EXFO reports third quarter results for fiscal 2018

• Sales increase 23.4% to US$72.2 million, including US$8.6 million from Astellia
• Bookings improve 14.8% to US$73.1 million, including US$7.6 million from Astellia
• Cash flows from operations total US$4.7 million

QUEBEC CITY, July 10, 2018 /CNW Telbec/ - EXFO Inc. (NASDAQ: EXFO) (TSX: EXF), the communications industry's test, monitoring and analytics experts, reported today financial results for the third quarter ended May 31, 2018.

IFRS sales, which included a US$8.6 million contribution from recently acquired Astellia, increased 23.4% to US$72.2 million in the third quarter of fiscal 2018 from US$58.5 million in the third quarter of 2017. Astellia's sales were reduced by US$0.9 million to account for acquisition-related fair value adjustment of deferred revenue.

Bookings, which included a US$7.6 million contribution from Astellia, improved 14.8% year-over-year to US$73.1 million in the third quarter of fiscal 2018 from US$63.7 million in the same period of 2017. The company's book-to-bill ratio was 1.01 in the third quarter of 2018.

Gross margin before depreciation and amortization^* amounted to 59.9% of sales in the third quarter of fiscal 2018 compared to 58.0% in the third quarter of 2017.

IFRS net loss in the third quarter of fiscal 2018 totaled US$6.0 million, or US$0.11 per share, compared to US$4.3 million, or US$0.08 per share, in the third quarter of 2017. IFRS net loss in the third quarter of 2018 included US$4.1 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs, US$0.9 million for acquisition-related fair value adjustment of deferred revenue and a foreign exchange gain of US$0.2 million.

Adjusted EBITDA^* totaled US$2.5 million, or 3.5% of sales, in the third quarter of fiscal 2018 compared to US$2.3 million, or 3.9% of sales, in the third quarter of 2017.

"I am pleased our organic business and newly acquired Astellia delivered healthy growth in the third quarter and after nine months into fiscal 2018," said Philippe Morin, EXFO's Chief Executive Officer. "This solid execution across the combined organization demonstrates that EXFO is on the right path to profitable growth. Looking ahead, we are strategically transforming our monitoring and analytics business to offer a highly differentiated solution as the communications industry migrates to NFV and 5G architectures."

Selected Financial Information
(In thousands of US dollars)
		Three months ended May 31, 2018			Three months ended May 31, 2017			Nine months ended May 31, 2018			Nine months ended May 31, 2017
Physical-layer sales		$	43,760		$	41,007		$	129,734		$	121,061
Protocol-layer sales			28,278			17,678			69,799			59,784
Foreign exchange gains (losses) on forward exchange contracts			179			(180)			797			(525)
Total sales		$	72,217		$	58,505		$	200,330		$	180,320
Physical-layer bookings		$	44,796		$	47,157		$	134,579		$	125,278
Protocol-layer bookings			28,115			16,691			69,179			60,692
Foreign exchange gains (losses) on forward exchange contracts			179			(180)			797			(525)
Total bookings		$	73,090		$	63,668		$	204,555		$	185,445
Book-to-bill ratio (bookings/sales)			1.01			1.09			1.02			1.03
Gross margin before depreciation and amortization^*		$	43,254		$	33,950		$	122,752		$	109,963
			59.9%			58.0%			61.3%			61.0%
Other selected information:
	IFRS net earnings (loss) attributable to the parent interest	$	(5,970)		$	(4,304)		$	(7,951)		$	7
	Amortization of intangible assets	$	4,210		$	1,046		$	8,385		$	2,241
	Stock-based compensation costs	$	440		$	372		$	1,280		$	983
	Restructuring charges	$	–		$	3,813		$	–		$	3,813
	Change in fair value of cash contingent consideration	$	–		$	–		$	(716)		$	–
	Acquisition-related deferred revenue fair value adjustment	$	913		$	–		$	1,222		$	–
	Income tax expense for US tax reform	$	–		$	–		$	1,528		$	–
	Net income tax effect of the above items	$	(138)		$	(357)		$	(704)		$	(583)
	Foreign exchange gain	$	(160)		$	(1,725)		$	(1,386)		$	(1,965)
	Adjusted EBITDA*	$	2,549		$	2,300		$	11,100		$	13,496

Operating Expenses
Selling and administrative expenses totaled US$26.0 million, or 35.9% of sales in the third quarter of fiscal 2018 compared to US$22.6 million, or 38.6% of sales, in the third quarter of 2017.

Net R&D expenses totaled US$16.1 million, or 22.3% of sales, in the third quarter of fiscal 2018 compared to US$13.3 million, or 22.7% of sales, in the same period last year.

