EXFO Inc.
Q1 2020 Earnings Call Transcript

Published: 8 Jan 2020

[Operator:]

Good day, everyone. Welcome to EXFO's First Quarter Conference Call for Fiscal 2020. Today's conference is being recorded.At this time, I would like to turn the conference over to Vance Oliver, EXFO’s Director of Investor Relations. Please go ahead, sir.

[Vance Oliver:]

Good afternoon, and welcome to EXFO's first quarter conference call for fiscal 2020. 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.A reminder that this conference call will include certain forward-looking statements and/or estimates concerning our intents, beliefs or expectations regarding future events that may affect EXFO. Please note that such comments will be affected by risks and/or uncertainties which may cause the actual results of the Company to be materially different from those expressed or implied today. For more information about EXFO, I encourage you to review our Form 20-F filed with the Securities and Exchange Commission. Our Annual Information Form is available with Canadian Securities Commission as well.Please note that non-IFRS numbers may be used during this conference call. A reconciliation of these non-IFRS numbers with IFRS numbers is available in the Q1 2020 news release on the website. All dollar amounts in this conference call are expressed in U.S. dollars, unless otherwise indicated. So without further delays, I will turn the call over to Philippe.

[Philippe Morin:]

All right. Thank you, Vance and good afternoon, everyone. First of all, I'd like to take the opportunity to wish everyone on the call here Happy New Year. Now turning to our financial results, EXFO opened fiscal 2020 with a strong first quarter performance, with sales increasing 6.3% year-over-year to $73.6 million.Now this marks the fifth consecutive quarter that our sales results finished above the midpoint of our management guidance. We're also pleased with our reported adjusted EBITDA of $7.5 million or 10.3% of sales, which sets EXFO on the right path to achieve our profitability target of $33 million for the fiscal year.Our organic sales increase is mainly due to a steady influx of Test and Measurement orders that were booked and shipped in Q1 2020 versus a back end loaded Q1 2019. Notably, we benefited from strong demand from EXFO's optical test solutions in our Asia PAC region in our first quarter of 2020 and increased appetite of our 400 gig test equipment along with our high end lab solution.Our bookings however, were down versus the same period last year. And if you recall, we had reported our second highest bookings level of $81.2 million in Q1 2019, which was due to unprecedented calendar year -- year-end spending on the part of service providers in America for our Test and Measurements products.Now given less year-end spending and some annual maintenance contracts renewal being pushed out in the second quarter, our bookings totaled $69.9 million for a book-to-bill ratio of 0.95 in the first quarter of 2020. Now we're not overly concerned about this data point, as we secured three SaaS orders, totaling more than $2.5 million in the first quarter of December, sorry, the first week of December, related to our RAN optimization, real time network topology and as well active monitoring for mobile backhaul networks.Now these deals would have narrowed the bookings gap, had they been obtained a few days earlier, and are still proof points that we're increasing our relevancy with our SaaS offering. Now speaking of our SaaS offering, we recently rebranded all of their solutions under the new Nova name for -- Nova name brand for better consistency and positioning clarity. I'm confident these solutions will increasingly gain traction as we get closer to deployment of 5G networks later in the fiscal 2020.So in short, our Test and Measurement business with sales that are up to 12.4% year-over-year continues to thrive based on our innovation we bring to the market, and ongoing tailwinds related to fiber build out and high speed deployments.On the SaaS side, sales were down 8.6% year-over-year. As we expected, we witnessed order lumpiness, as we build scale and navigate through complex customer requirements related to 5G and virtualized networks.Now let me provide you with our guidance for Q2 2020. We're forecasting sales between $66 million and $71 million for the reporting period extending from December 1, 2019 to February 29, 2020. It should be noted that EXFO recognized into revenue a $5 million network topology order in Q2 2019, but we don't anticipate a similar high margin software deal in Q2 2020.Looking at the bottom line, IFRS net loss is expected to range between negative $0.09 to negative $0.05 per share for the second quarter of 2020. IFRS net loss includes $0.05 per share and after tax amortization of intangible assets, stock based compensation costs and anticipated foreign exchange loss.So at this point, I'd like to turn the call over to Pierre to cover our financials.

