EXFO Inc.
Q1 2021 Earnings Call Transcript

Published: 12 Jan 2021

[Operator:]

Good day, everyone, and welcome to today’s EXFO’s First Quarter Conference Call for the Fiscal Year of 2021. A quick reminder that today’s program is being recorded. And at this time, I’d like to turn the floor over to Vance Oliver, Director of Investor Relations. Please go ahead, sir.

[Vance Oliver:]

Good afternoon, and welcome to EXFO’s first quarter conference call for fiscal 2021. With me on the line today are Philippe Morin, EXFO’s Chief Executive Officer; and Pierre Plamondon, CFO and Vice President of Finance. Germain Lamonde, EXFO’s Founder and Executive Chairman, will also be available to answer questions during the Q&A period.

[Philippe Morin:]

All right. Thank you, Vance. And good afternoon, everyone. I would really like to take this opportunity to wish everyone a happy, safe, and healthy New Year. Given the start of vaccinations for the coronavirus pandemic in several countries, it’s certainly growing optimism that we can return to a semblance of normality sometime in 2021. So turning to our financial results. EXFO opened fiscal 2021 with a strong first quarter performance with revenue of $71.5 million and IFRS net earnings $3.6 million. IFRS net earnings included $1.4 million for an after-tax wage subsidy by the Canadian government to lessen the impact of the pandemic and as well $2.5 million for an insurance recovery related to the loss of assets. This financial performance represents a solid achievement considering the impact of the pandemic on our global operations, which we did not have to cope with this a year ago in our Q1 2020. We also delivered adjusted EBITDA of $9.9 million or 13.9% of sales in the first quarter of 2021. Our robust sales and earnings results confirm market acceptance of our highly differentiated solutions related to fiber, cloud native, and 5G network deployment as we continue to also develop new ways to engage and serve our global customer base in this virtualized environment. So now let’s take a look at how both product families fared in the first quarter of 2021 and now their position for the fiscal year. In terms of test and measurement, sales decreased by 9.8% in the first quarter of 2021 from a record level of $55.9 million in Q1 2020. The year-over-year sales drop is largely due to the reduction of large scale network deployment caused by the pandemic in favor of maintenance projects on the private communication service providers.

[Pierre Plamondon:]

Thank you, Philippe. Good afternoon, everybody. Sales decreased 2.8% to $71.5 million in the first quarter of 2021 from $73.6 million in the first quarter of 2020. As previously mentioned by Philippe, sales decreased year-over-year, mainly due to the reduction in large scale industrial deployments in fiber and maintenance projects covered by the COVID-19 pandemic, mainly in the Americas and the APAC region. The pandemic impact was partially offset by stronger year-end calendar spending on the part of the service providers and catch up spending in EMEA. Bookings meanwhile decreased 1.2% year-over-year to $69 million in the first quarter of 2021 for a book-to-bill ratio of 0.97. Gross margin before depreciation and amortization reached 58.2% of sales in the first quarter of 2021 compared to 58.9% in the first quarter of 2020. Our gross margin in the first quarter of 2021 included $0.4 million for a wage subsidy granted by the Canadian government to lessen the impact of the pandemic. This represented a positive impact of 0.6% on our gross margin. Otherwise, our gross margin was negatively affected by a less favorable sales mix overall compared to the same period last year and lower absorption of fixed manufacturing costs, I’d say, were lower year-over-year. In terms of operating expenses, selling and administrative expenses decreased to $21.6 million or 30.2% of sales in the first quarter of 2021 from $24.5 million or 33.2% of sales in the first quarter of 2020. The $2.9 million decrease in SG&A expenses reflects lower travel expenses due to the pandemic the full impact of our 2020 restructuring plan and the wage subsidy that has a positive impact on our SG&A expenses by $0.6 million or 0.9% overall. These items were partially offset by restructuring charges of $0.5 million in the first quarter of 2021. Net R&D expenses decreased to $11.2 million or 15.7% of sale in the first quarter of 2021 from $11.7 million or 16% of sale in the same period last year. The decrease in net R&D expenses is mainly related to the wage subsidy that was positively affected on net R&D expenses by $0.8 million in Q1 2021. IFRS net earnings totaled $3.6 million of $0.06 per share in the first quarter of 2021 compared to a net loss of $0.1 million or $0.00 per share in the first quarter of 2020. IFRS net earnings in the first quarter of 2021 included $2 million in after-tax amortization of intangible assets, $0.6 million in stock-based compensation costs, $0.5 million in after-tax restructuring charges and foreign exchange loss of $0.2 million. IFRS net earnings also included a after-tax wage subsidy of $1.4 million under the Canadian emergency wage subsidy program as well as an insurance recovery of $2.5 million related to the loss of assets.

