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06.29.2017

EXFO Reports Third Quarter Results for Fiscal 2017

  • Sales reach US$58.5 million
  • Bookings attain US$63.7 million, book-to-bill ratio of 1.09
  • Adjusted EBITDA totals US$2.3 million
  • Cost savings from restructuring of US$8.0 million expected in FY 2018

QUEBEC CITY, June 29, 2017 /CNW Telbec/ - EXFO Inc. (NASDAQ: EXFO, TSX: EXF), the network test, monitoring and analytics experts, reported today financial results for the third quarter ended May 31, 2017.

Sales reached US$58.5 million in the third quarter of fiscal 2017 compared to US$60.9 million in the third quarter of 2016 and US$60.0 million in the second quarter of 2017.

Bookings attained US$63.7 million in the third quarter of fiscal 2017 compared to US$59.7 million in the same period last year and US$55.9 million in the second quarter of 2017. The company's book-to-bill ratio was 1.09 in the third quarter of 2017.

Gross margin before depreciation and amortization* amounted to 58.0% of sales in the third quarter of fiscal 2017 compared to 60.8% in the third quarter of 2016 and 61.7% in the second quarter of 2017. Excluding restructuring charges of US$1.6 million or 2.7% of sales, gross margin would have amounted to 60.7% in the third quarter of 2017.

IFRS net loss in the third quarter of fiscal 2017 totaled US$4.3 million, or US$0.08 per share, compared to net earnings of US$0.9 million, or US$0.02 per share, in the same period last year and net earnings of US$1.0 million, or US$0.02 per share, in the second quarter of 2017. IFRS net loss in the third quarter of 2017 included US$3.6 million in after-tax restructuring expenses, US$0.9 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs and a foreign exchange gain of US$1.7 million.

Adjusted EBITDA* totaled US$2.3 million, or 3.9% of sales, in the third quarter of fiscal 2017 compared to US$5.3 million, or 8.7% of sales, in the third quarter of 2016 and US$4.9 million, or 8.1% of sales, in the second quarter of 2017.

At the beginning of March, EXFO acquired UK-based Ontology Systems for a consideration of US$7.7 million, net of cash acquired, plus an earnout estimated at US$1.4 million based on future sales.

In early May, EXFO announced a restructuring plan to streamline its monitoring solutions portfolio. This plan, which resulted in US$3.8 million of restructuring charges in the third quarter of 2017, is expected to generate annual cost savings of US$8.0 million.

"Although bookings were robust at US$63.7 million, the timing of orders and necessity to rebuild backlog affected our financial results in the third quarter of 2017," said Philippe Morin, EXFO's Chief Executive Officer. "Looking at the bigger picture, we continued capturing market share in optical and high-speed Ethernet testing in the field, data centers and labs as reflected by sales and bookings growth of 6.2% and 4.2% nine months into the fiscal year. We also addressed an underperforming product line within our monitoring solutions portfolio and fined-tuned our go-to-market strategy to sharpen our focus and enhance profitability. We should begin benefitting from our restructuring efforts in the fourth quarter, but the full impact will be felt in fiscal 2018."

Selected Financial Information
(In thousands of US dollars)








Q3 2017


Q2 2017


Q3 2016










Physical-layer sales

$

41,007


$

38,038


$

42,074

Protocol-layer sales


17,678



22,097



19,260

Foreign exchange losses on forward exchange contracts


(180)



(105)



(438)

Total sales

$

58,505


$

60,030


$

60,896










Physical-layer bookings

$

47,157


$

34,031


$

41,797

Protocol-layer bookings


16,691



21,992



18,389

Foreign exchange losses on forward exchange contracts


(180)



(105)



(438)

Total bookings

$

63,668


$

55,918


$

59,748

Book-to-bill ratio (bookings/sales)


1.09



0.93



0.98

Gross margin before depreciation and amortization*

$

33,950


$

37,041


$

37,016



58.0%



61.7%



60.8%










Other selected information:










IFRS net earnings (loss)

$

(4,304)


$

1,008


$

919


Amortization of intangible assets

$

1,046


$

768


$

294


Stock-based compensation costs

$

372


$

353


$

386


Restructuring charges

$

3,813


$

-


$

-


Net income tax effect of the above items

$

(357)


$

(162)


$

(31)


Foreign exchange (gain) loss

$

(1,725)


$

272


$

957


Adjusted EBITDA*

$

2,300


$

4,875


$

5,301

 

Operating Expenses
Selling and administrative expenses totaled US$22.6 million, or 38.6% of sales in the third quarter of fiscal 2017 compared to US$20.8 million, or 34.2% of sales, in the same period last year and US$21.3 million, or 35.4% of sales, in the second quarter of 2017.