Third Quarter Highlights

• Sales. IFRS sales increased 23.4% year-over-year to US$72.2 million due to a strong performance from the Protocol-layer product line, revenue contributions from the Astellia and Yenista Optics acquisitions, and the positive impact of the decrease in the average value of the US dollar versus other currencies. Physical-layer sales accounted for 61% of revenue in the third quarter of 2018, while Protocol-layer sales totaled 39%. Revenue breakdown among the three main selling regions amounted to 49% in the Americas, 35% in Europe, Middle East and Africa (EMEA) and 16% in Asia-Pacific.  EXFO's top customer accounted for 5.7% of sales, while the top three represented 15.2%.
• Profitability. IFRS net loss totaled US$6.0 million in the third quarter of 2018, while adjusted EBITDA amounted to US$2.5 million. The company also generated US$4.7 million in cash flows from operations in the third quarter.
• Innovation. EXFO held its inaugural Innovation Summit in early May with a focus on artificial intelligence and machine learning. More than 100 team members from four continents participated in the three-day event which featured a hackathon and presentations from distinguished speakers. EXFO launched two products during the third quarter, including an automated network troubleshooting solution that links performance measurements to network topology in order to deliver service degradation diagnosis in record time. The company also released the CTP10 Component Test Platform, with related modules, for measuring insertion loss and return loss on a wide range of passive optical components.

Business Outlook
EXFO forecasts IFRS sales between US$68.0 million and US$73.0 million for the fourth quarter of fiscal 2018; the company anticipates that IFRS sales will be reduced by US$0.9 million to account for the acquisition-related fair value adjustment of deferred revenue.

IFRS net loss is expected to range between US$0.05 and US$0.01 per share. IFRS net loss includes US$0.10 per share in after-tax amortization of intangible assets, stock-based compensation costs and acquisition-related fair value adjustment of deferred revenue.

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, Astellia's preliminary purchase price allocation (PPA) as well as exchange rates as of the date of this news 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 2018. To listen to the conference call and participate in the question period via telephone, dial 1-323-994-2093. Please take note the following participant passcode will be required: 7503033. Germain Lamonde, founder and Executive Chairman, Philippe Morin, Chief Executive Officer, and Pierre Plamondon, 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 17, 2018. The replay number is 1-719-457-0820 and the required participant passcode is 7503033. 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 (NASDAQ: EXFO) (TSX: 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 more than 2,000 EXFO employees in over 25 countries work side by side with our customers in the lab, field, data center and beyond. For more information, visit EXFO.com and follow us on the EXFO Blog.

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, as well as capital spending and network deployment levels in the telecommunications 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 telecommunications test, service assurance and analytics solutions markets 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 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. This discussion and analysis should be read in conjunction with the consolidated financial statements.

*Non-IFRS Measures
EXFO provides non-IFRS measures (non-IFRS sales, gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding its operational performance. Non-IFRS sales represent total sales plus acquisition-related deferred revenue fair value adjustment. Gross margin before depreciation and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represent net earnings (loss) attributable to the parent interest before interest, income taxes, depreciation and amortization, stock-based compensation costs, change in fair value of cash contingent consideration, acquisition-related deferred revenue fair value adjustment, share in net loss of an associate, gain on the deemed disposal of the investment in an associate, and foreign exchange gain or loss.

These non-IFRS measures eliminate the effect on IFRS results of non-cash and/or non-operating statement of earnings elements, as well as elements subject to significant volatility such as foreign exchange gain or loss. EXFO uses these measures for evaluating historical and prospective financial performance, as well as its performance relative to competitors. These non-IFRS measures are also the financial measures used by financial analysts to evaluate and compare EXFO's performance against competitors and industry players in the company's sector. Finally, these measures help EXFO plan and forecast future periods as well as make operational and strategic decisions. EXFO believes that providing this information, in addition to the IFRS measures, allows investors 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 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 non-IFRS sales to IFRS sales, in thousands of US dollars:

Non-IFRS Sales
	Three months ended May 31, 2018			Three months ended May 31, 2017			Nine months ended May 31, 2018			Nine months ended May 31, 2017
IFRS sales	$	72,217		$	58,505		$	200,330		$	180,320
Acquisition-related deferred revenue fair value adjustment		913			–			1,222			–
Non-IFRS sales	$	73,130		$	58,505		$	201,552		$	180,320

