EXFO Reports Strong Financial Results for First Quarter of Fiscal 2010


    
    - Sales amount to US$45.6 million, up 24.8% from previous quarter
    - Bookings increase 28.2% from previous quarter, book-to-bill ratio
      reaches 1.14
    - Gross margin improves to 63.9%, highest level in almost nine years
    - EBITDA margin attains 9.6% despite foreign exchange loss of
      US$1.1 million
    
</pre>
<p/>
<p><location>QUEBEC</location> CITY, <chron>Jan. 12</chron> /CNW Telbec/ - EXFO Electro-Optical Engineering Inc. (NASDAQ:   EXFO; TSX: EXF) reported today strong financial results for the first quarter ended <chron>November 30, 2009</chron>.</p>
<p>Sales reached US$45.6 million in the first quarter of fiscal 2010, down 1.7% from US$46.4 million in the first quarter of 2009 but up 24.8% from US$36.5 million in the fourth quarter of 2009. Net bookings were US$52.2 million for a book-to-bill ratio of 1.14 in the first quarter of fiscal 2010, compared to a record level of US$52.3 million in the same period last year, but increased 28.2% from US$40.7 million in the fourth quarter of 2009.</p>
<p>Gross margin improved to 63.9% of sales in the first quarter of fiscal 2010, its highest level since the second quarter of 2001, from 62.3% in the first quarter of 2009 and 60.0% in the fourth quarter of 2009.</p>
<p>GAAP net earnings in the first quarter of fiscal 2010 were US$0.3 million, or US$0.01 per diluted share, compared to GAAP net earnings of US$5.3 million, or US$0.08 per diluted share, in the same period last year and a GAAP net loss of US$1.2 million, or US$0.02 per share, in the fourth quarter of fiscal 2009. It should be noted that EXFO recorded a pre-tax, foreign exchange loss of US$1.1 million in the first quarter of fiscal 2010 compared to a gain of US$4.6 million in the first quarter of 2009 and a gain of US$1.2 million in the fourth quarter of 2009. GAAP net earnings in the first quarter of 2010 included US$1.5 million in amortization of intangible assets and US$0.4 million in stock-based compensation costs. The former item resulted in an income tax recovery of US$0.5 million.</p>
<p>"I'm extremely pleased with our strong sales, bookings and gross margin performance in the first quarter of fiscal 2010," said Germain Lamonde, EXFO's Chairman, President and CEO. "Given that almost all our product lines and geographic regions met or exceeded expectations, I believe that we've successfully navigated through the economic recession while continuing to strengthen our market position to greatly benefit from IP fixed-mobile network convergence and broadband deployments - key trends driving our business. I'm especially encouraged that a string of major contract wins bolstered our backlog entering our second quarter, which is typically the most challenging due to seasonality. The Canadian/US exchange rate turned into a headwind in the first quarter, but I'm confident our EBITDA will continue to improve in the long run as the twofold impact of increased sales volume and a strong gross margin trickles down to the bottom line."</p>
<p/>
<pre>
    
    Unaudited Selected Financial Information
    (In thousands of US dollars)

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Segmented results:                   Q1 2010       Q1 2009       Q4 2009
                                    -----------------------------------------
      Sales:
      Telecom Division              $     40,292  $     41,159  $     31,509
      Life Sciences and Industrial
       Division                            5,268         5,204         4,998
                                    -----------------------------------------
      Total                         $     45,560  $     46,363  $     36,507
                                    -----------------------------------------
                                    -----------------------------------------

      Earnings (loss) from
       operations:
      Telecom Division              $      2,041  $      1,355  $     (3,238)
      Life Sciences and Industrial
       Division                              687           738       2,020
                                    -----------------------------------------
      Total                         $      2,728  $      2,093  $     (1,218)
                                    -----------------------------------------
                                    -----------------------------------------

      Other selected information:
      GAAP net earnings (loss)      $        334  $      5,287  $     (1,181)

