EXFO reports first quarter results for fiscal 2020

Sales increased 6.3% to US$73.6 million, above midpoint of guidance range
IFRS net loss amounted to US$0.1 million, US$0.00 per share
Adjusted EBITDA totaled US$7.5 million, 10.3% of sales

QUEBEC CITY, Jan. 7, 2020 /PRNewswire/ - EXFO Inc. EXFO EXF, the communications industry's test, monitoring and analytics experts, reported today financial results for the first quarter ended November 30, 2019.

"EXFO delivered a strong first-quarter performance to begin fiscal 2020, highlighted by sales above the midpoint of guidance for a fifth consecutive reporting period and adjusted EBITDA margin in double-digits," said EXFO's CEO Philippe Morin. "These results demonstrate the heightened leverage in our business model through a combination of increased revenue and lower cost structure. Although we are operating within a highly dynamic and transforming industry, we are confident about achieving our profitable growth strategy for the full fiscal year."

First-Quarter Highlights

Sales. Sales increased 6.3% in the first quarter of fiscal 2020 mainly due to a more linear influx of Test and Measurement (T&M) orders compared to the same period in 2019, and stronger demand for the company's solutions in the Asia-Pacific region. T&M sales accounted for 76% of revenue in the first quarter of 2020, while Service Assurance, Systems and Services (SASS) sales totaled 24%. Revenue distribution among the three main selling regions amounted to 54% in the Americas, 29% in Europe, Middle East and Africa (EMEA) and 17% in Asia-Pacific. EXFO's top customer accounted for 11.9% of sales, while the top three represented 19.7%.
Profitability. IFRS net loss amounted to US$0.1 million, or US$0.00 per share, in the first quarter of fiscal 2020, while adjusted EBITDA totaled US$7.5 million, or 10.3% of sales. EXFO adopted IFRS 16, "Leases," on Sept. 1, 2019, using the modified retrospective method which had a positive impact on adjusted EBITDA of US$0.9 million, or 1.2% of sales, in the first quarter of 2020. Prior period amounts were not adjusted.
Innovation. EXFO introduced the Optical Wave Expert, the first test solution to integrate DWDM (dense wavelength division multiplexing) channel power validation and OTDR (optical time domain reflectometry) fault-locating capabilities on a single port. Designed to reduce mean-time-to-repair, this instrument enables field technicians to automatically troubleshoot optical fiber links.

Business Outlook
EXFO forecasts sales between US$66.0 million and US$71.0 million for the second quarter of fiscal 2020, while IFRS net loss is expected to range between -US$0.09 and -US$0.05 per share. IFRS net loss includes US$0.05 per share in after-tax amortization of intangible assets, stock-based compensation costs and anticipated foreign exchange loss.

This guidance, which is a forward-looking statement, was established by management based on existing backlog as of the date of this news release, seasonality, expected bookings for the remaining of the quarter as well as exchange rates as of the date of this news release.

Selected Financial Information
(In thousands of US dollars)

	Three months ended November 30,
	2019		2018

Test and measurement sales	$	55,947	$	49,764
Service assurance, systems and services sales	17,749		19,416
Foreign exchange gains (losses) on forward exchange contracts	(145)		21
Total sales	$	73,551	$	69,201

Test and measurement bookings	$	55,009	$	63,996
Service assurance, systems and services bookings	15,049		17,221
Foreign exchange gains (losses) on forward exchange contracts	(145)		21
Total bookings	$	69,913	$	81,238
Book-to-bill ratio (bookings/sales)	0.95		1.17
Gross margin before depreciation and amortization^*	$	43,310	$	40,304
	58.9 %		58.2 %

Other selected information:
IFRS net loss	$	(63)	$	(7,467)
Amortization of intangible assets	$	1,632	$	2,940
Stock-based compensation costs	$	487	$	418
Restructuring charges	$	-	$	2,741
Acquisition-related deferred revenue fair value adjustment	$	-	$	864
Net income tax effect of the above items	$	(249)	$	(423)
Foreign exchange (gain) loss	$	126	$	(215)
Adjusted EBITDA^*	$	7,544	$	2,728

Quarterly Overview
Sales reached US$73.6 million in the first quarter of fiscal 2020 compared to US$69.2 million in the first quarter of 2019.

Bookings attained US$69.9 million in the first quarter of fiscal 2020 compared to US$81.2 million for the same period in 2019. The company's book-to-bill ratio was 0.95 in the first quarter of 2020.

Gross margin before depreciation and amortization* improved to 58.9% of sales in the first quarter of fiscal 2020 from 58.2% in the first quarter of 2019.

Selling and administrative expenses totaled US$24.5 million, or 33.3% of sales in the first quarter of fiscal 2020 compared to US$26.4 million, or 38.1% of sales, in the first quarter of 2019.

Net R&D expenses amounted to US$11.7 million, or 16.0% of sales, in the first quarter of fiscal 2020 compared to US$15.2 million, or 22.0% of sales, in the same period last year. Net R&D expenses included US$2.1 million in restructuring charges in the first quarter of 2019.