[Pierre Plamondon:]

Thank you, Philippe. Sales increased 6.2% to $73.6 million in the first quarter 2020 from $69.2 million in the first quarter 2019. As previously mentioned, we increased our sales year-over-year mainly due to a more steady flow of customers order in Q1 2020 compared to the same period last year, in which a significant portion of our order were backend loaded and only recognizing to revenue in the following quarters. We've also been seeing some stronger demand for our solution in the Asia-Pac region in Q1 2020 compared to Q1 2019.Bookings, meanwhile decreased 13.9% year-over-year to $69.9 million in the first quarter of 2020 for a book-to-bill ratio of 0.95. Gross margin before depreciation and amortization improved to 58.9% of sales in the first quarter of 2020, from 58.2% in the first quarter of 2019. The adoption of IFRS 16 raised our gross margin by 0.4% in Q1 2020, while our Q1 2019 gross margin included 0.4% for restructuring expenses.In terms of operating expenses, selling and administrative expenses decreased to $24.5 million or 33.2% of sales in the first quarter of 2020, from $26.4 million or 38.1% of sales in the first quarter of 2019. The $1.9 million decrease in SG&A expenses reflect the full impact of our 2018 restructuring plan, the adoption of IFRS 16 and no restructuring charges in Q1 2020.Net R&D expenses dropped to $11.7 million or 16% of sales in the first quarter of 2020 from $15.2 million or 22% of sales in the same period last year. Likewise the $3.5 million decrease in net R&D expenses is linked to the positive impact of our 2018 restructuring plan, the adoption of IFRS 16 and no restructuring charges in Q1 2020 compared to $2.1 million expense in Q1 2019.On the other hand, SG&A and net R&D expenses were negatively affected by inflation and 2019 salary increases. IFRS net loss totaled $0.1 million or $0.00 per share in the first quarter of 2020 compared to a loss of $7.5 million or $0.14 per share in the first quarter of 2019. IFRS net loss in the first quarter of 2020 included 1.4 million in after-tax amortization of intangible assets, $0.5 million in stock-based compensation costs and a foreign exchange loss of $0.1 million. IFRS net loss was impacted by restructuring charges of $2.7 million in the first quarter of 2019.Adjusted EBITDA totaled $7.5 million or 10.2% of sales in the first quarter 2020 compared to $2.7 million or 3.9% of sales in the first quarter of 2019.EXFO adopted IFRS 16 related to leases on September 1, 2019, which had a positive impact on adjusted EBITDA of $0.9 million or [1.2%] [ph] of sales in the first quarter of 2020. Prior period amount were not adjusted.Geographically, the America accounted for 54% of total sales in Q1 2020; Europe, Middle East and Africa represented 29%; while Asia Pacific totaled 17%. In comparison, the sales split was 51%, 32% and 16% among the three geographic region in the first quarter of 2019. In terms of customer mix, our top customer accounted for 11.9% of total sales in Q1 2020, while our top three represented 19.7%.Turning to a few key points on the balance sheet, our cash position decreased by $1.9 million to $17.5 million at the end of the first quarter of 2020. This decrease is mainly due to $6.5 million in cash flow used by operation, $2 million for the purchase of capital asset, $1.5 million for the repayment of lease liabilities and long term debt, and $0.2 million for the redemption of share capital. These cash amounts were partially offset by a $8.4 million increase in our backlog in the first quarter of 2020. At the end of Q1 '20 EXFO has net debt position of $0.8 million and available revolving credit facilities up to $47.7 million.At this point, I will turn the call over to the operator for the start of the Q&A.

[Operator:]

Thank you. [Operator Instructions] We will go first to Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos:]

Hi, good afternoon. So maybe if I look at your results this quarter and the guidance for next quarter, it would seem you're looking for the first half of the fiscal year to be relatively flat year-over-year. So I mean, based on your commentary, should we attribute that primarily to a tough year-over-year comp or what's the bigger picture here? Is it may be that you're still seeing some pause from operators as they sort out through their 5G requirements?

