EXFO Inc.
Q2 2019 Earnings Call Transcript

Published: 3 Apr 2019

[Operator:]

Good day, and welcome to the EXFO's Second Quarter Financial Results for Fiscal 2019 Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to EXFO. Please go ahead.

[Vance Oliver:]

Good afternoon, and welcome to EXFO's second quarter conference call for fiscal 2019. 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 results with IFRS numbers is available in the Q2 2019 news release on our website. All dollar amounts in this conference call are expressed in U.S. dollars, unless otherwise indicated. So without further delay, I will turn the call over to Philippe.

[Philippe Morin:]

Thanks, and good afternoon, everyone. And very pleased that today EXFO delivered an outstanding second quarter with strong revenue and bookings growth, profitability and as well cash flow generation. First, on revenue. Our revenue increase by 14.2% year-on-year to $73.9 million, which is at the high end of our guidance range of $70 million to $75 million. This double-digit sales increase can mainly be attributed to a full quarter contribution from Astellia and as well as strong results from our test and measurement, and network topology solutions. These same factors are responsible for our robust sales growth of 11.7% as we reached our halfway mark of our fiscal year 2019. Second, on bookings. Bookings improved 16% year-on-year to $76.1 million for a book-to-bill ratio of 1.03 in our second quarter. Obviously a strong book-to-bill ratio above 1 always represents business momentum. And this is following our second highest bookings results, which was $81 million. And for the company's history, that’s a place in our Q1 -- our prior quarter, Q1 2019. Third, on our profitability. Our adjusted EBITDA totaled $8.8 million, close to 12% of our sales in our second quarter 2019. This improved level of profitability clearly demonstrates that the leverage in our operating model. When we have increased revenue from high-end, high-margin systems based solutions that impact our bottom line. And as we looked at our mid-way point of our fiscal 2019, our adjusted EBITDA now stands at $11.5 million, which is on plan to achieve our $24 million annual target. Finally, our cash flow. Cash flows from operations surged to $18.7 million in the second quarter, raising cash and raising short-term investments to $27 million and returning EXFO to a positive net cash position of $10.7 million. Now cash flow generation has always been a key priority for the Company, but more so following the acquisition of Astellia last year. And that focus has translated into a strong replenishment of our cash position. Now, all these proof points demonstrate that we are on track with our profitable growth strategy and have made a very rapidly changing communication industry. And I'm really a firm believer that companies that can adapt to this multiple customer transformation and that can evolve with customers’ requirements like fiber buildout at the network edge or 5G wireless deployment, or network virtualization, those companies that can adapt will thrive in our industry. Now, let's take a closer look on how our two major businesses, product families perform in our second quarter. In terms of test and measurement, sales were up 1% year-over-year, despite reduced legacy copper access sales, which are characterized by large and intermediate deals. Now, the key growth theme for our test and measurement business in North America was around network densification in preparation for 5G wireless networks. I do anticipate that this trend will accelerate in upcoming months as communication service providers raise to fiberize their optical edge and their fronthaul networks in support of 5G commercial deployments. And clearly, our optical and high-speed transport test solutions will continue to benefit from the strength as 10 gig and 100 gig rates per minutes, various parts of their network. Now, if we look in Europe, we are seeing a growing appetite for fiber-to-the-prem test solutions especially fiber-to-home flavor. After several years of building out metro optical networks, many European service providers are now accelerating their fiber investment to the edge of the network to meet the rising bandwidth requirements of their customer base. Now, this market dynamic obviously plays well to EXFO’s strength as our OTDR capability along with our award-winning intelligent optical link mapping software capabilities have captured the majority of available orders. Now, in addition, our 400 gig test solutions for network equipment manufacturers and advanced test solutions for labs made significant inroads with customers globally. I am also pleased with Yenista’s revenue contribution in recent quarters, confirming the rationale of the acquisition that we did for that company 18 months ago. Yenista’s high end optical spectrum analyzers have clearly filled the gap in our optical test portfolio for the lab and manufacturing environment. Now, on our service assurance, systems and services side, the sales increased 63.9% year-over-year, or 28% if we exclude the Astellia's revenue contribution. Now, as announced earlier this year in January, a $4.9 million network topology deal with a tier 1 U.S. service provider allowed EXFO to post double-digit sales growth on an organic basis. This key contract win comes also with a multimillion dollar customer support plan over the next three years. So, our real-time topology solution plays a critical part of this customer's network transformation by mapping network resources with related services to provide a comprehensive view of their network inventory. So, our SASS product family also received solid revenue contribution for our fiber monitoring solutions in our second quarter, which continues to resonate with service providers worldwide but especially in Asia PAC. Our fiber monitoring system is also an extension of our OTDR solutions, which allows a centralized, real-time monitoring of optical networks to detect fiber breaks or fiber performance issues. Our monitoring solution reduced troubleshooting time and allows cost savings for service providers like NBN in Australia that have deployed our solutions. As we continue our transition towards software-based solution and as we increase the relevancy of our SASS solution with tier 1 service providers, the funnel of similar network topology and fiber monitoring deals will widen and our revenue recognition will become more predictable. So, now, let me provide you with our guidance for Q3 2019. We're forecasting sales between $70 million and $75 million for the reporting period extending from March 1st to March 31, 2019. Looking at the bottom-line, IFRS net loss is expected to range between negative $0.04 and $0.00 per share for the third quarter of 2019. IFRS net loss does include expenses of $0.05 per share and after-tax amortization of intangible asset and stock-based compensation costs. Now, at this point, I'd like to turn the call over to Pierre, so he can cover the financials in more detail.