Net R&D expenses totaled US$13.3 million, or 22.7% of sales, in the third quarter of fiscal 2017 compared to US$11.3 million, or 18.6% of sales, in the third quarter of 2016 and US$11.3 million, or 18.8% of sales, in the second quarter of 2017.

EXFO recorded US$3.8 million of restructuring charges in the third quarter of fiscal 2017, of which US$1.6 million (2.7% of sales) was included in cost of sales, US$0.9 million (1.6% of sales) in selling and administrative expenses and US$1.3 million (2.2% of sales) in net R&D expenses.

Third-Quarter Highlights

  • Sales and bookings. Sales decreased 3.9% year-over-year to US$58.5 million in the third quarter of 2017 mainly due to the timing of orders and necessity to rebuild backlog as bookings improved 6.6% to US$63.7 million. After nine months into fiscal 2017, sales and bookings increased 6.2% and 4.2%, respectively. Physical-layer sales accounted for 70% of total revenue in the third quarter of 2017, while Protocol-layer totaled 30%. Revenue contribution among the three main geographic regions in the third quarter amounted to 62% from the Americas, 20% from EMEA and 18% from Asia-Pacific. EXFO's top customer accounted for 9.9% of sales in the third quarter, while the top three customers represented 24.0%.
  • Profitability. EXFO generated adjusted EBITDA of US$2.3 million, or 3.9% of sales, in the third quarter of 2017 and US$13.5 million, or 7.5% of sales, after nine months into the fiscal year. In early May, the company announced a restructuring plan that is expected to deliver annual cost savings of US$8.0 million.
  • Innovation. EXFO launched seven new solutions in the third quarter of 2017 and 15 since the beginning of the fiscal year. Key product introductions in the third quarter included a 400G test solution for the high-speed lab and manufacturing markets; a four-slot, FTB-4 Pro platform for network testing in the field, data centers and R&D labs; a software-based solution, Universal Virtual Sync, enabling communications service providers to accurately and cost-effectively measure network latency; a tunable optical time domain reflectometer (OTDR) that characterizes coarse wavelength division multiplexing (CWDM) channels in metro Ethernet links and centralized radio access networks (C-RANs); as well as an optical spectrum analyzer and two optical power meters for the lab and manufacturing markets.

Business Outlook
EXFO forecasts sales between US$58.0 million and US$63.0 million for the fourth quarter of fiscal 2017, while IFRS net results are expected to range between a loss of US$0.03 per share and earnings of US$0.01 per share. IFRS net results include US$0.03 per share in after-tax amortization of intangible assets, after-tax restructuring charges and stock-based compensation costs as well as an anticipated foreign exchange loss of US$0.04 per share.

This outlook was established by management based on existing backlog as of the date of this news release, expected bookings for the remaining of the quarter, exchange rates as of the day of this news release, as well as the preliminary allocation of the fair value of the total consideration for the acquisition of Ontology Partners Limited.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review third quarter results for fiscal 2017. To listen to the conference call and participate in the question period via telephone, dial 1-323-794-2093. Please take note the following participant passcode will be required: 1063188. Germain Lamonde, Executive Chairman, Philippe Morin, Chief Executive Officer, and Pierre Plamondon, CPA, 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 8:00 p.m. on July 6, 2017. The replay number is 1-719-457-0820 and the required participant passcode is 1063188. 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
EXFO develops smarter network test, monitoring and analytics solutions for the world's leading communications service providers, network equipment manufacturers and webscale companies. Since 1985, we've worked side by side with our customers in the lab, field, data center, boardroom and beyond to pioneer essential technology and methods for each phase of the network lifecycle. Our portfolio of test orchestration and real-time 3D analytics solutions turn complex into simple and deliver business-critical insights from the network, service and subscriber dimensions. Most importantly, we help our customers flourish in a rapidly transforming industry where "good enough" testing, monitoring and analytics just aren't good enough anymore—they never were for us, anyway. For more information, visit EXFO.com and follow us on the EXFO Blog.