[Philippe Morin:]

Yeah, I think yeah. So you're right, so when you look at the first half, the first half will be roughly around flat performance. Coupled I would say two facts. One is the test and measurement lumpiness that we had last year, the yearend money was greater than what we've done this year, what we've seen this year. And as well, the CenturyLink customer, [Nova context] [ph] for Ontology that we announced last year. If you remember the $5 million purchase order that also came into Q2 that we don't believe we're going to realize a similar type of contract this quarter. So that's kind of combination of those two things.

[Thanos Moschopoulos:]

Okay. And then if we just look at sort of the SaaS business, I mean, the bookings have been a little softer the last three quarters. Now obviously that's lumpy segments. But how would you characterize the pipeline, your discussions with operators? And how does it evolve over the last while? I mean, would you still expect to see the inflection point maybe later this year as there's more 5G activity? Or is there any change in that time frame?

[Philippe Morin:]

Yeah. So we're going to continue to see -- I guess we're predicting an inflection point more into the latter part of our fiscal year. We see some of our -- if you remember we have three phased approach with regards to 5G deployment. The first one is around the whole impacting our test and measurement for fiber build out and small cells and and we're seeing the benefit of that. The second phase is around optimization, mobile backhaul, monitoring and so on. And that's continuing and we do expect to see some demand as I mentioned in my opening remarks.And then the 5G real core deployment, which we expect more as an inflection point into the latter part of 2020. We do see that there's still work being done, RFQs are being going through that hopefully will convert into our second half or 2020 in terms of our performance from a bookings point of view.

[Thanos Moschopoulos:]

Okay. Would you still hope to achieve mid-single digit revenue growth for the fiscal year?

[Thanos Moschopoulos:]

Yeah. And as I mentioned, as well, achieving the $33 million of EBITDA as well.

[Thanos Moschopoulos:]

Okay. And the question for Pierre. Taxes were higher this quarter, what is that related to?

[Pierre Plamondon:]

Yeah, it's mostly a matter of timing of the tax in the country. But for the next quarter we're expecting probably an tax expense average of $0.5 million for the quarter.

[Thanos Moschopoulos:]

Okay, and then looking at your guidance it would seem that OpEx should be relatively consistent in Q2 relative to Q1, is that correct?

[Pierre Plamondon:]

You remember that in Q2 we have these increases starting in January 1. And we do add some benefits like insurance premium is one that they kick on again at the beginning of the year. So and you have probably mentioned this that the currency is not playing in our favor in this quarter as that can generally get stronger compared to the previous quarter. So all of those events tend to increase our OpEx for next quarter.

[Thanos Moschopoulos:]

Okay, and what level of FX gain or loss is embedded in your EPS guidance?

[Pierre Plamondon:]

It's a roughly $0.01.

[Thanos Moschopoulos:]

Okay. All right. Thank you. I'll pass the line.

[Philippe Morin:]

Thank you.

[Operator:]

We'll move next to Todd Coupland with CIBC.

[Todd Coupland:]

Good evening, everyone. I had a question on -- follow up question on the 5G. What can we watch for from the outside to see whether the market is moving in line with your expectations over the course of this year? What are some of the signs we should watch for?

[Philippe Morin:]

Yes, what we're monitoring ourselves is one activities associated with [antenna] [ph] small cell deployment and fiber deployment associated with it. Second is announcements around what I would call the 5G radio, new radio selection from our customer base, and then the virtualization announcements in terms of what they're looking at modernizing their network. These are kind of the bellwether we're looking at with regards to the activities. Obviously, internally, we see RFQs and RFIs that we received. But from an external point of view, these are kind of the activities I would say are either leading front-end indicators of the 5G deployment about to happen.

[Todd Coupland:]

And the new -- I mean, it's a good point on the new radios. I mean, this has been something the sector's been watching for a while. Would you think that that happens when some of the later in calendar Q1, early Q2 releases from the carriers come out. Is that the kind of timing that's generally expected right now? And so that'll say, yes, the RFQs will turn into orders this year? Or do you have a different view of that?