IFRS net loss totaled US$0.1 million, or US$0.00 per share, in the first quarter of fiscal 2020 compared to US$7.5 million, or US$0.14 per share, in the first quarter of 2019. IFRS net loss in the first quarter of 2020 included US$1.4 million in after-tax amortization of intangible assets, US$0.5 million in stock-based compensation costs and US$0.1 million in foreign exchange loss. In the first quarter of 2019, IFRS net loss was impacted by restructuring charges of US$2.7 million.

Adjusted EBITDA* amounted to US$7.5 million, or 10.3% of sales, in the first quarter of fiscal 2020 compared to US$2.7 million, or 3.9% of sales, in the first quarter of 2019.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review first-quarter results for fiscal 2020. 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: 7351891. Executive Chairman Germain Lamonde, CEO Philippe Morin and Pierre Plamondon, CPA, Chief Financial Officer and Vice-President of Finance, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8 p.m. on January 14, 2020. The replay number is 1-719-457-0820 and the participant passcode is 7351891. 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 EXFO EXF develops smarter test, monitoring and analytics solutions for fixed and mobile network operators, webscale companies and equipment manufacturers in the global communications industry. Our customers count on us to deliver superior network performance, service reliability and subscriber insights. They count on our unique blend of equipment, software and services to accelerate digital transformations related to fiber, 4G/LTE and 5G deployments. They count on our expertise with automation, real-time troubleshooting and big data analytics, which are critical to their business performance. We've spent over 30 years earning this trust, and today 1,900 EXFO employees in over 25 countries work side by side with our customers in the lab, field, data center and beyond.

Forward-Looking Statements
This news 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 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, including trade wars and recessions; our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the communications industry (including our ability to quickly adapt cost structures to 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 communications test, monitoring and analytics solutions markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regard 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 and to conduct business internationally; 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 you 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. Gross margin before depreciation and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represents net loss before interest and other expense, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, and foreign exchange gain or loss.

These non-IFRS measures eliminate the effect on IFRS results of non-cash statement of earnings elements, restructuring charges as well as elements subject to significant volatility such as foreign exchange gain or loss. EXFO uses these measures for evaluating its historical and prospective financial performance, as well as its performance relative to competitors. These non-IFRS measures are also used by financial analysts who evaluate and compare EXFO's performance against that of competitors and industry players in the sector.

Finally, these measures help EXFO to plan and forecast future periods as well as make operational and strategic decisions. EXFO believes that providing this information to investors, in addition to IFRS measures, allows them to see the company's results through the eyes of management, and to better understand historical and future financial performance. More importantly, it enables the comparison of EXFO's performance on a relatively similar basis against that of other public and private companies in the industry worldwide.

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.

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

Adjusted EBITDA
	Three months ended November 30,
	2019		2018

IFRS net loss for the period	$	(63)	$	(7,467)

Add (deduct):

Depreciation and amortization	3,926		4,369
Interest and other expense	399		377
Income taxes	2,669		1,641
Stock-based compensation costs	487		418
Restructuring charges	-		2,741
Acquisition-related deferred revenue fair value adjustment	-		864
Foreign exchange (gain) loss	126			(215)
Adjusted EBITDA for the period ⁽¹⁾	$	7,544	$	2,728

Adjusted EBITDA in percentage of sales ⁽¹⁾	10.3 %		3.9 %


(1)	IFRS net loss for the three months ended November 30, 2019 takes into account the impact of the adoption of IFRS 16 on September 1, 2019. The adoption of IFRS 16 had a positive impact on adjusted EBITDA of $851,000, or 1.2% of sales, for the three months ended November 30, 2019. Comparative figures were not adjusted.

EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)

	As at November 30, 2019		As at August 31, 2019

Assets

Current assets
Cash	$	15,045	$	16,518
Short-term investments		2,491		2,918
Accounts receivable
Trade		51,429		51,517
Other		3,404		3,396
Income taxes and tax credits recoverable		3,692		3,159
Inventories		41,513		38,017
Prepaid expenses		5,663		6,510
Other assets		3,364		3,083
		126,601		125,118

Tax credits recoverable		45,285		46,704
Property, plant and equipment		39,719		39,364
Lease right-of-use assets		10,498		–
Intangible assets		20,495		21,654
Goodwill		39,076		38,648
Deferred income tax assets		4,819		4,821
Other assets		979		1,293
	$	287,472	$	277,602
Liabilities

Current liabilities
Bank loan	$	13,322	$	5,000
Accounts payable and accrued liabilities		47,482		50,790
Provisions		942		1,065
Income taxes payable		311		704
Deferred revenue		20,120		24,422
Other liabilities		1,602		1,606
Current portion of lease liabilities		2,962		–
Current portion of long-term debt		2,335		2,449
		89,076		86,036

Provisions		2,615		2,737
Deferred revenue		9,021		9,056
Lease liabilities		7,158		–
Long-term debt		2,718		3,293
Deferred income tax liabilities		3,166		3,598
Other liabilities		269		318
		114,023		105,038