      Selected items included in
       GAAP net earnings (loss):
      Recognition of previously
       unrecognized R&D tax
       credits                      $          -  $          -  $     (1,902)
      Amortization of intangible
       assets                       $      1,469  $      1,319  $      1,147
      Restructuring charges         $          -  $          -  $      1,171
      Stock-based compensation
       costs                        $        418  $        322  $        379
      Net recovery of income tax    $          -  $          -  $       (943)
      Net income tax effect of
       the above selected items     $       (471) $       (221) $         93
    -------------------------------------------------------------------------
    
</pre>
<p/>
<p>Operating Expenses</p>
<p/>
<p>Selling and administrative expenses amounted to US$15.4 million, or 33.7% of sales, in the first quarter of fiscal 2010 compared to US$17.1 million, or 36.9% of sales, in the same period last year and US$14.2 million, or 38.9% of sales, in the fourth quarter of 2009.</p>
<p>Gross research and development expenses totaled US$9.8 million, or 21.5% of sales, in the first quarter of fiscal 2010 compared to US$8.6 million, or 18.6% of sales, in the first quarter of 2009 and US$9.0 million, or 24.7% of sales, in the fourth quarter of 2009.</p>
<p>Net R&D expenses totaled US$8.3 million, or 18.2% of sales, in the first quarter of fiscal 2010 compared to US$7.2 million, or 15.6% of sales, in the same period last year and US$5.4 million, or 14.7% of sales, in the fourth quarter of 2009.</p>
<p/>
<p>First-Quarter Highlights</p>
<p/>
<p>IP Fixed-Mobile Network Convergence and Broadband Deployments - EXFO announced several new product introductions and contract wins related to its key growth drivers: IP fixed-mobile network convergence and broadband deployments. Major  product launches related to these market trends included a complete wireless backhaul testing and service assurance offering, a new end-to-end IP video service assurance solution, an optical modulation analyzer for characterizing signals up to 100G, and expanded optical transport network (OTN) test capabilities on the Transport Blazer for characterizing 40G and 10G networks. Following the quarter-end, EXFO announced that its AXS-200/635 Triple-Play Test Set had been approved by four tier-1 network operators to support their respective deployments of next-generation VDSL2 services and applications. The combined deals could reach US$15 million over the next several years. The company previously reported that its VoIP service assurance solution had been selected by a large broadband wireless operator in a million-dollar deal. Overall, EXFO launched eight new products in the first quarter of fiscal 2010 and 41.0% of sales were derived from products on the market two years or less.</p>
<p>Profitable Growth Path - EXFO reported a gross margin of 63.9% in the first quarter of 2010, its highest level since the second quarter of 2001, on sales volume of US$45.6 million. Quarterly bookings reached US$52.2 million for a book-to-bill ratio of 1.14. EBITDA amounted to US$4.4 million or 9.6% of sales. EBITDA included a foreign exchange loss of US$1.1 million (2.4% of sales).</p>
<p/>
<p>Business Outlook</p>
<p/>
<p>EXFO forecasted sales between US$50 million and US$55 million and GAAP net earnings between US$0.03 and US$0.07 per diluted share for the second quarter of 2010. GAAP net earnings include US$0.02 per diluted share in after-tax amortization of intangible assets and stock-based compensation costs.</p>
<p>This guidance was established by management based on existing backlog as of the date of this press release, seasonality, expected bookings for the remainder of the quarter, as well as current exchange rates.</p>
<p/>
<p>Conference Call and Webcast</p>
<p/>
<p>EXFO will host a conference call today at <chron>5 p.m. (Eastern time</chron>) to review its financial results for the first quarter of fiscal 2010. To listen to the conference call and participate in the question period via telephone, dial 1-416-981-9077. Germain Lamonde, Chairman, President and CEO, and <person>Pierre Plamondon</person>, 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 <chron>7 p.m.</chron> on <chron>January 19, 2010</chron>. The replay number is 1-402-977-9141 and the reservation number is 21448595. The audio Webcast and replay of the conference call will also be available on EXFO's Website at <a href="http://www.EXFO.com">www.EXFO.com</a>, under the Investors section.</p>
<p/>
<p>About EXFO</p>
<p/>
<p>EXFO is a leading provider of test and service assurance solutions for network operators and equipment manufacturers in the global telecommunications industry. The Telecom Division, which accounts for almost 90% of the company's revenues, offers a wide range of innovative solutions to assess optical networks, from the core to access, as well as next-generation IP infrastructures and related triple-play services. The Life Sciences and Industrial Division offers solutions in medical device and opto-electronics assembly, fluorescence microscopy and other life science sectors. For more information, visit <a href="http://www.EXFO.com">www.EXFO.com</a>.</p>
<p/>
<p>Forward-Looking Statements</p>
<p/>
<p>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 the effect of the worldwide recession and the length of the recovery on the telecom market for our customers and suppliers; fluctuating exchange rates and our ability to execute in these uncertain conditions; consolidation in the global telecommunications test, measurement and service assurance industry; capital spending levels in the telecommunications, life sciences and high-precision assembly sectors; concentration of sales; the effects of the additional actions we have taken in response to such economic uncertainty (including our ability to quickly adapt cost structures with anticipated levels of business, ability to manage inventory levels with market demand); market acceptance of our new products and other upcoming products; limited visibility with regards to customer orders and the timing of such orders; our ability to successfully integrate our acquired and to-be-acquired businesses; our ability to successfully expand international operations; the retention of key technical and management personnel; and future economic, competitive, financial and market condition. 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.</p>
<p/>
<p>Non-GAAP Financial Measure</p>
<p/>
<p>EXFO provides a non-GAAP financial measure (EBITDA*) as supplemental information regarding its operational performance. EXFO uses EBITDA for the purposes of evaluating its historical and prospective financial performance, as well as its performance relative to its competitors. This measure also helps EXFO's management to plan and forecast future periods as well as to make operational and strategic decisions. EXFO believes that providing this information to investors, in addition to the GAAP measures, allows them to see the company's results through the eyes of management, and to better understand its historical and future financial performance.</p>
<p>The presentation of this additional information is not prepared in accordance with GAAP. 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 GAAP.</p>
<p/>
<p>The following table summarizes the reconciliation of EBITDA to GAAP net earnings, in thousands of US dollars:</p>
<p/>
<pre>
    