[Operator:]

And we’ll take our first from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos:]

I know you recently closed the acquisition of InOpticals. As we think about Q2, can you provide some color in terms of the financial impact we should anticipate or is it not material?

[Philippe Morin:]

Yes. Thanos, again, the acquisition just got closed. The impact will be twofold. One is, obviously they have a leading-edge product solution that allows us to go on to places that we have not been able to do so. We’d be able to leverage those type of solutions for them. And then, we’ll be able to as well do cross-selling of our existing solutions with them. So, you don’t expect that it will be material for sales in our Q2, but we do expect as we get into the second half of the year, we’ll start seeing the positive impact of that acquisition not just from pure products as an obstacle, but with the pulling of other products.

[Thanos Moschopoulos:]

And can you update us in terms of how RFP activity has progressed through 5G, new SASS solutions over the past quarter? I mean, I know you had a number of wins that we talked about last quarter. How has the pipeline evolved in recent weeks?

[Philippe Morin:]

Yes. The amount of RFPs continues to be strong, especially around what I would call, the 5G SA and cloud-native deployment. We’ve - in Q4, we’ve announced five new wins. In Q1, other than the - what I just talked about in terms of the fiber monitoring with Openreach, we’ve expanded some of our existing account solutions as they move to more of 4G to 5G. So we were able to leverage our position there as an incumbent and win the - I guess, the network modernization. And we’re continuing to see some RFPs predominantly out of the U.S. and predominantly out of Europe where we’re seeing activities around 5G SA and as well in some of these applications moving from a 4G to more of a cloud-native architecture. So that’s still pretty active.

[Thanos Moschopoulos:]

I know you’re not providing revenue guidance at this stage. I guess, given your commentary, is there anything that you would add specifically as we think about heading into Q2, whether anything from a seasonal perspective, it does sound from your commentary that maybe there was a little bit of budget flush happening, which - it would seem it might have benefited the start of the quarter, but just any color you can provide in terms of Q2 would be helpful?

[Philippe Morin:]

Yes. So, Thanos, you’ve been following EXFO for a while. So, you know our Q2 tends to be more of a challenging quarter if I want to put it that way because of the seasonal aspect of it. But the good news is, we saw at the end of our Q1 analysis and year end money coming through that will impact our T&M business. The SASS activities are continuing to be from a pipeline point of view, from an RFP point of view. So, the things are very active, still going very strong. My only caveat will be, how - what will happen with the pandemic, right? It’s really around, as you see, certain countries going into lockdown. We don’t expect to be as drastic as we’ve seen in the month of March or April, but that’s creating a bit of uncertainty that we’ll have to navigate. But other than that, we’re seeing some good traction from a T&M point of view, especially as we head to the year-end money and then the activities on our SASS business.

[Operator:]

We’ll move on to Tim Savageaux with Northland Capital Markets.

[Tim Savageaux:]

I’m wondering you mentioned, Philippe, just the notion of a year-end budget flush? I just wanted to kind of clarify, you mentioned a couple of factors, I think one was some notion of catch-up spending in EMEA and you saw some rise in year-over-year growth there. Is that a separate dynamic from what you’re terming year-end money? Is that more focused on your traditional U.S. carrier customer base? And to what extent did you see that kind of year-end dynamic continue into your fiscal second quarter thus far?

