EXFO Reports First-Quarter Results for Fiscal 2014

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Jan 08, 2014, 04:05 ET

Sales reach US$56.0 million (book-to-bill ratio of 1.03)
Gross margin amounts to 62.2% of sales
Adjusted EBITDA totals US$2.3 million

QUEBEC CITY, Jan. 8, 2014 /PRNewswire/ - EXFO Inc. (NASDAQ: EXFO; TSX: EXF) reported today financial results for the first quarter ended November 30, 2013.

Sales reached US$56.0 million in the first quarter of fiscal 2014 compared to US$59.8 million in the first quarter of 2013 and US$60.9 million in the fourth quarter of 2013.

Bookings attained US$57.9 million in the first quarter of fiscal 2014 compared to US$64.3 million in the same period last year and US$54.0 million in the fourth quarter of 2013. The company's book-to-bill ratio was 1.03 in the first quarter of 2014.

Gross margin^* amounted to 62.2% of sales in the first quarter of fiscal 2014 compared to 60.5% in the first quarter of 2013 and 62.9% in the fourth quarter of 2013.

IFRS net loss in the first quarter of fiscal 2014 totaled US$0.7 million, or US$0.01 per share, compared to a net loss of US$1.6 million, or US$0.03 per share, in the same period last year and net earnings of US$3.8 million, or US$0.06 per diluted share, in the fourth quarter of 2013. IFRS net loss in the first quarter of 2014 included US$1.1 million in after-tax amortization of intangible assets, a foreign exchange gain of US$0.8 million and US$0.5 million in stock-based compensation costs.

Adjusted EBITDA^** totaled US$2.3 million, or 4.1% of sales, in the first quarter of fiscal 2014 compared to US$2.7 million, or 4.5% of sales, in the first quarter of 2013 and US$7.1 million, or 11.6% of sales, in the fourth quarter of 2013.

"Both EMEA and A-PAC delivered year-over-year revenue growth. We witnessed lower bookings and revenues than expected in the Americas due to order delays and lower spending levels, especially among key customers. Our growth in EMEA and A-PAC, together with much stronger engagement with Americas' largest operators, demonstrates that our portfolio of innovative solutions is ideally positioned to help resolve the most critical deployment, turn-up and operation issues related to investments in next-generation 4G/LTE, small cell and 100G networks that will assuredly take place," said Germain Lamonde, EXFO's Chairman, President and CEO.

Selected Financial Information
(In thousands of US dollars)


		Q1 2014		Q4 2013		Q1 2013

Sales		$	56,003	$	60,888	$	59,821

Gross margin^*		$	34,818	$	38,314	$	36,164
			62.2%		62.9%		60.5%

Other selected information:
	IFRS net earnings (loss)	$	(747)	$	3,802	$	(1,638)
	Amortization of intangible assets	$	1,182	$	1,173	$	1,962
	Stock-based compensation costs	$	463	$	437	$	448
	Net income tax effect of the above items	$	(67)	$	(64)	$	(67)
	Foreign exchange gain	$	802	$	1,312	$	756
	Adjusted EBITDA^**	$	2,292	$	7,052	$	2,720

Operating Expenses
Selling and administrative expenses totaled US$21.7 million, or 38.8% of sales in the first quarter of fiscal 2014 compared to US$22.3 million, or 37.3% of sales, in the same period last year and US$21.4 million, or 35.1% of sales, in the fourth quarter of 2013.

Gross research and development expenses amounted to US$13.3 million, or 23.8% of sales, in the first quarter of fiscal 2014 compared to US$13.9 million, or 23.2% of sales, in the first quarter of 2013 and US$12.5 million, or 20.6% of sales, in the fourth quarter of 2013.

Net R&D expenses totaled US$11.3 million, or 20.1% of sales, in the first quarter of fiscal 2014 compared to US$11.6 million, or 19.4% of sales, in the same period last year and US$10.3 million, or 16.9% of sales, in the fourth quarter of 2013.