Shareholders' equity
Share capital		93,355		92,706
Contributed surplus		18,816		19,196
Retained earnings		112,110		112,173
Accumulated other comprehensive loss		(50,832)		(51,511)
		173,449		172,564

	$	287,472	$	277,602

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings

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

	Three months ended November 30,
		2019		2018

Sales	$	73,551	$	69,201

Cost of sales ⁽¹⁾		30,241		28,897
Selling and administrative		24,504		26,375
Net research and development		11,749		15,224
Depreciation of property, plant and equipment		1,443		1,429
Depreciation of lease right-of-use assets		851		–
Amortization of intangible assets		1,632		2,940
Interest and other expense		399		377
Foreign exchange (gain) loss		126		(215)

Earnings (loss) before income taxes		2,606		(5,826)

Income taxes		2,669		1,641

Net loss for the period	$	(63)	$	(7,467)

Basic and diluted net loss per share	$	(0.00)	$	(0.14)

Basic weighted average number of shares outstanding (000's)		55,439		55,184

Diluted weighted average number of shares outstanding (000's)		55,439		55,184


(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 ended November 30,
		2019		2018

Net loss for the period	$	(63)	$	(7,467)
Other comprehensive income (loss), net of income taxes
Items that may be reclassified subsequently to net loss
Foreign currency translation adjustment		561		(3,356)
Unrealized gains/losses on forward exchange contracts		(35)		(687)
Reclassification of realized gains/losses on forward exchange contracts in net loss		183		91
Deferred income tax effect of gains/losses on forward exchange contracts		(30)		209

Other comprehensive income (loss)		679		(3,743)

Comprehensive income (loss) for the period	$	616	$	(11,210)

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity

(in thousands of US dollars)

		Three months ended November 30, 2018
		Share capital		Contributed surplus		Retained earnings		Accumulated other comprehensive loss		Total shareholders' equity

Balance as at September 1, 2018	$	91,937	$	18,428	$	114,906	$	(47,350)	$	177,921
Adoption of IFRS 9		–		–		(253)		–		(253)
Adjusted balance as at September 1, 2018		91,937		18,428		114,653		(47,350)		177,668
Reclassification of stock-based compensation costs		643		(643)		–		–		–
Stock-based compensation costs		–		460		–		–		460
Net loss for the period		–		–		(7,467)		–		(7,467)
Other comprehensive loss
Foreign currency translation adjustment		–		–		–		(3,356)		(3,356)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $209		–		–		–		(387)		(387)

Total comprehensive loss for the period										(11,210)

Balance as at November 30, 2018	$	92,580	$	18,245	$	107,186	$	(51,093)	$	166,918


		Three months ended November 30, 2019
		Share capital		Contributed surplus		Retained earnings		Accumulated other comprehensive loss		Total shareholders' equity

Balance as at September 1, 2019	$	92,706	$	19,196	$	112,173	$	(51,511)	$	172,564
Reclassification of stock-based compensation costs		861		(861)		–		–		–
Redemption of share capital		(212)		(13)		–		–		(225)
Stock-based compensation costs		–		494		–		–		494
Net loss for the period		–		–		(63)		–		(63)
Other comprehensive income
Foreign currency translation adjustment		–		–		–		561		561
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $30		–		–		–		118		118

Total comprehensive income for the period										616

Balance as at November 30, 2019	$	93,355	$	18,816	$	112,110	$	(50,832)	$	173,449

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)

	Three months ended November 30,
		2019		2018

Cash flows from operating activities
Net loss for the period	$	(63)	$	(7,467)
Add (deduct) items not affecting cash
Stock-based compensation costs		487		418
Depreciation and amortization		3,926		4,369
Write-off of capital assets		216		–
Deferred revenue		(4,372)		3,922
Deferred income taxes		(442)		(29)
Changes in foreign exchange gain/loss		(21)		(529)
		(269)		684

Changes in non-cash operating items
Accounts receivable		72		(4,052)
Income taxes and tax credits		516		(998)
Inventories		(3,493)		(1,361)
Prepaid expenses		378		183
Other assets		35		(12)
Accounts payable, accrued liabilities and provisions		(3,693)		3,132
Other liabilities		(16)		(51)
		(6,470)		(2,475)
Cash flows from investing activities
Additions to short-term investments		(147)		–
Disposal of short-term investments		563		342
Purchases of capital assets		(2,040)		(2,882)
		(1,624)		(2,540)
Cash flows from financing activities
Bank loan		8,354		11,257
Repayment of lease liabilities		(844)		–
Repayment of long-term debt		(676)		(717)
Redemption of share capital		(225)		–
		6,609		10,540

Effect of foreign exchange rate changes on cash		12		(196)

Change in cash		(1,473)		5,329
Cash – Beginning of the period		16,518		12,758
Cash – End of the period	$	15,045	$	18,087

EXFO-F

SOURCE EXFO Inc.

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