                                                       Three months ended
                                                           November 30,
                                                  ---------------------------
                                                          2009          2008
                                                  ---------------------------
    GAAP net earnings for the period              $        334  $      5,287

    Add (deduct):

    Amortization of property, plant and
     equipment                                           1,291         1,159
    Amortization of intangible assets                    1,469         1,319
    Interest (income) expense                               42          (466)
    Income taxes                                         1,243         1,840
                                                  -------------- ------------

    EBITDA(xx) for the period                     $      4,379  $      9,139
                                                  -------------- ------------
                                                  -------------- ------------
    EDITDA(xx) in percentage of sales                      9.6%         19.7%
                                                  -------------- ------------
                                                  -------------- ------------

    *  EBITDA is defined as net earnings before interest, income taxes,
       amortization of property, plant and equipment and amortization of
       intangible assets.
    (xx) EBITDA in the first quarter of fiscal 2009 included a foreign
       exchange gain of US$4.6 million, or 9.9% of sales, compared to a
       foreign exchange loss of US$1.1 million, or 2.4% of sales, in the
       first quarter of fiscal 2010.


                    EXFO Electro-Optical Engineering Inc.
                     Interim Consolidated Balance Sheet

                         (in thousands of US dollars)

                                                         As at         As at
                                                   November 30,    August 31,
                                                          2009          2009
                                                  ------------- -------------
                                                    (unaudited)

    Assets

    Current assets
    Cash                                          $      9,102  $     10,611
    Short-term investments                              58,914        59,105
    Accounts receivable
      Trade                                             28,107        22,946
      Other                                              3,080         2,752
    Income taxes and tax credits recoverable             2,961         2,353
    Inventories                                         34,370        30,863
    Prepaid expenses                                     2,734         2,043
    Future income taxes                                  6,257         5,538
                                                  ------------- -------------
                                                       145,525       136,211

    Tax credits recoverable                             28,753        26,762

    Forward exchange contracts                             592           428

    Property, plant and equipment                       19,274        19,100

    Intangible assets                                   16,336        16,859

    Goodwill                                            23,313        22,478

    Future income taxes                                 16,728        18,533
                                                  ------------- -------------