First-Quarter Highlights

Sales. EXFO's sales improved year-over-year in Europe, Middle East and Africa (EMEA) and Asia-Pacific regions in the first quarter of 2014, but decreased in the Americas. Global sales originated 51% from the Americas, 29% from EMEA, and 20% from Asia-Pacific. EXFO's top customer accounted for 4.9% of sales in the first quarter, while the top three represented 12.5%.
Profitability. EXFO generated adjusted EBITDA of US$2.3 million, or 4.1% of sales, in the first quarter of 2014. The company also delivered US$3.3 million in cash flows from operating activities. EXFO had a cash position of US$52.6 million and no debt as at November 30, 2013.
Innovation. EXFO launched nine new products in the first quarter, including among others an all-in-one optical and Ethernet test module that accelerates the deployment and troubleshooting of wireless backhaul, small cell and metro Ethernet networks; a tablet-based OTDR series that simplifies and speeds up testing in fixed and mobile networks; a software application that transforms an Android-based phone into a mobile probe to monitor quality of experience in public venues like stadiums and malls; and a next-generation fiber inspection probe that eliminates error risks while accelerating connector certification time by more than 50%. The company also expanded the capabilities of its Power Blazer, making it the industry's only multi-service, field test module covering all transmission rates from 10 Mbit/s to 100 Gbit/s.

Business Outlook
EXFO forecasts sales between US$53.0 million and US$58.0 million for the second quarter of fiscal 2014, while IFRS net loss is expected to range between -US$0.05 and -US$0.01 per share. Net loss includes 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 press release, 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 its financial results for the first quarter of fiscal 2014. To listen to the conference call and participate in the question period via telephone, dial 1-416-641-6700. 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 one hour after the event until 7 p.m. on January 15, 2014. The replay number is 1-402-977-9141 and the reservation number is 21693946. 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
Listed on the NASDAQ and TSX stock exchanges, EXFO is among the leading providers of next-generation test and service assurance solutions for wireline and wireless network operators and equipment manufacturers in the global telecommunications industry. The company offers innovative solutions for the development, installation, management and maintenance of converged, IP fixed and mobile networks—from the core to the edge. Key technologies supported include 3G, 4G/LTE, IMS, Ethernet, OTN, FTTx, VDSL2, ADSL2+ and various optical technologies accounting for more than 35% of the portable fiber-optic test market. EXFO has a staff of approximately 1600 people in 25 countries, supporting more than 2000 customers worldwide. For more information, visit www.EXFO.com and follow us on the EXFO Blog, Twitter, LinkedIn, Facebook, Google+ and YouTube.

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, will, expect, believe, anticipate, intend, could, estimate, continue, or the negative or comparable terminology 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 macro-economic 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; limited visibility with regards to customer orders and the timing of such orders; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully integrate our acquired and to-be-acquired businesses; 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 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* 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.

*	Gross margin 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 and foreign exchange gain.

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

Adjusted EBITDA

	Q1 2014		Q4 2013		Q1 2013

IFRS net earnings (loss) for the period	$	(747)	$	3,802	$	(1,638)

Add (deduct):

Depreciation of property, plant and equipment		1,275		1,446		1,605
Amortization of intangible assets		1,182		1,173		1,962
Interest income		(27)		(37)		(33)
Income taxes		948		1,543		1,132
Stock-based compensation costs		463		437		448
Foreign exchange gain		(802)		(1,312)		(756)
Adjusted EBITDA for the period	$	2,292	$	7,052	$	2,720

Adjusted EBITDA in percentage of sales		4.1%		11.6%		4.5%

EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)

		As at November 30, 2013		As at August 31, 2013
Assets

Current assets
Cash		$	47,765	$	45,386
Short-term investments			4,837		4,868
Accounts receivable
	Trade		51,417		50,117
	Other		2,765		2,778
Income taxes and tax credits recoverable			4,821		6,525
Inventories			37,653		35,705
Prepaid expenses			2,367		2,561
			151,625		147,940

Tax credits recoverable			41,924		41,719
Property, plant and equipment			44,834		45,523
Intangible assets			6,787		7,543
Goodwill			27,082		27,313
Deferred income taxes			10,539		10,807
Other assets			681		693

		$	283,472	$	281,538
Liabilities

Current liabilities
Accounts payable and accrued liabilities		$	32,306	$	26,253
Provisions			728		756
Income taxes payable			331		679
Current portion of long-term debt			304		296
Deferred revenue			7,869		9,467
			41,538		37,451

Deferred revenue			3,703		3,932
Deferred income taxes			3,525		3,226
Other liabilities			474		477
			49,240		45,086

Shareholders' equity
Share capital			111,378		109,837
Contributed surplus			16,168		17,186
Retained earnings			112,105		112,852
Accumulated other comprehensive loss			(5,419)		(3,423)

			234,232		236,452

		$	283,472	$	281,538

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings

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

	Three months ended November 30,
		2013		2012

Sales	$	56,003	$	59,821

Cost of sales ⁽¹⁾		21,185		23,657
Selling and administrative		21,708		22,290
Net research and development		11,281		11,602
Depreciation of property, plant and equipment		1,275		1,605
Amortization of intangible assets		1,182		1,962
Interest income		(27)		(33)
Foreign exchange gain		(802)		(756)