[Pierre Plamondon:]

Thank you, Philippe. Sales increased 14.2% to $73.9 million in the second quarter of 2019 from $64.7 million in the second quarter of 2018. We increased our sales year-over-year, mainly due to a $7.5 million revenue contribution from Astellia compared to $1.8 million for the one month during the same period in 2018. We also recognized into revenue the $4.9 million order for network topology that Philippe talked about earlier. These factors were partially offset by a negative currency impact on revenue based on the stronger average U.S. dollars as we have some sale in Canadian dollars and euro but report in U.S. dollar financials. Gross margin before depreciation and amortization amounted to 60.7% of the sales in the second quarter of 2019 compared to 60.9% in the second quarter of 2018. Although our gross margin remained relatively stable year-over-year, we had some moving parts. As mentioned before, we recognized into revenue a high margin $4.9 million network topology deal in the second quarter of 2019. This was mitigated by the fourth quarter contribution from Astellia, which as expected, carry a lower gross margin than our corporate average due to higher proportional of sales coming from professional services. In terms of operating expenses selling and administrative expenses totaled $25.5 million or 34.4% of sales in the second quarter of 2019, compared to $24.9 million or 38.5% of sales in the same period last year. The $0.6 million increase in SG&A expenses reflects a full quarter contribution from Astellia, some increases year-over-year and restructuring charges in Q2 2019. These expenses were reduced by our researching plan with some help from currency fluctuation as the average value of the Canadian dollar and the euro decrease compared to the U.S. dollar. We also incurred acquisition-related cost of $1.4 million in the second quarter of 2018 compared to nil for the most recent quarter. Net R&D expenses reached $12.2 million or 16.5% of sales in the second quarter of 2019, compared to $13.1 million, or 20.2% of sale in the same period last year. The $0.9 million decrease in net R&D expenses is directly related to our restructuring plan with the added benefits of currency fluctuations. These positive effects were partially offset by the full quarter impact of Astellia acquisition, some increases and restructuring charges in Q2 2019. IFRS net earnings in the second quarter of 2019 totaled $5.2 million or $0.09 per share. In comparison, IFRS net loss attributable to the parent interest reached $4.7 million or $0.08 per share in the second quarter of 2018. IFRS net earnings in the second quarter 2019 included $1.9 million in after tax amortization of intangible assets, $0.5 million in stock-based compensation cost, $0.5 million in after tax restructuring charges, $0.6 million for acquisition-related fair value adjustment of deferred revenues, and then foreign exchange loss of $0.4 million. These expenses were offset by the sales of a building under EXFO’s restructuring plan that generated a gain of $1.7 million in the second quarter of 2019. We also benefited from a deferred income tax recovery of $2.4 million in the second quarter. Geographically, the Americas accounted for 50% of total sales in Q2 2019, Europe, Middle East and Africa represented 34%, while Asia Pacific totaled 16%. In comparison, the sales split was 49%, 33% and 18% among the three geographic regions in the second quarter 2018. In terms of customer mix, our top customer accounted for 14.9% of total sales in Q2 2019 while our top three represented 24.7%. Turning to a few key points on the balance sheet. Our cash position increased to $27 million at the end of Q2 2019 from $20.1 million in the previous quarter. This $6.9 million increase is mainly due to $18.7 million in cash flow from operations and $3.3 million for proceeds from the disposal of the building we sold in Q2. These items were partially offset by $12.5 million reduction of the bank loan, $1.8 million for the purchase of capital assets, $0.7 million for the repayment of long-term debt and $0.1 million for the redemption of share capital under our normal course issuer bid. At the end of Q2 2019, EXFO had a net cash position of $10.7 million and available revolver and credit facility up to $53 million. At this point, I would turn the call over to the operator for the start of the Q&A. Thank you.