[Philippe Morin:]

Yes, two interesting dynamics for us this quarter, and so that you’ve picked up on both. Number one is EMEA. EMEA really picked up strongly on TNM this year both on - but as well on some of our manufacturing and lab activities and certain accounts in those regions. And as you can see, I mean, EMEA had a really nice growth year-on-year, and as a matter of fact represented 37% of our total revenue when they tend to be more than the 30%. So good performance there from a point of view of EMEA. And I do think that a lot of it is the recovery from the lockdown that was pretty drastic there as you remember. The second point is the year-end money which is more as you highlighted more North American focus. We did get a nice amount of year-end money coming into the end of our quarter - month of November with some now going to be leaking into our Q2, but it was again a bit more - a bit later than we’ve seen in the past. But again, good amount of business coming in from the service providers, the MSOs in particular in North America.

[Operator:]

All right. And we did have another one come through. It looks like it’s from Reuben Gaz, who is with Opus Capital Management.

[Reuben Gaz:]

Regarding your - the Nova portfolio, could you please give some examples of installed base things which are interesting? What is the traction and what is the forecast for this calendar year as far as OTT video monitoring?

[Philippe Morin:]

On 5G monitoring is what you said, yeah?

[Reuben Gaz:]

Yes. Like regarding the Nova product, and in general regarding your SASS solutions like how many trials you have and so on?

[Philippe Morin:]

Yes. So, on the SASS side, I mean, we tend to have, I would say, the two major kind of product solutions. The first one is the fiber monitoring capability that we just talked about. So, really around being able to help from especially the context of COVID, by having much more of a centralized monitoring solution for fiber has become really critical especially with the high demand of fiber-to-the-home and broadband connectivity that we are seeing that people that the service providers need to respond. So - and that’s we’re seeing the success that businesses is growing. It’s one of the fastest growing business unit for us. And the Openreach deal - the multi-million Openreach deal is a very strong proof point of attraction for that fiber monitoring solution. And then, on the other parts of our SASS solution is, around where we’ve gotten more on the wireless service assurance, whether it’s for 5G - 4G and 5G networks. And this is a combination of solutions that you go from - by putting virtual monitoring probes that it could be either active or passive. And then we gather all of the information, do a correlation with the data and provide monitoring and end-to-end visibility to help our customers troubleshoot much, much faster by bringing more automation. And now, with Nova SensAI, we’re actually bringing machine learning algorithms to really speed up the troubleshooting as they start deploying in a much more cloud-native 5G environment. The work that we’ve done in three U.K. urban is probably the best example. They were one of the first in London. In the U.K., it’s actually to deploy a first telco cloud. And we’ve provided solutions such as our wireless probes and being able to correlate the data and provide monitoring and visibility type of solution. As we move forward this year in 2021, we’re seeing a market - much more market activity around 5G standalone type of network, much more telco, cloud, native-based solutions. And we’re seeing some of that traction with some of the five wins that we were able to close in Q4 of the previous quarter. And so that’s where we see the evolution. So, really for us, we’re focusing where our customers are investing, which is fiber, which is 5G, which is cloud and we’re providing solutions to help them and turn up networks, but monitor and troubleshoot networks in much more faster way.

[Reuben Gaz:]

There is a quick follow-up. Do you have, in addition to this win, in the last - during last year first quarter. Do you have anything ongoing RFPs or further than RFPs with any carriers?

[Philippe Morin:]

So there are RFPs out there around 5G, SAs, both. And as I said earlier to Thanos’ question, they tend to be more in North America and in Europe. So there’s a lot of activities right now with some of the major Tier 1s that we’re participating right now. Decisions have not been made yet. But we’re actively involved either directly or sometimes with strategic partners, as I mentioned earlier in my opening statement.

[Reuben Gaz:]

And who you would say your main competitor or competitors in these RFPs?