Earnings (loss) before income taxes		201		(506)

Income taxes		948		1,132

Net loss for the period	$	(747)	$	(1,638)

Basic and diluted net loss per share	$	(0.01)	$	(0.03)

Basic and diluted weighted average number of shares outstanding (000's)		60,217		60,389

(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 November 30,
			2013		2012

Net loss for the period		$	(747)	$	(1,638)
Other comprehensive income (loss), net of income taxes
Items that will not be reclassified subsequently to net earnings
	Foreign currency translation adjustment		(1,948)		(1,708)
Items that may be reclassified subsequently to net earnings
	Unrealized gains/losses on forward exchange contracts		(240)		(83)
	Reclassification of realized gains/losses on forward exchange contracts in net loss		174		(199)
	Deferred income tax effect of gains/losses on forward exchange contracts		18		76
Other comprehensive loss			(1,996)		(1,914)

Comprehensive loss for the period		$	(2,743)	$	(3,552)

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

(in thousands of US dollars)

		Three months ended November 30, 2012
		Share Capital		Contributed Surplus		Retained earnings		Accumulated other comprehensive income		Total shareholders' equity

Balance as at September 1, 2012		$	110,965	$	17,298	$	111,511	$	13,507	$	253,281
Exercise of stock options			51		-		-		-		51
Redemption of share capital			(793)		(180)		-		-		(973)
Reclassification of stock-based compensation costs			612		(612)		-		-		-
Stock-based compensation costs			-		444		-		-		444
Net loss for the period			-		-		(1,638)		-		(1,638)
Other comprehensive loss
	Foreign currency translation adjustment		-		-		-		(1,708)		(1,708)
	Changes in unrealized gains on forward exchange contracts, net of deferred income taxes of $76		-		-		-		(206)		(206)

Total comprehensive loss for the period			-		-		(1,638)		(1,914)		(3,552)

Balance as at November 30, 2012		$	110,835	$	16,950	$	109,873	$	11,593	$	249,251


		Three months ended November 30, 2013
		Share Capital		Contributed Surplus		Retained earnings		Accumulated other comprehensive loss		Total shareholders' equity

Balance as at September 1, 2013		$	109,837	$	17,186	$	112,852	$	(3,423)	$	236,452
Exercise of stock options			106		-		-		-		106
Reclassification of stock-based compensation costs			1,435		(1,435)		-		-		-
Stock-based compensation costs			-		417		-		-		417
Net loss for the period			-		-		(747)		-		(747)
Other comprehensive loss
	Foreign currency translation adjustment		-		-		-		(1,948)		(1,948)
	Changes in unrealized losses on forward exchange contracts, net of deferred income taxes of $18		-		-		-		(48)		(48)

Total comprehensive loss for the period			-		-		(747)		(1,996)		(2,743)

Balance as at November 30, 2013		$	111,378	$	16,168	$	112,105	$	(5,419)	$	234,232

EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)

		Three months ended November 30,
			2013		2012

Cash flows from operating activities
Net loss for the period		$	(747)	$	(1,638)
Add (deduct) items not affecting cash
	Changes in discount on short-term investments		-		2
	Stock-based compensation costs		463		448
	Depreciation and amortization		2,457		3,567
	Deferred revenue		(1,752)		(1,531)
	Deferred income taxes		625		733
	Changes in foreign exchange gain/loss		(108)		(23)
			938		1,558

Changes in non-cash operating items
	Accounts receivable		(1,657)		(8,104)
	Income taxes and tax credits		743		(1,873)
	Inventories		(2,312)		(160)
	Prepaid expenses		171		359
	Other assets		6		-
	Accounts payable, accrued liabilities and provisions		5,485		3,637
	Other liabilities		(26)		(195)
			3,348		(4,778)
Cash flows from investing activities
Additions to short-term investments			(9,781)		(24,533)
Proceeds from disposal and maturity of short-term investments			9,772		24,527
Additions to capital assets			(701)		(1,989)
			(710)		(1,995)
Cash flows from financing activities
Exercise of stock options			106		51
Redemption of share capital			-		(973)
			106		(922)

Effect of foreign exchange rate changes on cash			(365)		(355)

Change in cash			2,379		(8,050)
Cash - Beginning of the period			45,386		58,868
Cash - End of the period		$	47,765	$	50,818