EXFO Reports Third Quarter Results for Fiscal 2016

• Sales increase 5.4% year-over-year to US$60.9 million
• Adjusted EBITDA improves 18.8% year-over-year to US$5.3 million
• Cash flows from operations of US$2.3 million raises cash position to US$46.3 million

QUEBEC CITY, June 29, 2016 /CNW Telbec/ - EXFO Inc. (NASDAQ: EXFO) (TSX: EXF) reported today financial results for the third quarter ended May 31, 2016.

Sales reached US$60.9 million in the third quarter of fiscal 2016 compared to US$57.8 million in the third quarter of 2015 and US$53.6 million in the second quarter of 2016. After three quarters into 2016, sales increased 2.6% year-over-year to US$169.7 million.

Bookings attained US$59.7 million in the third quarter of fiscal 2016 for a book-to-bill ratio of 0.98 compared to US$59.2 million in the same period last year and US$59.7 million in the second quarter of 2016. Bookings improved 5.8% year-over-year to US$177.9 million after three quarters into 2016 for a book-to-bill ratio of 1.05 for this period.

Gross margin before depreciation and amortization^* amounted to 60.8% of sales in the third quarter of fiscal 2016 compared to 61.4% in the third quarter of 2015 and 64.7% in the second quarter of 2016. After three quarters into 2016, gross margin reached 62.9% compared to 61.9% for the same period in 2015.

IFRS net earnings in the third quarter of fiscal 2016 totaled US$0.9 million, or US$0.02 per diluted share, compared US$0.6 million, or US$0.01 per diluted share, in the same period last year and US$4.0 million, or US$0.07 per diluted share, in the second quarter of 2016. IFRS net earnings in the third quarter of 2016 included US$0.3 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs and a foreign exchange loss of US$1.0 million.

After three quarters into 2016, IFRS net earnings totaled US$6.6 million, or US$0.12 per diluted share, compared to US$3.0 million, or US$0.05 per diluted share, in the same period in 2015. IFRS net earnings on a year-to-date basis included US$0.8 million in after-tax amortization of intangible assets, US$1.1 million in stock-based compensation costs and a foreign exchange gain of US$0.5 million.

Adjusted EBITDA^* totaled US$5.3 million, or 8.7% of sales, in the third quarter of fiscal 2016 compared to US$4.5 million, or 7.7% of sales, in the third quarter of 2015 and US$5.3 million, or 9.9% of sales, in the second quarter of 2016. On a year-to-date basis, adjusted EBITDA totaled US$15.9 million, or 9.3% of sales, compared to US$8.8 million, or 5.3% of sales, for the same period in 2015.

EXFO's cash and short-term investments amounted to US$46.3 million at the end of the third quarter of fiscal 2016 compared to US$29.9 million at the end of the third quarter of 2015 and US$44.4 million at the end of the second quarter of 2016.

"I am quite pleased with the progress of our financial results after the first three quarters of 2016, including the solid performances of both our Physical and Protocol-layer product groups," said Germain Lamonde, EXFO's Chairman, President and CEO. "During the third quarter, our instruments business delivered strong bookings and revenues, while we experienced delays in closing some systems-based deals which, in turn, limited our overall top and bottom-line results."

"After nine months into fiscal 2016, we have increased adjusted EBITDA by 80% year-over-year and generated more EBITDA than the entire reporting period in 2015," Mr. Lamonde added.

Selected Financial Information
(In thousands of US dollars)
			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

Operating Expenses
Selling and administrative expenses totaled US$20.8 million, or 34.2% of sales in the third quarter of fiscal 2016 compared to US$20.5 million, or 35.5% of sales, in the same period last year and US$19.6 million, or 36.5% of sales, in the second quarter of 2016.

Net R&D expenses totaled US$11.3 million, or 18.6% of sales, in the third quarter of fiscal 2016 compared to US$10.9 million, or 18.9% of sales, in the third quarter of 2015 and US$10.2 million, or 19.0% of sales, in the second quarter of 2016.

Third-Quarter Highlights

• Sales. In the third quarter of 2016, sales were particularly robust within EXFO's optical and transport product lines which are benefiting from a 100G investment cycle. From a geographic standpoint, 59% of sales originated from the Americas, 22% from EMEA and 19% from Asia-Pacific. EXFO's top customer accounted for 5.0% of sales, while the top three represented 14.7%.
• Profitability. Adjusted EBITDA improved 18.8% year-over-year to US$5.3 million in the third quarter of 2016. After nine months into fiscal 2016, EXFO generated adjusted EBITDA of US$15.9 million, or 9.3% of sales. The company also reported US$2.3 million in cash flows from operating activities in the third quarter and US$20.8 million after nine months into fiscal 2016.
• Innovation. EXFO launched four key new solutions during the third quarter of 2016, including the LTB-8, a multi-module test platform dedicated to high-speed testing in lab and manufacturing environments; a 100G Power Blazer test module that can be swapped between the LTB-8 and FTB-2 Pro platforms to ease the transition between lab and field testing; and EXFO added two 100G portable testers to its NetBlazer product family in order to address growing turn-up and troubleshooting requirements for metro networks and data center interconnects (DCIs).

Business Outlook
EXFO forecasts sales between US$57.0 million and US$62.0 million for the fourth quarter of fiscal 2016, while IFRS net results are expected to range between a loss of US$0.01 per share and earnings of US$0.03 per share. IFRS net loss/earnings include US$0.01 per share in after-tax amortization of intangible assets and stock-based compensation costs as well as US$0.01 per 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, current market conditions, 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 third-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: 20909896. 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 July 5, 2016. The replay number is 1-855-859-2056 and the conference ID number is 20909896. 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 provides 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. The company has also forged strong relationships with network equipment manufacturers (NEMs) to develop deep expertise that migrates from the lab to the field and beyond. EXFO's 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. EXFO is no. 1 in portable optical testing and boasts the largest active service assurance deployment worldwide. For more information, visit www.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 (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)
		Q3 2016			Q2 2016			Q3 2015
IFRS net earnings for the period	$	919		$	3,963		$	563
Add (deduct):
Depreciation of property, plant and equipment		958			924			1,163
Amortization of intangible assets		294			286			444
Interest and other (income) expenses		(309)			(470)			36
Income taxes		2,096			1,364			1,707
Stock-based compensation costs		386			314			374
Foreign exchange (gain) loss		957			(1,101)			175
Adjusted EBITDA for the period	$	5,301		$	5,280		$	4,462
Adjusted EBITDA in percentage of sales		8.7%			9.9%			7.7%

EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets
(in thousands of US dollars)
			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				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

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings
(in thousands of US dollars, except share and per share data)
		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)			23,880			62,921			22,281			63,064
Selling and administrative			20,798			60,615			20,489			61,689
Net research and development			11,303			31,398			10,923			33,087
Depreciation of property, plant and equipment			958			2,857			1,163			3,664
Amortization of intangible assets			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			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)			54,813			54,655			54,549			58,453
(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 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)

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity
(in thousands of US dollars)
		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				(26,396)			1,222			–			–			(25,174)
Reclassification of stock-based compensation costs				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				(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		$	125,581		$	(48,846)		$	181,196

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows
(in thousands of US dollars)
			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				(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

EXFO-F

SOURCE EXFO inc.

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