EXFO reports third quarter results for fiscal 2020

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Jul 08, 2020, 16:02 ET

Sales reached US$66.1 million
IFRS net earnings totaled US$3.2 million
Adjusted EBITDA amounted to US$10.7 million, 16.1% of sales

QUEBEC CITY, July 8, 2020 /PRNewswire/ - 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, 2020.

"Despite constraints and restrictive measures in many countries, EXFO navigated through the coronavirus pandemic with a solid financial performance in the third quarter of 2020," said EXFO's CEO Philippe Morin. "We delivered encouraging sales in a difficult environment and proactively implemented cost-controls, while benefiting from a Canadian government wage subsidy program. The end-result was strong earnings amid end-markets that will necessarily improve as long-term drivers like fiber and 5G deployments remain intact."

Third Quarter Highlights

Sales. Sales decreased 10.1% year-over-year to US$66.1 million in the third quarter of fiscal 2020 mainly due to the ongoing impact of the coronavirus pandemic. Test and Measurement (T&M) sales accounted for 75% of revenue in the third quarter of 2020, while Service Assurance, Systems and Services (SASS) sales represented 25%. Revenue distribution among the three main selling regions amounted to 45% in the Americas, 33% in Europe, Middle East and Africa (EMEA) and 22% in Asia-Pacific. EXFO's top customer accounted for 9.6% of sales, while the top three totaled 18.2%.
Profitability. IFRS net earnings amounted to US$3.2 million, or US$0.06 per share, in the third quarter of fiscal 2020, while adjusted EBITDA totaled US$10.7 million, or 16.1% of sales. Net earnings included a wage subsidy of US$3.3M (US$2.4M after-tax) under the Canada emergency wage subsidy program to help qualifying businesses alleviate the effects of the coronavirus pandemic.

Selected Financial Information
(In thousands of US dollars)
	Three months ended May 31, 2020		Three months ended May 31, 2019		Nine months ended May 31, 2020		Nine months ended May 31, 2019

Test and Measurement sales	$	50,309	$	54,359	$	143,733	$	154,530
Service Assurance, Systems and Services sales		16,352		19,469		52,036		62,586
Foreign exchange losses on forward exchange
contracts		(514)		(241)		(758)		(401)
Total sales	$	66,147	$	73,587	$	195,011	$	216,715

Test and Measurement bookings	$	46,634	$	50,157	$	153,646	$	159,473
Service Assurance, Systems and Services
bookings		12,988		19,648		49,000		67,822
Foreign exchange losses on forward exchange
contracts		(514)		(241)		(758)		(401)
Total bookings	$	59,108	$	69,564	$	201,888	$	226,894
Book-to-bill ratio (bookings/sales)		0.89		0.95		1.04		1.05
Gross margin before depreciation and amortization^*	$	38,199	$	43,129	$	113,026	$	128,298
		57.7%		58.6%		58.0%		59.2%

Other selected information:
IFRS net earnings (loss)	$	3,177	$	21	$	(5,907)	$	(2,253)
Amortization of intangible assets	$	1,698	$	2,072	$	5,025	$	7,142
Stock-based compensation costs	$	523	$	475	$	1,446	$	1,354
Restructuring charges (reversals)	$	–	$	(13)	$	–	$	3,305
Acquisition-related deferred revenue fair value
adjustment	$	–	$	–	$	–	$	1,435
Net income tax effect of the above items	$	(257)	$	(344)	$	(760)	$	(1,115)
Foreign exchange (gain) loss	$	141	$	(146)	$	649	$	55
Adjusted EBITDA^*	$	10,656	$	7,860	$	13,284	$	19,372

Quarterly Overview
Sales reached US$66.1 million in the third quarter of fiscal 2020 compared to US$73.6 million in the third quarter of 2019.

Bookings attained US$59.1 million in the third quarter of fiscal 2020 compared to US$69.6 million for the same period in 2019. The company's book-to-bill ratio was 0.89 in the third quarter of 2020.

Gross margin before depreciation and amortization* amounted to 57.7% of sales in the third quarter of fiscal 2020 compared to 58.6% in the third quarter of 2019.

Selling and administrative expenses totaled US$18.9 million, or 28.6% of sales in the third quarter of fiscal 2020 compared to US$23.8 million, or 32.3% of sales, in the third quarter of 2019.

Net R&D expenses attained US$9.2 million, or 13.9% of sales, in the third quarter of fiscal 2020 compared to US$12.0 million, or 16.3% of sales, in the same period last year.

IFRS net earnings totaled US$3.2 million, or US$0.06 per share, in the third quarter of fiscal 2020 compared to net earnings of US$21,000, or US$0.00 per share, in the third quarter of 2019. IFRS net earnings in the third 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. Net earnings in the third quarter of 2020 also included US$2.4 million for an after-tax wage subsidy granted by the Canadian government to help qualifying businesses alleviate the effects of the coronavirus pandemic.

Adjusted EBITDA* amounted to US$10.7 million, or 16.1% of sales, in the third quarter of fiscal 2020 compared to US$7.9 million, or 10.7% of sales, in the third quarter of 2019.