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 (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.

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

Adjusted EBITDA represents net earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, and foreign exchange gain or loss.

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

Adjusted EBITDA


Q3 2017


Q2 2017


Q3 2016










IFRS net earnings (loss) for the period

$

(4,304)


$

1,008


$

919










Add (deduct):


















Depreciation of property, plant and equipment


1,029



962



958

Amortization of intangible assets


1,046



768



294

Interest (income) expense


57



(9)



(309)

Income taxes


2,012



1,521



2,096

Stock-based compensation costs


372



353



386

Restructuring charges


3,813



-



-

Foreign exchange (gain) loss


(1,725)



272



957

Adjusted EBITDA for the period

$

2,300


$

4,875


$

5,301










Adjusted EBITDA in percentage of sales


3.9%



8.1%



8.7%

 

EXFO Inc.

Condensed Unaudited Interim Consolidated Balance Sheets







(in thousands of US dollars)









As at
May 31,
2017



As at
August 31,
2016

Assets












Current assets






Cash

$

34,373


$

43,208

Short-term investments


3,337



4,087

Accounts receivable







Trade


41,358



42,993


Other


2,107



2,474

Income taxes and tax credits recoverable


5,090



4,208

Inventories


32,124



33,004

Prepaid expenses


3,781



3,099



122,170



133,073







Tax credits recoverable


33,718



34,594

Property, plant and equipment


36,718



35,978

Intangible assets


11,969



3,391

Goodwill


32,756



21,928

Deferred income tax assets


6,705



8,240

Other assets


455



589








$

244,491


$

237,793

Liabilities












Current liabilities






Accounts payable and accrued liabilities

$

41,966


$

37,174

Provisions


296



299

Income taxes payable


610



971

Deferred revenue


11,556



9,486



54,428



47,930







Deferred revenue


6,211



5,530

Deferred income tax liabilities


2,720



2,857

Other liabilities


31



75



63,390



56,392







Shareholders' equity






Share capital


90,376



85,516

Contributed surplus


17,721



18,150

Retained earnings


126,316



126,309

Accumulated other comprehensive loss


(53,312)



(48,574)









181,101



181,401








$

244,491


$

237,793

 

EXFO Inc.

Condensed Unaudited Interim Consolidated Statements of Earnings













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















Three months



Nine months



Three months



Nine months



ended



ended



ended



ended



May 31, 2017



May 31, 2017



May 31, 2016



May 31, 2016













Sales

$

58,505


$

180,320


$

60,896


$

169,725













Cost of sales (1)


24,555



70,357



23,880



62,921

Selling and administrative


22,572



65,422



20,798



60,615

Net research and development


13,263



35,841



11,303



31,398

Depreciation of property, plant and equipment


1,029



2,894



958



2,857

Amortization of intangible assets


1,046



2,241



294



880

Interest and other (income) expense


57



28



(309)



(716)

Foreign exchange (gain) loss


(1,725)



(1,965)



957



(454)

Earnings (loss) before income taxes


(2,292)



5,502



3,015



12,224













Income taxes


2,012



5,495



2,096



5,576













Net earnings (loss) for the period

$

(4,304)


$

7


$

919


$

6,648













Basic and diluted net earnings (loss) per share

$

(0.08)


$

0.00


$

0.02


$

0.12













Basic weighted average number of shares outstanding (000s)


54,593



54,328



53,940



53,894













Diluted weighted average number of shares outstanding (000s)


54,593



55,479



54,813



54,655


(1) The cost of sales is exclusive of depreciation and amortization, shown separately.



 

EXFO Inc.

