EXFO Reports Fourth Quarter and Fiscal 2017 Results

Q4 2017

• Sales reach US$63.0 million, top of guidance range
• Bookings attain US$66.3 million, book-to-bill ratio of 1.05
• Adjusted EBITDA totals US$8.5 million, 13.6% of sales

Fiscal 2017

• Sales increase 4.6% to US$243.3 million
• Bookings improve 4.8% to US$251.8 million
• Adjusted EBITDA totals US$22.0 million, 9.1% of sales

QUEBEC CITY, Oct. 12, 2017 /CNW Telbec/ - EXFO Inc. (NASDAQ: EXFO) (TSX: EXF), the network test, monitoring and analytics experts, announced today financial results for the fourth quarter and fiscal year ended August 31, 2017.

Sales in the fourth quarter of fiscal 2017 reached US$63.0 million compared to US$58.5 million in the third quarter of 2017 and US$62.9 million in the fourth quarter of 2016. Annual sales increased 4.6% to US$243.3 million in fiscal 2017 from US$232.6 million in 2016.

Bookings totaled US$66.3 million for a book-to-bill ratio of 1.05 in the fourth quarter of fiscal 2017 compared to US$63.7 million in the third quarter of 2017 and US$62.4 million in the fourth quarter of 2016. Overall for fiscal 2017, bookings increased 4.8% to US$251.8 million for a book-to-bill ratio of 1.03 from US$240.3 million in 2016.

Gross margin before depreciation and amortization* attained 61.9% of sales in the fourth quarter of fiscal 2017 compared to 58.0% in the third quarter of 2017 and 61.6% in the fourth quarter of 2016. Gross margin included restructuring charges of 0.2% of sales in the fourth quarter of 2017, 2.7% of sales in the third quarter of 2017 and nil in the fourth quarter of 2016. In fiscal 2017, gross margin reached 61.2% of sales compared to 62.6% in 2016. Gross margin included restructuring charges of 0.7% of sales in 2017 and nil in 2016.  

In the fourth quarter of fiscal 2017, IFRS net earnings amounted to US$0.8 million, or US$0.02 per diluted share, compared to a net loss of US$4.3 million, or US$0.08 per share, in the third quarter of 2017 and net earnings of US$2.3 million, or US$0.04 per diluted share, in the fourth quarter of 2016. Net earnings in the fourth quarter of 2017 included net expenses totaling US$5.3 million: US$0.9 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs, US$1.2 million in after-tax restructuring changes, US$0.4 million for the positive change in the fair value of the cash contingent consideration related to the Ontology Systems acquisition, US$0.3 million in after-tax acquisition-related costs, and a foreign exchange loss of US$2.9 million.

In fiscal 2017, IFRS net earnings totaled US$0.9 million, or US$0.02 per diluted share, compared to US$8.9 million, or US$0.16 per diluted share, in 2016. Net earnings in 2017 included net expenses totaling US$10.6 million: US$2.7 million in after-tax amortization of intangible assets, US$1.4 million in stock-based compensation costs, US$4.8 million in after-tax restructuring charges, US$0.4 million for the positive change in the fair value of the cash contingent consideration related to the Ontology Systems acquisition, US$1.1 million in after-tax acquisition-related costs, and a foreign exchange loss of US$1.0 million.

Adjusted EBITDA* totaled US$8.5 million, or 13.6% of sales, in the fourth quarter of fiscal 2017 compared to US$2.3 million, or 3.9% of sales, in the third quarter of 2017 and US$6.2 million, or 9.8% of sales, in the fourth quarter of 2016. In fiscal 2017, adjusted EBITDA totaled US$22.0 million compared to US$22.0 million in 2016.

On September 8, 2017, EXFO acquired a 33.1% stake in Astellia, a global leader in the performance analysis of mobile networks and subscriber experience. EXFO intends to purchase publicly traded Astellia's remaining equity through a public tender offer. On October 2, 2017, EXFO closed the acquisition of Yenista Optics, a supplier of high-end optical test equipment for the laboratory and manufacturing markets.

"I am very pleased with EXFO's financial results in the fourth quarter of 2017, highlighted by revenue at the top of our guidance range, even stronger bookings and our best adjusted EBITDA margin in recent memory," said EXFO's CEO Philippe Morin. "Overall in fiscal 2017, we delivered 5% revenue growth and healthy profitability amid a competitive environment. Equally important, we established a solid foundation for future growth with investments—both internally and through acquisitions—in key technology areas like fiber, the Cloud, network virtualization and 5G.  These growth initiatives, combined with heightened sales efficiency and recent restructuring measures, should enhance profitability in 2018."  