During the third quarter of fiscal 2020, EXFO extended its revolving credit facilities, which had provided advances up to US$50.8 million (C$70.0 million), to US$65.3 million (C$90.0 million) until May 31, 2021, and will return to US$50.8 million (C$70.0 million) on June 1, 2021.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review third 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: 8963518. 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 July 15, 2020. The replay number is 1-719-457-0820 and the participant passcode is 8963518. 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 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, namely the impact of the coronavirus pandemic on our employees, customers and global operations, including the ability of our suppliers to fulfil raw material requirements and services and our ability to manufacture and deliver our products and services to our customers; the effects of emergency measures related to isolation periods for individuals in affected areas, lockdown restrictions imposed by national governments on businesses in countries where we operate and have employees, and limitations on travel to attract new customers and serve existing ones; deteriorating financial and market conditions as well as a potential recession; trade wars, and 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 represent net earnings (loss) before interest and other income/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 historical and prospective financial performance, as well as its performance relative to competitors. These non-IFRS measures are also used by financial analysts to evaluate and compare EXFO's performance against that of 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 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 earnings (loss), in thousands of US dollars:

Adjusted EBITDA

	Three months ended May 31, 2020		Three months ended May 31, 2019		Nine months ended May 31, 2020		Nine months ended May 31, 2019

IFRS net earnings (loss) for the period ⁽¹⁾	$	3,177	$	21	$	(5,907)	$	(2,253)

Add (deduct):

Depreciation and amortization		3,833		3,440		11,732		11,329
Interest and other (income) expense		291		698		975		(439)
Income taxes		2,691		3,385		4,389		4,586
Stock-based compensation costs		523		475		1,446		1,354
Restructuring charges (reversals)		–		(13)		–		3,305
Acquisition-related deferred revenue fair value
adjustment		–		–		–		1,435
Foreign exchange (gain) loss		141		(146)		649		55
Adjusted EBITDA for the period	$	10,656	$	7,860	$	13,284	$	19,372

Adjusted EBITDA as a percentage of sales		16.1%		10.7%		6.8%		8.9%

(1)

IFRS net earnings (loss) for the three months and the nine months ended May 31, 2020 takes into account the impact of the adoption of IFRS 16 on September 1, 2019. The adoption of IFRS 16 on September 1, 2019 had a positive impact on adjusted EBITDA of $844,000 or 1.3% of sales and $2,549,000 or 1.3% of sales respectively for the three months and the nine months ended May 31, 2020. Comparative figures were not adjusted.

EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)

	As at May 31, 2020		As at August 31, 2019

Assets

Current assets
Cash	$	17,070	$	16,518
Short-term investments		3,384		2,918
Accounts receivable
Trade		56,842		51,517
Other		4,543		3,396
Income taxes and tax credits recoverable		4,912		3,159
Inventories		42,745		38,017
Prepaid expenses		5,553		6,510
Other assets		3,800		3,083
		138,849		125,118

Tax credits recoverable		45,203		46,704
Property, plant and equipment		37,814		39,364
Right-of-use assets		10,636		–
Intangible assets		17,523		21,654
Goodwill		37,842		38,648
Deferred income tax assets		4,407		4,821
Other assets		1,257		1,293
	$	293,531	$	277,602
Liabilities

Current liabilities
Bank loan	$	33,821	$	5,000
Accounts payable and accrued liabilities		43,954		50,790
Provisions		706		1,065
Income taxes payable		249		704
Deferred revenue		21,634		24,422
Other liabilities		1,616		1,606
Current portion of lease liabilities		3,188		–
Current portion of long-term debt		2,043		2,449
		107,211		86,036

Provisions		2,490		2,737
Deferred revenue		7,669		9,056
Lease liabilities		7,453		–
Long-term debt		2,118		3,293
Deferred income tax liabilities		2,760		3,598
Other liabilities		878		318
		130,579		105,038

Shareholders' equity
Share capital		93,999		92,706
Contributed surplus		19,149		19,196
Retained earnings		106,266		112,173
Accumulated other comprehensive loss		(56,462)		(51,511)
		162,952		172,564
	$	293,531	$	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 May 31, 2020		Nine months ended May 31, 2020		Three months ended May 31, 2019		Nine months ended May 31, 2019

Sales	$	66,147	$	195,011	$	73,587	$	216,715

Cost of sales ⁽¹⁾		27,948		81,985		30,458		88,417
Selling and administrative		18,898		67,705		23,761		75,610
Net research and development		9,168		33,483		11,970		39,410
Depreciation of property, plant and
equipment		1,291		4,158		1,368		4,187
Depreciation of lease right-of-use assets		844		2,549		–		–
Amortization of intangible assets		1,698		5,025		2,072		7,142
Interest and other (income) expense		291		975		698		(439)
Foreign exchange (gain) loss		141		649		(146)		55
Earnings (loss) before income taxes		5,868		(1,518)		3,406		2,333

Income taxes		2,691		4,389		3,385		4,586

Net earnings (loss) for the period	$	3,177	$	(5,907)	$	21	$	(2,253)