Condensed Unaudited Interim Consolidated Statements of Comprehensive Income (Loss)













(in thousands of US dollars)


























Three months


Nine months


Three months


Nine months


ended


ended


ended


ended


May 31, 2017


May 31, 2017


May 31, 2016


May 31, 2016













Net earnings (loss) for the period

$

(4,304)


$

7


$

919


$

6,648

Other comprehensive income (loss), net of income taxes












Items that will not be reclassified subsequently to net earnings













Foreign currency translation adjustment


(2,568)



(4,766)



5,488



775

Items that may be reclassified subsequently to net earnings













Unrealized gains/losses on forward exchange contracts


(127)



(362)



1,045



825


Reclassification of realized gains/losses on forward exchange contracts in net earnings


39



359



666



2,383


Deferred income tax effect of gains/losses on forward exchange contracts


39



31



(434)



(824)

Other comprehensive income (loss)


(2,617)



(4,738)



6,765



3,159













Comprehensive income (loss) for the period

$

(6,921)


$

(4,731)


$

7,684


$

9,807



 

EXFO Inc.

Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity
















(in thousands of US dollars)
































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


$

117,409


$

(52,005)


$

169,227

Redemption of share capital


(457)



55



-



-



(402)

Reclassification of stock-based compensation costs


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


$

124,057


$

(48,846)


$

179,672















































Nine months ended May 31, 2017


Share
capital


Contributed
surplus


Retained
earnings


Accumulated
other
comprehensive
loss


Total
shareholders'
equity
















Balance as at September 1, 2016

$

85,516


$

18,150


$

126,309


$

(48,574)


$

181,401

Issuance of share capital


3,490



-



-



-



3,490

Reclassification of stock-based compensation costs


1,370



(1,370)



-



-



-

Stock-based compensation costs


-



941



-



-



941

Net earnings for the period


-



-



7



-



7

Other comprehensive income (loss)
















Foreign currency translation adjustment


-



-



-



(4,766)



(4,766)


Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $31


-



-



-



28



28
















Total comprehensive loss for the period














(4,731)
















Balance as at May 31, 2017

$

90,376


$

17,721


$

126,316


$

(53,312)


$

181,101

 


EXFO Inc.

Condensed Unaudited Interim Consolidated Statements of Cash Flows













(in thousands of US dollars)














Three months
ended
May 31, 2017


Nine months
ended
May 31, 2017


Three months
ended
May 31, 2016


Nine months
ended
May 31, 2016













Cash flows from operating activities












Net earnings (loss) for the period

$

(4,304)


$

7


$

919


$

6,648

Add (deduct) items not affecting cash













Stock-based compensation costs


372



983



386



1,076


Depreciation and amortization


2,075



5,135



1,252



3,737


Deferred revenue


79



3,026



1,203



4,876


Deferred income taxes


704



1,163



611



1,285


Changes in foreign exchange gain/loss


(524)



(955)



626



(333)



(1,598)



9,359



4,997



17,289

Changes in non-cash operating items













Accounts receivable


(901)



1,701



(5,887)



3,394


Income taxes and tax credits


(842)



(1,232)



(301)



632


Inventories


315



(9)



(759)



(6,627)


Prepaid expenses


(863)



(761)



(452)



(418)


Other assets


(103)



(127)



-



203


Accounts payable, accrued liabilities, provisions and other liabilities


1,169



1,756



4,670



6,347



(2,823)



10,687



2,268



20,820

Cash flows from investing activities












Additions to short-term investments


(2,571)



(2,887)



(3,109)



(3,130)

Proceeds from disposal and maturity of short-term investments


3,298



3,596



-



501

Purchases of capital assets


(2,555)



(5,448)



(1,138)



(3,374)

Business combinations, net of cash acquired


(7,479)



(12,479)







(9,307)



(17,218)



(4,247)



(6,003)

Cash flows from financing activities












Bank loan


-



-



-



468

Repayment of long-term debt


(1,480)



(1,480)



-



-

Redemption of share capital


-



-



(215)



(402)



(1,480)



(1,480)



(215)



66

Effect of foreign exchange rate changes on cash


(360)



(824)



1,049



1,526













Change in cash


(13,970)



(8,835)



(1,145)



16,409

Cash - Beginning of the period


48,343



43,208



43,418



25,864

Cash - End of the period

$

34,373


$

34,373


$

42,273


$

42,273

 

SOURCE EXFO inc.

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