[Operator:]

[Operator instructions] And we’ll go first to Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos:]

Hi. Good afternoon. Philippe, maybe to summarize I guess your commentary on how the market environment is looking, it sounds like you’re seeing building demand in preparation for 5G that’s already translating into an uptake in the optical test and measurement side and then you mentioned the progress, does that capture it, maybe just diving deeper into the copper issue that you mentioned as well, how long should that be headwind forward? That’s the question, or I guess reflecting the restructuring you have done that in business and how long will that be a drag for you?

[Philippe Morin:]

So, the market dynamic, Thanos, continues to be -- on our high-speed and optical portfolio continues to be fairly consistent as the first two quarters that we just went through. So, 10 gig, 100 gig for fiber deployment, fiber to the antenna in preparation or densification in preparation for 5G, data center interconnect, especially North America, that continues to be a big trend. But, as I highlighted as well, Europe continues to grow for us at a faster pace actually than North America. Thanks to the fact that you’re starting to see much more deployment to the fiber to home and fiber to the prem, and therefore the impact on our -- both our fiber characterization equipment and as well 10 gig and 100gig. The MEMS, [ph] as you highlighted, we’re very happy with now the progress we made. The acquisition, as I said, of Yenista, took place 18 months ago. By doing integration, training your sales team, we are now seeing now that the benefit of that acquisition and the rationale behind being able to take a strong reposition in the labs and manufacturing business, and Q2 was a good proof point of that performance. With regards to corporate, as you mentioned we are continuing to see some business on copper but our investment focus continues to be more where we see the market evolving is on fiber and fiber deployment. Copper does continue to add some business, but we feel that we are going to continue to see that market going through a bit of a headwind as our customers are transitioning away from copper and continuing to transition more and more towards fiber deployments.

[Thanos Moschopoulos:]

So, question is how much longer step your year-over-year drag? I guess, the impact probably just diminishes over time given the uptick you’re seeing on the optical test side? Is that correct?

[Philippe Morin:]

Yes. No, I think -- yes, I think we're always surprised that legacy kind of business always takes more time to reduce. So, I think we're going to continue to see some business, we’re going to obviously continue to support our opportunities with our existing customers. So, I do expect we're going to continue to see business for the next few quarters. But, that's going to continue to diminish as we -- as we move through our fiscal year.