Selected Financial Information (unaudited)
(In thousands of US dollars)
		Q4 2017			Q3 2017			Q4 2016			FY 2017			FY 2016
Physical-layer sales		$	40,802		$	41,007		$	39,777		$	161,864		$	151,910
Protocol-layer sales			22,122			17,678			23,445			81,905			83,324
Foreign exchange gains (losses) on forward exchange contracts			57			(180)			(364)			(468)			(2,651)
Total Sales		$	62,981		$	58,505		$	62,858		$	243,301		$	232,583
Physical-layer bookings		$	39,322		$	47,157		$	39,826		$	165,886		$	155,320
Protocol-layer bookings			26,943			16,691			22,969			86,348			87,631
Foreign exchange gains (losses) on forward exchange contracts			57			(180)			(364)			(468)			(2,651)
Total Bookings		$	66,322		$	63,668		$	62,431		$	251,766		$	240,300
Book-to-bill ratio (Bookings/Sales)			1.05			1.09			0.99			1.03			1.03
Gross margin before depreciation and amortization*		$	39,009		$	33,950		$	38,713		$	148,972		$	145,517
			61.9%			58.0%			61.6%			61.2%			62.6%
Other selected information:
	IFRS net earnings (loss)	$	844		$	(4,304)		$	2,252		$	851		$	8,900
	Amortization of intangible assets	$	1,048		$	1,046		$	292		$	3,289		$	1,172
	Stock-based compensation costs	$	431		$	372		$	302		$	1,414		$	1,378
	Restructuring charges	$	1,266		$	3,813		$	−		$	5,079		$	−
	Change in fair value of cash contingent consideration	$	(383)		$	−		$	−		$	(383)		$	−
	Net income tax effect of the above items	$	(275)		$	(357)		$	(31)		$	(858)		$	(120)
	Foreign exchange (gain) loss	$	2,943		$	(1,725)		$	293		$	978		$	(161)
	Adjusted EBITDA^*	$	8,545		$	2,300		$	6,172		$	22,041		$	22,039

Operating Expenses
Selling and administrative expenses totaled US$20.8 million, or 33.1% of sales, in the fourth quarter of fiscal 2017 compared to US$22.6 million, or 38.6% of sales, in the third quarter of 2017 and US$21.6 million, or 34.3% of sales, in the fourth quarter of 2016. In fiscal 2017, selling and administrative expenses amounted to US$86.3 million, or 35.5% of sales, compared to US$82.2 million, or 35.3% of sales, in 2016.

Net R&D expenses amounted to US$11.3 million, or 17.9% of sales, in the fourth quarter of fiscal 2017 compared to US$13.3 million, or 22.7% of sales, in the third quarter of 2017 and US$11.3 million, or 18.0% of sales, in the fourth quarter of 2016. In fiscal 2017, net R&D expenses totaled US$47.2 million, or 19.4% of sales, compared to US$42.7 million, or 18.4% of sales, in 2016.

Fiscal 2017 Highlights

• Sales. Total sales increased 4.6% to US$243.3 million in fiscal 2017 mainly due to EXFO's leadership in optical testing, ongoing 100G investment cycle among communications service providers and the company's growing business with web-scale operators. Sales of Physical-layer solutions (optical and copper access) increased 6.6% year-over-year, while sales of Protocol-layer solutions (transport, datacom, service assurance, analytics and wireless products) dipped 1.7%.
  Annual sales in the Americas as well as Europe, Middle East and Africa (EMEA) increased by 5.6% and 8.6%, respectively, while sales in the Asia-Pacific region dropped 2.9%.
  EXFO's largest customer accounted for 10.1% of sales in fiscal 2017, while the company's top-three customers represented 18.4%. In comparison, EXFO's largest customer accounted for 7.1% of sales in 2016, while the company's top-three customers represented 15.6%.
• Profitability. EXFO generated adjusted EBITDA of US$22.0 million, or 9.1% of sales, in fiscal 2017 compared to US$22.0 million, or 9.5% of sales, in 2016. The company also delivered US$12.9 million in cash flows from operating activities in 2017 compared to US$24.4 million in 2016.
• Innovation. EXFO launched 16 new products and/or major enhancements in fiscal 2017, addressing four key technology areas: fiber, Cloud, network virtualization and 5G. New product introductions included a 400 Gbit/s optical transport test solution for the lab and manufacturing markets; an automated inspection probe for testing multi-fiber connectors in data centers and radio access networks; a software-based solution, Universal Virtual Synch, enabling communications service providers to accurately and cost-effectively measure network latency; and optical RF over OBSAI (open base station architecture initiative) link test capabilities to complement optical RF over CPRI (common public radio interface) test technology for centralized radio access networks.