[Philippe Morin:]

Yes. On the service assurance side, when you look at these 5G, SA Service Assurance deal, we tend to obviously face the typical competitors such as NetScout. But we’re also starting to see some of our - depending on the regions, some of their kind of more regionalized competition. The real differentiating element for me is, whoever has a solution that is cloud-native ready and evolving to new standard like 5G standalone, and this is when we tend to be with a lesser amount of competitors that we’re facing. RADCOM being one of them, as one competitor that we’re also facing.

[Operator:]

And we’ll move on to our next question. It’s from Daniel Chen with TD Securities.

[Daniel Chen:]

So, the strong SASS performance this quarter, would you attribute that to mostly the five SASS contracts that you won last quarter? And just falling on that like, what is the linearity of the revenue recognition from those contracts that kind of peak here and kind of trail off over the next three quarters or do they continue to stay elevated at this level for the remainder of the year?

[Philippe Morin:]

Yes. The pattern, Dan, are fairly similar with these contracts. They tend to be much more around a nine- to 12-month of revenue recognition as you start deploying the system as you start putting the delivery of our solutions and progress across the network. And then - and as you wrap up, you start recognizing the revenue. And with it, as I explained before, we tend to get software revenues, software licenses but as well we get, what we call, maintenance - annual maintenance contract. We tend to get renewed and you get that every year. So all these contracts, the five we’ve talked about as an example, the Openreach, they tend to be multi-year, multi-million, they tend to be a longer revenue recognition cycle because you need to deploy across the geography. And then there’s opportunity to upsell, upsell by adding more testing capability to widen the geography scope and then ultimately add more features, more products and that’s why it’s so critical on this FAS is to capture these wins because they’re multi - as I mentioned, multi-year deployment and then an opportunity to really start getting more scale in the business and more predictability into our business, which is one - which has been one of our challenges with the FAS business.

[Daniel Chen:]

I was hoping if you can provide more details about the Openreach contract as well. You mentioned those multi-year multi-million dollar, should we expect revenue recognition to start in your fiscal Q2 and any kind of details you could provide around size and length of the contract?

[Philippe Morin:]

Yes. So we won’t be able to provide more details, Dan, in terms of the contract other than as what you stated multi-year multi-million. We’ve already received TOs for the first phase that will again - as I highlighted, will get recognized in the next nine to 12 months, the same pattern. What do we like about this particular contract? As you said, the sheer size of the deployment, 20 million homes that we will be working with Openreach to deploy over the many - four or five years. So, again, bringing us scale of our business, bringing predictability to our business, and then obviously much more relevancy to a customer that we’ve been working for many, many years with, but this is again another key milestone with our relationship with Openreach.

[Daniel Chen:]

And then, I don’t know if I missed it earlier, but can you tell me what the EBITDA was without the wage subsidy and the insurance recovery?

[Philippe Morin:]

Pierre, you want take that one?

[Pierre Plamondon:]

Yes. The EBITDA is $9.9 million, okay? And the wage subsidy is $1.9 million. So, that just $9.9 million and that include the wage subsidy of $1.9 million pre-tax.

[Daniel Chen:]

Okay. So you’re looking at $8 million and the insurance recovery was below the EBITDA line?

[Pierre Plamondon:]

Yes, correct, in other income on interest.

[Operator:]

All right. And ladies and gentlemen, with no further questions in the queue, I’d like to turn the floor back to CEO, Philippe Morin, with - for any additional or closing remarks. Please go ahead, sir.

[Philippe Morin:]

Thank you very much. So just a few key takeaways before we conclude this call today. One, EXFO delivered a strong first quarter starting the year on a good, good base with sales reaching $71.5 million with IFRS net earnings and adjusted EBITDA totaled to $3.6 million and $9.9 million respectively. Second, we’re seeing lots of opportunities for fiscal 2021 with the resumption of large scale fiber deployment that should benefit our T&M product family. But we’re also pleased by a SASS operating penetration into new accounts and as well to reiterate again the newly announced fiber monitoring deal with Openreach. Finally, EXFO will be holding tomorrow our Annual Meeting on January 13th at 9

[Operator:]

Once again ladies and gentlemen, that does conclude our call for today. We appreciate you joining us. You may now disconnect.