[Germain Lamonde:]

This is a business that was going to see -- Thanos, to your question, this is a business that is very -- pretty table and it’s such a business that is not going to decline very fast. And given the fact that it’s not a big part of our business overall, the significance when it comes to the overall numbers of the business is rather small.

[Thanos Moschopoulos:]

Thanks for clarifying. Maybe just couple of modeling questions. Remind us, is this the quarter in which the maintenance -- the customer support bookings usually come through where there's the seasonality in that regard?

[Philippe Morin:]

Yes. So Q1, Q2 tends to be that -- Q2 obviously being -- having the month of December when you have year-end. And so for customers that didn't sign in December, you tend to get that into the January Month. So, it does have that benefit from a maintenance contract renewal.

[Thanos Moschopoulos:]

Okay. And maybe just one last one for some on the MEMS business. Just remind us what the sales cycles look like in that business. Is that a fairly quick turns business or is that more of a design process about customer makes a longer term decision as to whose products to use and then once they do, it ramps quickly after that?

[Philippe Morin:]

Yes. No, I think the -- I would say it’s a bit longer sales cycle than the normal P&M business, the portable business, but it is a much faster cycle then -- especially if you put that in context, Thanos, of our Service Assurance business, which is a much, much more longer sales cycle.

[Operator:]

And we'll go next to Todd Coupland with CIBC.

[Todd Coupland:]

Good evening, everyone. I also wanted to ask about 5G. I just wanted to understand your comments. So, what I heard was copper is not a significant part of our business, but it is going to continue to be a bit of a headwind, although not a material one. So, I guess, what my follow-up question is, I get your point on calling out 4G densification to prep for 5G, but what I'm not sure on where it's what's not clear is you're basically saying that business is flattish. So, is there any way for you to unpack for us what kind of growth you're seeing from 5G or is it just not materially enough for you to call it out? Just a color on that would be helpful. Thanks.

[Philippe Morin:]

I think, the densification of the edge network or the wireless network is absolutely growing and happening as we speak. Whether it's in the context of 5G, as you said, Todd or 4G and 4G, plus, you are seeing fiber being deployed. First of all, you're seeing much more smaller -- small cells being deployed, new antenna is being deployed and you run and then ultimately fiberization of that taking place. And we're seeing the benefits of that with the fiber characterization of both fiber densification and fiber deployment. And yes, when you look at our overall bookings growth from a T&M point of view, let's say it's kind of flattish and that was a comment we made is that it did include, and if you compare it to our Q2 2018 to Q2 2019, there was two impacts on that one, one we meant we talked about the copper, it tends to be more copper active, it tends to be to be more intermittent and bigger deal, which happened in Q2, 2018 and did not happen again this quarter, and then also there was also an impact of foreign exchange impact for about $1 million and so. Overall when you take those two effects out, you would have seen again a growth coming from the fact that we are exceeding densification at the edge of network for 4G plus and preparation for 5G and that's impacting positively our business.

[Todd Coupland:]

And you did call it out as a common trend this year, your fiscal year. Did it actually accelerate in this quarter or is it consistent with the prior quarter?

[Philippe Morin:]

Again, it's very -- Q1 and Q2 have been good quarters for us, consistently. And again, driven on top of that by as I mentioned the 100 gig being deployed for data center and interconnect, and the impact there on that business.

[Todd Coupland:]

Let me ask the question one other way. So, if we were to roll forward a year or so when we’re seeing wider deployment of 5G, did your growth and the impact of that look different than it is now or is it just a continuation of this trend? So, would there be a immaterial acceleration, if the market plays out as generally expected?

[Philippe Morin:]

I think, the markets generally -- you are seeing more of customers, many more customers deploying into densification. And outside of just North America, then yes, we would probably see a faster growth because that network densification tends to be more North American based versus Europe. As I mentioned in my opening statement, it tends to be much more on fiber deployment from fiber to the home, fiber to the prem where you're seeing some nice growth happening there as people are fiberizing their network to the edge, not necessarily in the context of wireless.