                                                  $    250,521  $    240,371
                                                  ------------- -------------
                                                  ------------- -------------
    Liabilities

    Current liabilities
    Accounts payable and accrued liabilities      $     22,545  $     21,650
    Deferred revenue                                     6,391         6,481
                                                  ------------- -------------

                                                        28,936        28,131

    Deferred revenue                                     4,138         4,195
                                                  ------------- -------------
                                                        33,074        32,326
                                                  ------------- -------------

    Shareholders' equity

    Share capital                                      104,915       104,846
    Contributed surplus                                 18,088        17,758
    Retained earnings                                   44,243        43,909
    Accumulated other comprehensive income              50,201        41,532
                                                  ------------- -------------

                                                       217,447       208,045
                                                  ------------- -------------

                                                  $    250,521  $    240,371
                                                  ------------- -------------
                                                  ------------- -------------


                    EXFO Electro-Optical Engineering Inc.
            Interim Unaudited Consolidated Statements of Earnings

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


                                                       Three months ended
                                                           November 30,
                                                  ---------------------------

                                                          2009          2008
                                                  ------------- -------------

    Sales                                         $     45,560  $     46,363

    Cost of sales(1)                                    16,438        17,480
                                                  ------------- -------------

    Gross margin                                        29,122        28,883
                                                  ------------- -------------

    Operating expenses
    Selling and administrative(1)                       15,361        17,091
    Net research and development(1)                      8,273         7,221
    Amortization of property, plant and
     equipment                                           1,291         1,159
    Amortization of intangible assets                    1,469         1,319
                                                  ------------- -------------

    Total operating expenses                            26,394        26,790
                                                  ------------- -------------

    Earnings from operations                             2,728         2,093

    Interest income (expense)                              (42)          466
    Foreign exchange gain (loss)                        (1,109)        4,568
                                                  ------------- -------------

    Earnings before income taxes                         1,577         7,127

    Income taxes
    Current                                                 87           (61)
    Future                                               1,156         1,901
                                                  ------------- -------------

                                                         1,243         1,840
                                                  ------------- -------------

    Net earnings for the period                   $        334  $      5,287
                                                  ------------- -------------
                                                  ------------- -------------

    Basic and diluted net earnings per share      $       0.01  $       0.08

    Basic weighted average number of shares
     outstanding (000's)                                59,386        67,340

    Diluted weighted average number of shares
     outstanding (000's)                                60,122        67,717

    (1) Stock-based compensation costs
        included in:
        Cost of sales                             $         41  $         29
        Selling and administrative                         268           201
        Net research and development                       109            92
                                                  ------------- -------------
                                                  $        418  $        322
                                                  ------------- -------------
                                                  ------------- -------------


                    EXFO Electro-Optical Engineering Inc.
    Interim Unaudited Consolidated Statements of Comprehensive Income (Loss)
                 and Accumulated Other Comprehensive Income

                         (in thousands of US dollars)


    Comprehensive income (loss)
                                                       Three months ended
                                                           November 30,
                                                  ---------------------------
                                                          2009          2008
                                                  ------------- -------------

    Net earnings for the period                   $        334  $      5,287
    Foreign currency translation adjustment              7,813       (36,933)
    Changes in unrealized losses on short-term
     investments                                             -            22
    Unrealized gains (losses) on forward
     exchange contracts                                  1,164        (6,929)
    Reclassification of realized gains (losses)
     on forward exchange contracts in net
     earnings                                               77          (137)
    Future income tax effect of the above items           (385)        2,190
                                                  ------------- -------------

    Comprehensive income (loss)                   $      9,003  $    (36,500)
                                                  ------------- -------------
                                                  ------------- -------------

    Accumulated other comprehensive income

                                                       Three months ended
                                                           November 30,
                                                  ---------------------------

                                                          2009          2008
                                                  ------------- -------------

    Foreign currency translation adjustment
      Cumulative effect of prior periods          $     40,458  $     51,129
      Current period                                     7,813       (36,933)
                                                  ------------- -------------