Business Outlook
EXFO forecasts sales between US$60 million and US$65 million for the first quarter of fiscal 2018, while IFRS net results are expected to range between a net loss of US$0.01 per share and net earnings of US$0.03 per share.

IFRS net results include US$0.02 per share in after-tax amortization of intangible assets and stock-based compensation costs.

This guidance 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 day of this release.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review fourth quarter and year-end financial 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 conference ID number will be required: 6482663. EXFO's Executive Chairman Germain Lamonde, CEO Philippe Morin, 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 October 19, 2017. The replay number is 1-719-457-0820 and the conference ID number is 6482663. 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; our ability to successfully integrate businesses that we acquire; 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; 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 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, change in fair value of cash contingent consideration, 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
	Q4 2017			Q3 2017			Q4 2016			FY 2017			FY 2016
IFRS net earnings (loss) for the period	$	844		$	(4,304)		$	2,252		$	851		$	8,900
Add (deduct):
Depreciation of property, plant and equipment		1,008			1,029			957			3,902			3,814
Amortization of intangible assets		1,048			1,046			292			3,289			1,172
Interest and other (income) expenses		275			57			(112)			303			(828)
Income taxes		1,113			2,012			2,188			6,608			7,764
Stock-based compensation costs		431			372			302			1,414			1,378
Restructuring charges		1,266			3,813			–			5,079			–
Change in fair value of cash contingent consideration		(383)			–			–			(383)			–
Foreign exchange (gain) loss		2,943			(1,725)			293			978			(161)
Adjusted EBITDA for the period	$	8,545		$	2,300		$	6,172		$	22,041		$	22,039
Adjusted EBITDA in percentage of sales		13.6%			3.9%			9.8%			9.1%			9.5%

EXFO-F

EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets
(in thousands of US dollars)
		As at August 31,
			2017			2016
Assets
Current assets
Cash		$	38,435		$	43,208
Short-term investments			775			4,087
Accounts receivable
	Trade		41,130			42,993
	Other		3,907			2,474
Income taxes and tax credits recoverable			4,955			4,208
Inventories			33,832			33,004
Prepaid expenses			4,202			3,099
			127,236			133,073
Tax credits recoverable			38,111			34,594
Property, plant and equipment			40,132			35,978
Intangible assets			11,183			3,391
Goodwill			35,077			21,928
Deferred income tax assets			6,555			8,240
Other assets			947			589
		$	259,241		$	237,793
Liabilities
Current liabilities
Accounts payable and accrued liabilities		$	36,776		$	37,174
Provisions			3,889			299
Income taxes payable			663			971
Deferred revenue			11,554			9,486
			52,882			47,930
Deferred revenue			6,257			5,530
Deferred income tax liabilities			3,116			2,857
Other liabilities			196			75
			62,451			56,392
Shareholders' equity
Share capital			90,411			85,516
Contributed surplus			18,184			18,150
Retained earnings			127,160			126,309
Accumulated other comprehensive loss			(38,965)			(48,574)
			196,790			181,401
		$	259,241		$	237,793

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings
(in thousands of US dollars, except share and per share data)
		Three months ended August 31, 2017			Twelve months ended August 31, 2017			Three months ended August 31, 2016			Twelve months ended August 31, 2016
Sales		$	62,981		$	243,301		$	62,858		$	232,583
Cost of sales ^(1,2)			23,972			94,329			24,145			87,066
Selling and administrative ^(2)			20,834			86,256			21,554			82,169
Net research and development ^(2)			11,327			47,168			11,289			42,687
Depreciation of property, plant and equipment			1,008			3,902			957			3,814
Amortization of intangible assets			1,048			3,289			292			1,172
Change in fair value of cash contingent consideration			(383)			(383)			‒			‒
Interest and other (income) expense			275			303			(112)			(828)
Foreign exchange (gain) loss			2,943			978			293			(161)
Earnings before income taxes			1,957			7,459			4,440			16,664
Income taxes			1,113			6,608			2,188			7,764
Net earnings for the period		$	844		$	851		$	2,252		$	8,900
Basic net earnings per share		$	0.02		$	0.02		$	0.04		$	0.17
Diluted net earnings per share		$	0.02		$	0.02		$	0.04		$	0.16
Basic weighted average number of shares outstanding (000's)			54,708			54,423			53,769			53,863
Diluted weighted average number of shares outstanding (000's)			55,784			55,555			54,709			54,669
(1)	The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)	Restructuring charges included in:
	Cost of sales	$	115		$	1,697		$	‒		$	‒
	Selling and administrative		231			1,150			‒			‒
	Net research and development		920			2,232			‒			‒
		$	1,266		$	5,079		$	‒		$	‒