[Todd Coupland:]

My second question had to do with the gross margin. So, the network topology upside that you benefited from in the quarter, so if we were to think about the gross margin, I got the impression that that's a one-off impact. So, if that's correct? Should we see a decline in the gross margin full Astellia contribution over the next couple of quarters? And if so, give us an idea on what that might look like?

[Philippe Morin:]

Yes. So, that $4.9 million tier 1 obviously a contract. And as I mentioned, also comes with a multiyear professional services contract. It does have again a positive impact for us this quarter. But I wouldn’t call it a one-off. I mean, this is -- the topology, the network topology capability where we can provide real-time inventory or real-time correlation of what’s happened in the network is absolutely continuing to getting traction with other customers. Granted we did really good news with this particular account. Going forward, obviously when we look at our guidance associated with gross margin, and I'll let Pierre comment, we did take into account the fact that there was a positive impact in Q2, and we use that clearly when we provide our guidance. From a SASS business point of view, I want to reiterate that we have multiple solutions in that, whether it’s a network topology, fiber monitoring, Astellia portfolio, our active portfolio, they tend to be, as I mentioned many times, tend to be bigger deals and tend to be a longer sales cycle. Our objective is to bring critical mass to that funnel and critical scale to that funnel, so that we can provide more predictability into our overall revenue profiling. But clearly, we are not at that level well yet in terms of the sale of that. But I think that this is -- what we’ve announced in Q2 was another good proof point of that -- of our capability of achieving it and really highlighting the fact that we have -- we are on a journey to get that scale in that business and therefore the predictability in our revenue profile.

[Pierre Plamondon:]

And maybe one more comment. So, for sure the mix of the project will have an impact on the margin. And especially in this quarter, we have three months;’ contribution from Astellia. And as we said has a margin profile lower than the historical business of EXFO as they deliver a lot of professional services. So sequentially, if you look to, sequentially in Q1, we have 58.7% gross margins in Q1; now, we have 60.7%. We did increase the gross margin. Yes, you are right, the $4.9 million did help to increase the gross margin. Otherwise the rest of the business is stable and we do incorporate the Astellia full quarter, next quarter and the calculation quarter-over-quarter will be more-easy to do.

[Todd Coupland:]

Okay. And then, just lastly, that was a very strong EBITDA in the quarter, for the reasons that we’ve been speaking about here. Do you have any updates on sort of your target, annual target for EBITDA margins and any EBITDA of this year, any puts and takes around that? Thanks very much.

[Philippe Morin:]

Yes. Todd, as I reaffirmed it in my opening statement, we are actually on path to achieve our $24 million adjusted EBITDA goal that we set at the beginning of the year.

[Operator:]

We’ll go next to Tim Savageaux with Northland Capital Markets.

[Tim Savageaux:]

Good afternoon. Couple of questions. First, with regard to guidance for revenue. I wonder if you could talk about the dynamics there. You’re guiding kind of flat [ph] with your guidance range last quarter. Obviously that included a big $5 million one-time order. So, to the extent you expect to make that up, would that the normal seasonal increases on the tests and measurement side after seasonally week fiscal Q2, or how would you sort of characterize the dynamics driving your guidance for next quarter by business segment?

[Philippe Morin:]

Yes. So, thanks, Tim. As we get into our Q3, Q3 tends to be -- when you look at this, seasonality tends to be every quarter for our test and measurement business. So, we do -- are looking forward to get that aspect of it. The other thing is we are leveraging on our book-to-bill ratio that was also at 1.03. So, that’s helping us as well provide the guidance that we have. So, we did build backlog which we are going to be leveraging obviously this quarter. So for us, it's all of these types of factors that helped us provide the guidance that we've provided here.

[Tim Savageaux:]

And sticking with test and measurement, I mean, obviously, you did orders come down from a very strong level in fiscal Q1. But anything there outside of normal seasonality to comment on from a bookings perspective in Q2?