[Philippe Morin:]

Yes. I think it really depends on by countries and then it starts off as you know Todd, first of all, they're going to be auctions for the particular spectrum in each of the respective countries and then in certain countries, you've seen already deployment of new radios being deployed. Obviously, the U.S., Korea and China are examples of where that's taking place.And then right behind that, you've got the opportunities for not only the new radio, but the modernization or the virtualization of the core and the [ramp] [ph], which follows right behind that. So that's kind of the leading indicators that I think the industry should be looking for.

[Todd Coupland:]

Okay. And if you were to -- again, just to be as precise as possible -- characterize your view of the rollout of these indicators now versus three months ago, has it changed at all? And if so, how?

[Philippe Morin:]

What's changed versus three months ago, I would say for depending on the regions, again, the level of some of our activities with response to -- responding to RFQs. I think six months ago, we were still having discussions around architecture and POCs [ph]. Now we're seeing some RFQs for monitoring for service assurance, virtual service assurance, that are starting to come in and then increasing - with that level of increasing activity, depending again on the regions. So that that would be the difference between three to six months ago.

[Todd Coupland:]

Okay. Last question for me. Is there any way for you to characterize your market share now, let's say, versus last year or the last cycle, do you -- directionally can you -- can you give any commentary on that?

[Philippe Morin:]

Yes, I'll answer the market share, I mean as you know we have two business units. So on the Test and Measurement side with our optical test solution, we believe we are number one market share and with the addition of our lab solutions with the acquisition that we made two years ago in Yenista, we actually believe we've increased our position there.With regards to SaaS, the market is very fluid, very dynamic. There's lots of solutions involved in this. We like to use -- Analysys Mason did a report about a month ago, for the year of 2019. And they put us at number two at 9% market share for that year behind NETSCOUT. But again, that was probably from a 2019 view. So with a very focus on the Service Assurance probe, virtual probe, [ph] and monitoring capability.But as you know, in our SaaS product, we have fiber monitoring, we have our simulator product. So it becomes really more complex trying to figure out exactly where we stand in terms of that total market share. But overall like in the pro market, we've made some improvement in our market share in the last 18 months.

[Todd Coupland:]

And is it too early to tell whether Astellia is going to help you raise your market share for 5G particularly in the U.S.?

[Philippe Morin:]

Well Astellia for sure it helps us with regards to having a solution and the portfolio that we didn't have before. Especially a virtualized solution that we've been able to implement into through UK and Europe and also provides us with professional services capability that we didn't have before. So absolutely it will help us in our positioning in North America for 5G and for Service Assurance deployment for 4G plus and 5G as well in North America.

[Todd Coupland:]

Okay. Great. I really appreciate the color. Thanks a lot.

[Philippe Morin:]

Thank you.

[Operator:]

[Operator Instructions] We'll move next to Tim Savageaux with Northland Capital Markets.

[Steven Chercover:]

Hi, this is actually Steven on for Tim. Thank you for taking my call. I was wondering if you guys could give us a little color, any indication on the drivers for your guide next year in terms of like optical and protocol.

[Philippe Morin:]

For the next quarter you mean, guidance for the next quarter?

[Steven Chercover:]

Yes, correct.

[Philippe Morin:]

I just want to make sure. I thought you said guidance for next year. So I just want to make sure we're talking about guidance for next quarter.

[Steven Chercover:]

Yes, next quarter.

[Philippe Morin:]

Yeah. So again, as you may know, Q2 for us is from a seasonality point of view is a quarter that goes from November -- sorry, December, January and February, which is a bit more of a challenge for us in terms of both the T&M and SaaS because we've got, obviously the holidays and Chinese New Year's and so on. And so that's part of the one take into account when we do the guidance, the seasonality aspect of that. And as well, when you look at our backlog, you look at the booking level. Our book to bill ratio being at 0.95, it really got us to a point where that's providing our guidance to make sure one we -- it is a realistic guidance for our revenue profile.So it takes into account the seasonality. It takes into account the service provider approval process and budgeting process that they go through at the beginning of the calendar year. And it's also taking into account the backlog that we've walked into the quarter following our bookings that we did in Q1.