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

Adjusted EBITDA
	Three months ended May 31, 2018			Three months ended May 31, 2017			Nine months ended May 31, 2018			Nine months ended May 31, 2017
IFRS net earnings (loss) attributable to the parent interest for the period	$	(5,970)		$	(4,304)		$	(7,951)		$	7
Add (deduct):
Depreciation of property, plant and equipment		1,555			1,029			3,972			2,894
Amortization of intangible assets		4,210			1,046			8,385			2,241
Interest and other expense		198			57			870			28
Income taxes		1,363			2,012			5,424			5,495
Stock-based compensation costs		440			372			1,280			983
Restructuring charges		–			3,813			–			3,813
Change in fair value of cash contingent consideration		–			–			(716)			–
Acquisition-related deferred revenue fair value adjustment		913			–			1,222			–
Share in net loss of an associate		–			–			2,080			–
Gain on deemed disposal of the investment in an associate		–			–			(2,080)			–
Foreign exchange gain		(160)			(1,725)			(1,386)			(1,965)
Adjusted EBITDA for the period ^(1)(2)	$	2,549		$	2,300		$	11,100		$	13,496
Adjusted EBITDA as a percentage of sales		3.5%			3.9%			5.5%			7.5%

(1)	Astellia negatively impacted adjusted EBITDA by $2.2 million and $3.4 million respectively for the three and nine months ended May 31, 2018 (nil in 2017).
(2)	Includes acquisition-related costs of $2.1 million for the nine months ended May 31, 2018 and $0.1 million and $0.8 million respectively for the three and nine months ended May 31, 2017.

EXFO Inc.
Unaudited Condensed Interim Consolidated Balance Sheets
(in thousands of US dollars)
		As at May 31, 2018			As at August 31, 2017
Assets
Current assets
Cash		$	18,489		$	38,435
Short-term investments			990			775
Accounts receivable
	Trade		46,756			41,130
	Other		4,997			3,907
Income taxes and tax credits recoverable			8,401			4,955
Inventories			37,883			33,832
Prepaid expenses			5,185			4,202
Other assets			1,776			‒
			124,477			127,236
Tax credits recoverable			47,988			38,111
Property, plant and equipment			44,661			40,132
Intangible assets			27,775			11,183
Goodwill			41,021			35,077
Deferred income tax assets			4,615			6,555
Other assets			666			947
		$	291,203		$	259,241
Liabilities
Current liabilities
Bank loan		$	10,982		$	‒
Accounts payable and accrued liabilities			50,702			36,776
Provisions			471			3,889
Income taxes payable			968			663
Deferred revenue			17,142			11,554
Other liabilities			4,651			‒
Current portion of long-term debt			2,938			‒
			87,854			52,882
Provisions			1,510			‒
Deferred revenue			6,235			6,257
Long-term debt			6,579			‒
Deferred income tax liabilities			5,074			3,116
Other liabilities			568			196
			107,820			62,451
Shareholders' equity
Share capital			91,910			90,411
Contributed surplus			18,007			18,184
Retained earnings			118,857			127,160
Accumulated other comprehensive loss			(45,391)			(38,965)
			183,383			196,790
		$	291,203		$	259,241

EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Earnings
(in thousands of US dollars, except share and per share data)
	Three months ended May 31, 2018			Nine months ended May 31, 2018			Three months ended May 31, 2017			Nine months ended May 31, 2017
Sales	$	72,217		$	200,330		$	58,505		$	180,320
Cost of sales ^(1)		28,963			77,578			24,555			70,357
Selling and administrative		25,957			74,066			22,572			65,422
Net research and development		16,101			40,440			13,263			35,841
Depreciation of property, plant and equipment		1,555			3,972			1,029			2,894
Amortization of intangible assets		4,210			8,385			1,046			2,241
Change in fair value of cash contingent consideration		‒			(716)			‒			‒
Interest and other expense		198			870			57			28
Foreign exchange gain		(160)			(1,386)			(1,725)			(1,965)
Share in net loss of an associate		‒			2,080			‒			‒
Gain on deemed disposal of the investment in an associate		‒			(2,080)			‒			‒
Earnings (loss) before income taxes		(4,607)			(2,879)			(2,292)			5,502
Income taxes		1,363			5,424			2,012			5,495
Net earnings (loss) for the period		(5,970)			(8,303)			(4,304)			7
Net loss for the period attributable to non-controlling interest		‒			(352)			‒			‒
Net earnings (loss) for the period attributable to parent interest	$	(5,970)		$	(7,951)		$	(4,304)		$	7
Basic and diluted net earnings (loss) attributable to parent interest per share	$	(0.11)		$	(0.14)		$	(0.08)		$	0.00
Basic weighted average number of shares outstanding (000's)		55,099			54,959			54,593			54,328
Diluted weighted average number of shares outstanding (000's)		55,099			54,959			54,593			55,479