[Philippe Morin:]

As I mentioned earlier, so I think when you look at the flatness or from a point of view of Q2, there's around, again, as I mentioned earlier, in Q2, 2018, we did have a strong performance on our copper axis, which, again, that business is going to continue, but maybe not as some of the big projects we've had. But I do think that the overall progress we're seeing and the momentum we're seeing on 10 gig, on 100 gig, on 400 gig as well, the NIMs, is really going to continue to help us out. And then also if you remember, Tim, because I know we did talked about that. From a Q1 point of view, we did have some year-end money that ended up coming in as well into the quarter. So, overall, when you look at it from a first half point of view, we've got nice double-digit growth on our TNM business. And overall, I think that we do see that momentum carrying forward into our second half.

[Germain Lamonde:]

And I think, overall, Tim, you're probably right thinking that Q2 from the TNM's point of view tends to be seasonally weak as much as Q1 was very strong, and we tend to have a stronger Q3. What we've seen in Q2 as per Philippe's comments is that overall very good results. Basically, the slowness of Q2 in TNM's standpoint were pretty much well offset with the near timing in that order that we got from the SASS standpoint, so this is really like -- and we typically get a stronger Q3.

[Tim Savageaux:]

Understood, and clearly, the budget for us in Q1 exaggerates that comparison sequentially…

[Philippe Morin:]

Yes, that's why you got them all from a first half kind of view, Tim.

[Tim Savageaux:]

And moving on to bottom line guide for Q3, assuming gross margins do come back down a bit given the mix impact. And it did look like R&D was a little bit lower than I would have expected in Q2. So you are tending to forecast a little bit of a bump up in the OpEx side, but not huge. And usually see some declines in your fiscal Q4. So I wonder if you could characterize the direction of OpEx through the back half of the year given what looked to be lower than expected R&D in Q2, guidance was fairly modest increases in Q3?

[Pierre Plamondon:]

The overall comments is we're seeing the effect of the restructuring plan that we have implemented that year, so we've said that we're going deliver 8 million savings this year and annually 10.5 million and we online on that. You have to remember that for Q4 usually our expectations tend to be lower because of the vacations. So when you model for Q4, you need to assume that probably and this is the main element that you have to take care of.

[Philippe Morin:]

Tim, obviously, the other thing that we're -- I think we've done a good job of being diligent on our overall OpEx spend as well. So we're going to continue to do both on sales and R&D to make sure that as we as we head into our second half here that we maintain control here on our overall performance.

[Tim Savageaux:]

Yes, absolutely. My comment would be given where you're headed your EBITDA target looks quite achievable relative to at least what I was expecting from an OpEx standpoint. So, I think we -- sounds like we should chalk that up to basically effective restructuring, or executing on that restructuring plan. And I was going ask about the EBITDA target but you're -- so I will pass it on.

[Philippe Morin:]

Yes, the target, I guess, we are reaffirming the $24 million EBITDA target for the year.

[Operator:]

And we'll go next to Justin Keywood with JMP Securities.

[Justin Keywood:]

So on the strong cast generation in the quarter, obviously, driven by deferred revenue, but I also noticed the accounts receivable came down quite a bit. Is that in relation to what's typical as far as Astellia and seasonal paybacks there? Should we expect that to normalize for the back half of the year?

[Germain Lamonde:]

Yes, Q2 has been very good. So I'm very proud that my team have credit collection, especially on the as you said, the maintenance contracts. Q2 is a strong quarter for the original amendment contract and we're close to get the collection of the contract during the quarter, so very good execution on that during the cash flow. For sure the sales that we're doing bring $2.2 million in the bank as well. So, that's also very good execution on the receivables. We still see that the sales has been not back end loaded this quarter, so that help also the team to be able to collect the accounts receivables. So performance has been it's mostly on the execution that I think we did pretty good to collect our accounts.