[Steven Chercover:]

Okay, great. And then again, do you think you could give us any more color on like optical compared to like last year, and even compared to this quarter.

[Philippe Morin:]

So the what happened last year, and again, just to remind everybody Q4 2018 was a softer quarter for us from T&M point of view and Q1 was very strong as I mentioned in my opening statement. If you actually look at it from a six month point of view, and you compare the six month to Q4, 2019, with Q1 2020, over the same period a year before, what we're seeing is a T&M market that's absolutely from a bookings point of view pretty flat. So what we're seeing is more of an even out over six months of that particular activity in that particular market segment.We do foresee as we talk to our service provider customers and our web scale customers that they are continued to do the fiber build out there. And on top of that, that's coupled with our 400 gig solution that we're seeing some really nice momentum there. And the ongoing lab, the Ion [ph] lab solutions that we have, we continue to foresee a good high demand for that T&M portfolio.

[Steven Chercover:]

Okay, thank you.

[Operator:]

We’ll hear next from Christian Sgro with Canaccord.

[Christian Sgro:]

Hi good evening. Just one question to add. With a longer term view, would you point out any seasonality across the two business segments? You're often calling that the SaaS segment is lumpy, but thinking about quarter-to-quarter in the longer term, is there something we should be looking for in spending patterns and the spending environment?

[Philippe Morin:]

So there's more seasonality associated with the T&M business than there is with the SaaS business. The SaaS business tends to be more lumpiness from the point of view of bigger contracts, longer sales cycles and lumpiness from the point of view of bigger contracts, longer sales cycles and when we close these deals, as I mentioned earlier, last year, we closed it was a 5 million deals of this tend to have multiyear multi-million dollar contract. So there's no seasonality on the SaaS side, it's more about closing deals, and they're longer sales cycles and more complex types of versus T&M there is more seasonality aspect associated with it. And as well, being able to convert those bookings that tends to be more back ended into the quarter to be able to convert them into revenue.

[Christian Sgro:]

Okay, that’s helpful. But when you look quarter-to-quarter across the fiscal year, is there a period in the year where you would say that some of your customers are looking to, I think it’s called budget flush [indiscernible] spend more or is that not so much seen anymore.

[Philippe Morin:]

And your question on SaaS or on T&M or overall?

[Christian Sgro:]

That’s all T&M.

[Philippe Morin:]

Okay, so T&M, so the seasonality there are yearend money being spent, and we saw some of it this year, but not as much as last year, tends to be in Q1 of our fiscal quarter. Now this year, we saw some yearend money but not as much as the previous year.

[Christian Sgro:]

That’s all helpful. Thank you for taking my question.

[Philippe Morin:]

Thank you.

[Operator:]

And at this time, I'd like to turn things back to CEO Philippe Morin for closing remarks.

[Philippe Morin:]

Thank you. So just a few key takeaways before we conclude this call today. So first EXFO delivered a strong first quarter based on our sales mainly all of them are organic sales now, increasing 6.3% year-over-year and a adjusted EBITDA reaching $7.5 million or 10.3% of sales.Second, we received more than $2.5 million of SaaS related orders in the first week of December, and had we secure these orders a few days earlier our book-to-bill ratio would have been closer to one in our Q1 2020. And so consequently, timing of orders continues to affect our SaaS business as we build the scale of that particular business unit. We evaluate the performance of our SaaS business more and more into six months period and I would actually encourage you to do likewise.So finally, EXFO will be holding its annual meeting on Wednesday 9 am at the Vantage Venues room L2, on the 27th floor located at 150 King Street West in Toronto. Both shareholders and analysts are welcome to attend. This point is concludes our Q1 2020 conference call on behalf of the entire EXFO team, thank you for joining us today.

[Operator:]

Again, that concludes today's conference. Thank you all for joining us.