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Income
(in thousands of US dollars)
		Three months ended August 31, 2017			Twelve months ended August 31, 2017			Three months ended August 31, 2016			Twelve months ended August 31, 2016
Net earnings for the period		$	844		$	851		$	2,252		$	8,900
Other comprehensive income (loss), net of income taxes
Items that will not be reclassified subsequently to net earnings
	Foreign currency translation adjustment		13,028			8,262			(68)			707
Items that may be reclassified subsequently to net earnings
	Unrealized gains/losses on forward exchange contracts		1,765			1,403			37			862
	Reclassification of realized gains/losses on forward exchange contracts in net earnings		64			423			414			2,797
	Deferred income tax effect of gains/losses on forward exchange contracts		(510)			(479)			(111)			(935)
Other comprehensive income			14,347			9,609			272			3,431
Comprehensive income for the period		$	15,191		$	10,460		$	2,524		$	12,331

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity
(in thousands of US dollars)
		Year ended August 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			(1,768)			217			–			–			(1,551)
Reclassification of stock-based compensation costs			1,239			(1,239)			–			–			–
Stock-based compensation costs			–			1,394			–			–			1,394
Net earnings for the year			–			–			8,900			–			8,900
Other comprehensive income
	Foreign currency translation adjustment		–			–			–			707			707
	Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $935		–			–			–			2,724			2,724
Total comprehensive income for the year															12,331
Balance as at August 31, 2016		$	85,516		$	18,150		$	126,309		$	(48,574)		$	181,401
		Year ended August 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			1,405			(1,405)			–			–			–
Stock-based compensation costs			–			1,439			–			–			1,439
Net earnings for the year			–			–			851			–			851
Other comprehensive income
	Foreign currency translation adjustment		–			–			–			8,262			8,262
	Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $479		–			–			–			1,347			1,347
Total comprehensive income for the year															10,460
Balance as at August 31, 2017		$	90,411		$	18,184		$	127,160		$	(38,965)		$	196,790

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows
(in thousands of US dollars)
		Three months ended August 31, 2017			Twelve months ended August 31, 2017			Three months ended August 31, 2016			Twelve months ended August 31, 2016
Cash flows from operating activities
Net earnings for the period		$	844		$	851		$	2,252		$	8,900
Add (deduct) items not affecting cash
	Stock-based compensation costs		494			1,477			302			1,378
	Depreciation and amortization		2,056			7,191			1,249			4,986
	Change in fair value of cash contingent consideration		(383)			(383)			‒			‒
	Deferred revenue		(1,303)			1,723			(638)			4,238
	Deferred income taxes		(109)			1,054			293			1,578
	Changes in foreign exchange gain/loss		2,051			1,096			1			(332)
			3,650			13,009			3,459			20,748
Changes in non-cash operating items
	Accounts receivable		2,254			3,955			(712)			2,682
	Income taxes and tax credits		(1,154)			(2,386)			307			939
	Inventories		920			911			1,914			(4,713)
	Prepaid expenses		(157)			(918)			138			(280)
	Other assets		6			(121)			(33)			170
	Accounts payable, accrued liabilities and provisions		(3,501)			(1,745)			(1,524)			4,882
	Other liabilities		165			165			(6)			(65)
			2,183			12,870			3,543			24,363
Cash flows from investing activities
Additions to short-term investments			(23)			(2,910)			(416)			(3,546)
Proceeds from disposal and maturity of short-term investments			2,778			6,374			372			873
Purchases of capital assets			(1,727)			(7,175)			(982)			(4,356)
Business combinations, net of cash acquired			(313)			(12,792)			‒			‒
			715			(16,503)			(1,026)			(7,029)
Cash flows from financing activities
Bank loan			‒			‒			(468)			‒
Repayment of long-term debt			‒			(1,480)			‒			‒
Redemption of share capital			‒			‒			(1,149)			(1,551)
			‒			(1,480)			(1,617)			(1,551)
Effect of foreign exchange rate changes on cash			1,164			340			35			1,561
Change in cash			4,062			(4,773)			935			17,344
Cash – Beginning of the period			34,373			43,208			42,273			25,864
Cash – End of the period		$	38,435		$	38,435		$	43,208		$	43,208

SOURCE EXFO inc.

Vance Oliver, Director, Investor Relations, [phone], Ext. 23733, [email protected]