Basic and diluted net earnings (loss)
per share	$	0.06	$	(0.11)	$	0.00	$	(0.04)

Basic weighted average number of shares
outstanding (000's)		55,678		55,573		55,392		55,306

Diluted weighted average number of
shares outstanding (000's)		56,724		55,573		56,437		55,306


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

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Loss

(in thousands of US dollars)

	Three months ended May 31, 2020		Nine months ended May 31, 2020		Three months ended May 31, 2019		Nine months ended May 31, 2019

Net earnings (loss) for the period	$	3,177	$	(5,907)	$	21	$	(2,253)
Other comprehensive income (loss), net of income taxes
Items that may be reclassified
subsequently to net earnings
Foreign currency translation
adjustment		(3,317)		(4,075)		(4,611)		(6,160)
Unrealized gains/losses on forward
exchange contracts		(1,052)		(1,805)		(1,046)		(1,237)
Reclassification of realized gains/losses
on forward exchange contracts		251		607		(91)		210
Deferred income tax effect on
gains/losses on forward exchange
contracts		206		322		314		356

Other comprehensive loss		(3,912)		(4,951)		(5,434)		(6,831)

Comprehensive loss for the period	$	(735)	$	(10,858)	$	(5,413)	$	(9,084)

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

(in thousands of US dollars)

	Nine months ended May 31, 2019
	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		1,078		(1,078)		–		–		–
Redemption of share capital		(126)		21		–		–		(105)
Stock-based compensation costs		–		1,363		–		–		1,363
Net loss for the period		–		–		(2,253)		–		(2,253)
Other comprehensive loss
Foreign currency translation adjustment		–		–		–		(6,160)		(6,160)
Changes in unrealized gains/losses on
forward exchange contracts, net of
deferred income taxes of $356		–		–		–		(671)		(671)

Total comprehensive loss for the period										(9,084)

Balance as at May 31, 2019	$	92,889	$	18,734	$	112,400	$	(54,181)	$	169,842


	Nine months ended May 31, 2020
	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		1,505		(1,505)		–		–		–
Redemption of share capital		(212)		(13)		–		–		(225)
Stock-based compensation costs		–		1,471		–		–		1,471
Net loss for the period		–		–		(5,907)		–		(5,907)
Other comprehensive loss
Foreign currency translation
adjustment		–		–		–		(4,075)		(4,075)
Changes in unrealized gains/losses
on forward exchange contracts,
net of deferred income taxes
of $322		–		–		–		(876)		(876)

Total comprehensive loss for the period										(10,858)

Balance as at May 31, 2020	$	93,999	$	19,149	$	106,266	$	(56,462)	$	162,952

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)

	Three months ended May 31, 2020		Nine months ended May 31, 2020		Three months ended May 31, 2019		Nine months ended May 31, 2019

Cash flows from operating activities
Net earnings (loss) for the period	$	3,177	$	(5,907)	$	21	$	(2,253)
Add (deduct) items not affecting cash
Stock-based compensation costs		523		1,446		475		1,354
Depreciation and amortization		3,833		11,732		3,440		11,329
Gain on disposal of capital assets		–		–		–		(1,732)
Write-off of capital assets		–		216		–		261
Deferred revenue		(329)		(3,144)		1,676		11,619
Deferred income taxes		493		(161)		(142)		(2,295)
Changes in foreign exchange gain/loss		869		1,750		143		(310)
		8,566		5,932		5,613		17,973
Changes in non-cash operating items
Accounts receivable		(25,485)		(6,874)		(12,857)		(7,038)
Income taxes and tax credits		44		(2,618)		1,596		1,629
Inventories		(2,282)		(6,233)		(306)		(668)
Prepaid expenses		(773)		215		(585)		(380)
Other assets		(256)		(712)		(664)		(1,003)
Accounts payable, accrued liabilities
and provisions		3,253		(6,020)		1,995		2,013
Other liabilities		53		95		(6)		(1,527)
		(16,880)		(16,215)		(5,214)		10,999
Cash flows from investing activities
Additions to short-term investments		(1,927)		(2,074)		(286)		(578)
Disposal of short-term investments		–		1,264		826		1,168
Purchases of capital assets		(1,880)		(6,066)		(1,639)		(6,318)
Proceeds from disposal of capital assets		–		–		–		3,318
		(3,807)		(6,876)		(1,099)		(2,410)
Cash flows from financing activities
Bank loan		19,934		28,304		(3,808)		(5,052)
Repayment of lease liabilities		(844)		(2,534)		–		–
Repayment of long-term debt		(292)		(1,607)		(713)		(2,165)
Redemption of share capital		–		(225)		–		(105)
		18,798		23,938		(4,521)		(7,322)
Effect of foreign exchange rate changes
on cash		(167)		(295)		(306)		(402)

Change in cash during the period		(2,056)		552		(11,140)		865
Cash – Beginning of the period		19,126		16,518		24,763		12,758
Cash – End of the period	$	17,070	$	17,070	$	13,623	$	13,623