			−				−				(54,369	)			(213	)			(213	)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			−				−				−				8				8
Balance as at May 31, 2016			31,643,000			$	1				22,253,240			$	86,825			$	86,826

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Gross research and development expenses		$	12,612			$	35,363			$	12,462			$	37,947
Research and development tax credits and grants			(1,309	)			(3,965	)			(1,539	)			(4,860	)
Net research and development expenses for the period		$	11,303			$	31,398			$	10,923			$	33,087

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Inventory write-down for the period		$	596			$	2,052			$	1,083			$	3,062

 

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Cost of sales
Depreciation of property, plant and equipment		$	325			$	960			$	367			$	1,136
Amortization of intangible assets			179				524				243				1,355
			504				1,484				610				2,491
Selling and administrative expenses
Depreciation of property, plant and equipment			125				385				124				401
Amortization of intangible assets			19				55				69				771
			144				440				193				1,172
Net research and development expenses
Depreciation of property, plant and equipment			508				1,512				672				2,127
Amortization of intangible assets			96				301				132				435
			604				1,813				804				2,562
		$	1,252			$	3,737			$	1,607			$	6,225
Depreciation of property, plant and equipment		$	958			$	2,857			$	1,163			$	3,664
Amortization of intangible assets			294				880				444				2,561
Total depreciation and amortization expenses for the period		$	1,252			$	3,737			$	1,607			$	6,225

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Salaries and benefits		$	28,983			$	83,741			$	28,724			$	88,031
Stock-based compensation costs			386				1,076				374				1,162
Total employee compensation for the period		$	29,369			$	84,817			$	29,098			$	89,193

 

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Cost of sales		$	25			$	80			$	43			$	126
Selling and administrative expenses			285				775				247				770
Net research and development expenses			76				221				84				266
Total stock-based compensation for the period		$	386			$	1,076			$	374			$	1,162

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Income tax provision at combined Canadian federal and provincial statutory tax rate (27%)		$	814			$	3,300			$	613			$	1,737
Increase (decrease) due to:
Foreign income taxed at different rates			(212	)			(612	)			223				800
Non-taxable (income)/loss			(203	)			(273	)			14				1,088
Non-deductible expenses			171				486				186				560
Foreign exchange effect of translation of foreign subsidiaries in the functional currency			227				328				(280	)			(3,399	)
Utilization of previously unrecognized deferred income tax assets			32				−				74				(6	)
Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses			1,340				2,682				926				2,909
Other			(73	)			(335	)			(49	)			(231	)
Income tax provision for the period		$	2,096			$	5,576			$	1,707			$	3,458

		Three months ended May 31, 2016				Nine months ended May 31, 2016				Three months ended May 31, 2015				Nine months ended May 31, 2015
Current		$	1,485			$	4,291			$	1,165			$	3,259
Deferred			611				1,285				542				199
		$	2,096			$	5,576			$	1,707			$	3,458

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 June 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 equipment manufacturers (NEMs) 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.

 

 

Our original products were focused on the needs of installers and operators of fiber-optic networks. Customers use these field-portable test solutions for the installation, maintenance and troubleshooting of optical networks. Over the past several years, we have enhanced our competitive position in telecommunications test, service assurance and network visibility markets through acquisitions of transport and datacom, copper/xDSL (digital subscriber lines) and wireless test companies, an IP (internet protocol) service assurance business as well as an analytics software company.

We target high-growth market opportunities related to increasing bandwidth and improving quality of experience on network infrastructures: 4G/LTE (long-term evolution), wireless backhaul, small cells and distributed antenna systems (DAS), 100G network upgrades and fiber-to-the-home (FTTH)/fiber-to-the-curb (FTTC)/fiber-to-the-node (FTTN) deployments.

Our sales increased 5.4% to $60.9 million in the third quarter of fiscal 2016 compared to $57.8 million for the same period last year. Bookings slightly increased 0.8% to $59.7 million in the third quarter of fiscal 2016, for a book-to-bill ratio of 0.98, from $59.2 million for the same period last year.

 

RESULTS OF OPERATIONS

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