                                                        48,271        14,196
                                                  ------------- -------------
    Unrealized gains (losses) on forward
     exchange contracts
      Cumulative effect of prior periods                 1,076           (96)
      Current period, net of realized gains
       (losses) and future income taxes                    856        (4,876)
                                                  ------------- -------------

                                                         1,932        (4,972)
                                                  ------------- -------------
    Unrealized losses on short-term investments
      Cumulative effect of prior periods                    (2)          (24)
      Current period, net of future income
       taxes                                                 -            22
                                                  ------------- -------------

                                                            (2)           (2)
                                                  ------------- -------------

    Accumulated other comprehensive income        $     50,201  $      9,222
                                                  ------------- -------------
                                                  ------------- -------------


                    EXFO Electro-Optical Engineering Inc.
       Interim Unaudited Consolidated Statements of Retained Earnings
                           and Contributed Surplus

                         (in thousands of US dollars)

    Retained earnings
                                                       Three months ended
                                                           November 30,
                                                  ---------------------------

                                                          2009          2008
                                                  ------------- -------------

    Balance - Beginning of the period             $     43,909  $     60,494

    Add
    Net earnings for the period                            334         5,287
                                                  ------------- -------------

    Balance - End of the period                   $     44,243  $     65,781
                                                  ------------- -------------
                                                  ------------- -------------

    Contributed surplus
                                                       Three months ended
                                                           November 30,
                                                  ---------------------------

                                                          2009          2008
                                                  ------------- -------------

    Balance - Beginning of the period             $     17,758  $      5,226

    Add (deduct)
    Stock-based compensation costs                         413           321
    Reclassification of stock-based
     compensation costs to share capital upon
     exercise of stock awards                              (86)            -
    Discount on redemption of share capital                  3           374
                                                  ------------- -------------

    Balance - End of the period                   $     18,088  $      5,921
                                                  ------------- -------------
                                                  ------------- -------------


                    EXFO Electro-Optical Engineering Inc.
           Interim Unaudited Consolidated Statements of Cash Flows

                         (in thousands of US dollars)

                                                       Three months ended
                                                           November 30,
                                                  ---------------------------

                                                          2009          2008
                                                  ------------- -------------
    Cash flows from operating activities
    Net earnings for the period                   $        334  $      5,287
    Add (deduct) items not affecting cash
      Change in discount on short-term
       investments                                           2           456
      Stock-based compensation costs                       418           322
      Amortization                                       2,760         2,478
      Deferred revenue                                    (542)          353
      Future income taxes                                1,156         1,901
      Change in unrealized foreign exchange
       loss (gain)                                         770        (3,456)
                                                  ------------- -------------

                                                         4,898         7,341
    Change in non-cash operating items
      Accounts receivable                               (4,102)       (7,325)
      Income taxes and tax credits                      (1,505)         (696)
      Inventories                                       (2,351)         (367)
      Prepaid expenses                                    (605)         (542)
      Accounts payable and accrued liabilities           1,030        (1,087)
                                                  ------------- -------------

                                                        (2,635)       (2,676)
                                                  ------------- -------------
    Cash flows from investing activities
    Additions to short-term investments                (78,954)     (122,100)
    Proceeds from disposal and maturity of
     short-term investments                             81,336       126,605
    Additions to capital assets                         (1,345)       (1,514)
                                                  ------------- -------------

                                                         1,037         2,991
                                                  ------------- -------------
    Cash flows from financing activities
    Redemption of share capital                            (14)         (447)
    Exercise of stock options                                -            26
                                                  ------------- -------------

                                                           (14)         (421)
                                                  ------------- -------------

    Effect of foreign exchange rate changes on
     cash                                                  103          (367)
                                                  ------------- -------------

    Change in cash                                      (1,509)         (473)

    Cash - Beginning of the period                      10,611         5,914
                                                  ------------- -------------

    Cash - End of the period                      $      9,102  $      5,441
                                                  ------------- -------------
                                                  ------------- -------------
    

For further information: For further information: Vance Oliver, Manager, Investor Relations, (418) 683-0913, Ext. 3733, vance.oliver@exfo.com

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