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

EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Comprehensive Loss
(in thousands of US dollars)
		Three months ended May 31, 2018			Nine months ended May 31, 2018			Three months ended May 31, 2017			Nine months ended May 31, 2017
Net earnings (loss) for the period		$	(5,970)		$	(8,303)		$	(4,304)		$	7
Other comprehensive income (loss), net of income taxes
Items that may be reclassified subsequently to net earnings
	Foreign currency translation adjustment		(3,189)			(5,033)			(2,568)			(4,766)
	Unrealized gains/losses on forward exchange contracts		(486)			(971)			(127)			(362)
	Reclassification of realized gains/losses on forward exchange contracts in net earnings		(232)			(840)			39			359
	Deferred income taxes on gains/losses on forward exchange contracts		155			418			39			31
Other comprehensive loss			(3,752)			(6,426)			(2,617)			(4,738)
Comprehensive loss for the period			(9,722)			(14,729)			(6,921)			(4,731)
Comprehensive loss for the period attributable to non-controlling interest			‒			(352)			‒			‒
Comprehensive loss for the period attributable to parent interest		$	(9,722)		$	(14,377)		$	(6,921)		$	(4,731)

EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders' Equity
(in thousands of US dollars)
		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

		Nine months ended May 31, 2018
		Share capital			Contributed surplus			Retained earnings			Accumulated other comprehensive loss			Non-controlling interest			Total shareholders' equity
Balance as at September 1, 2017		$	90,411		$	18,184		$	127,160		$	(38,965)		$	‒		$	196,790
Reclassification of stock-based compensation costs			1,499			(1,499)			‒			‒			‒			‒
Stock-based compensation costs			‒			1,322			‒			‒			‒			1,322
Business combination			‒			‒			‒			‒			(3,662)			(3,662)
Acquisition of non-controlling interest			‒			‒			(352)			‒			4,014			3,662
Net loss for the period			‒			‒			(7,951)			‒			(352)			(8,303)
Other comprehensive loss
	Foreign currency translation adjustment		‒			‒			‒			(5,033)			‒			(5,033)
	Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $418		‒			‒			‒			(1,393)			‒			(1,393)
Comprehensive loss for the period																		(14,729)
Balance as at May 31, 2018		$	91,910		$	18,007		$	118,857		$	(45,391)		$	‒		$	183,383

EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows
(in thousands of US dollars)
		Three months ended May 31, 2018			Nine months ended May 31, 2018			Three months ended May 31, 2017			Nine months ended May 31, 2017
Cash flows from operating activities
Net earnings (loss) for the period		$	(5,970)		$	(8,303)		$	(4,304)		$	7
Add (deduct) items not affecting cash
	Stock-based compensation costs		440			1,280			372			983
	Depreciation and amortization		5,765			12,357			2,075			5,135
	Write-off of capital assets		77			325			‒			‒
	Change in fair value of cash contingent consideration		‒			(716)			‒			‒
	Deferred revenue		(552)			1,682			79			3,026
	Deferred income taxes		389			2,533			704			1,163
	Share in net loss of an associate		‒			2,080			‒			‒
	Gain on deemed disposal of the investment in an associate		‒			(2,080)			‒			‒
	Changes in foreign exchange gain/loss		(603)			(239)			(524)			(955)
			(454)			8,919			(1,598)			9,359
Changes in non-cash operating items
	Accounts receivable		2,353			7,693			(901)			1,701
	Income taxes and tax credits		172			(2,787)			(842)			(1,232)
	Inventories		1,162			(12)			315			(9)
	Prepaid expenses		16			205			(863)			(761)
	Other assets		(245)			(769)			(103)			(127)
	Accounts payable, accrued liabilities and provisions		1,821			5			1,169			1,756
	Other liabilities		(109)			101			‒			‒
			4,716			13,355			(2,823)			10,687
Cash flows from investing activities
Additions to short-term investments			‒			(482)			(2,571)			(2,887)
Proceeds from disposal and maturity of short-term investments			‒			234			3,298			3,596
Purchases of capital assets			(3,431)			(7,680)			(2,555)			(5,448)
Investment in an associate			‒			(12,530)			–			–
Business combinations, net of cash acquired			‒			(19,120)			(7,479)			(12,479)
			(3,431)			(39,578)			(9,307)			(17,218)
Cash flows from financing activities
Bank loan			9,184			11,250			–			–
Repayment of long-term debt			(757)			(1,027)			(1,480)			(1,480)
Acquisition of non-controlling interest			(3,657)			(3,657)			–			–
			4,770			6,566			(1,480)			(1,480)
Effect of foreign exchange rate changes on cash			(119)			(289)			(360)			(824)
Change in cash during the period			5,936			(19,946)			(13,970)			(8,835)
Cash – Beginning of the period			12,553			38,435			48,343			43,208
Cash – End of the period		$	18,489		$	18,489		$	34,373		$	34,373
Supplementary information
Income taxes paid		$	426		$	1,695		$	627		$	2,188
Additions to capital assets		$	3,371		$	8,959		$	1,779		$	5,441

EXFO-F

SOURCE EXFO Inc.

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

Related Links

http://www.exfo.com/