[Justin Keywood:]

And then just as far as the competitive landscape, there has been announcements just highlighting the growth in the 5G area. I'm wondering if you could just speak to, I suppose advantages there and how you plan to position yourself again with some of these competitors. And also as we look for the whole year, assuming you're going achieve the EBITDA guidance. Are you going to consider investing any of that extra EBITDA back into the business and maybe sales and marketing to achieve some of the opportunity out there in 5G?

[Philippe Morin:]

So on the 5G questions, so we tend to play, I would say, at a high level into three main areas for 5G deployment. The first one is on we discussed at the beginning of the call, which is around the fiber, the fiberization, if I want to call it, of the cross haul. So bringing more fiber to the antennas, and then both front haul and backhaul and we're seeing the benefit of that growth mainly again as I mentioned in North America where we've seen lots of densification of the edge of the network with small cell deployment and new radio being deployed. The second place where we can play and is more around some of the -- we have some simulator type of products that allows us to also engage the network equipment vendors. And in terms of simulating type of behaviors of a 5G network, if you start increasing, as an example, IoT type of devices and so on. And we are engaged in a few accounts there and then our capability around ran optimization and geo-location. So as part of the Astella acquisition, we did gain a very strong portfolio around ran optimization and geo-location capability that as people start deploying 5G networks, we'll be able to play and then offer some solutions there that we hope we'll be able to do that mainly in 2020, but even at the beginning of this year. And then ultimately as networks start getting virtualized, whether it's driven by 5G or the overall network virtualization, we have our service assurance, which is completely virtualized and a proof point is our success and our win in Three UK, which is a virtualized tackle cloud business that we're providing solutions there in a 4G network, but ultimately we can port that functionality into 5G deployment. But again I'll see that more and we'll see that more into 2020 deployment. So, I hope that answers. But that's where we are playing in terms of 5G activities.

[Justin Keywood:]

And then on the idea of maximizing profits now versus investing in the business to capture the increasing opportunity, what's your view on that?

[Philippe Morin:]

Well, I think our number one objective is to achieve the $24 million EBITDA target, which would show a good execution on our part. Again, would be another proof point that our strategy, our profitable strategy is in the right direction. And then we'll see, depending on the dynamics but I would say, we need to bring more profitability to our shareholders and to the company, and I think that's where the focus will be.

[Germain Lamonde:]

Very good comments, Philippe, and just to add on this, Philippe. For your information, Justin, basically the long term planning that we have got to keep improving our adjusted EBITDA as a percentage of revenue, is still remaining very important to us. I would say what Philippe is really delivering this quarter and showing this quarter is really the fact that we're starting to execute on our long term plan. The focus is really to be back into where we used to be 12%, 14% and 15% range of adjusted EBITDA. And we really believe we can actually be there, while delivering sufficiently our long term capability to capture market share.

[Operator:]

[Operator Instructions] And we'll go next Robert Young with Canaccord Genuity.

[Robert Young:]

Maybe I'll push a little bit on this EBITDA guidance you've reiterated. Would it be fair to say that last quarter when you gave that guidance out that it was less certain to you. I assume that though you're less confident than you are today and I think probably most would agree that it seems that that's very attainable, because you're almost halfway there now. So why not raise the EBITDA guidance given what you've just reported this quarter or what less confident in that last quarter?

[Philippe Morin:]

Robert, obviously, as you highlighted, when you begin a new year, you obviously have 12 months ahead of your and you're trying to provide guidance based on market dynamics and solution. And I think obviously with what we just delivered this very strong quarter and revenue growth and bookings, and cash, and EBITDA. Yes, overall, it makes you feel more confident, because now you've got six months behind you and you've executed fairly well on the first six months. So for me, again, there is still a lot of work in front of us, there is still another six months. And obviously, as we are reaffirming our guidance to get to the $24 million and as we continue to execute, we'll see what we'll see in Q4, how the market will continue to shape up, but I like where we're at. I mean, we're seeing good market traction with our T&M business. The acquisitions we're making are highlighting that we are on the right path for our journey of our transformation of the company and responding to the market. And we've got -- and with the cash generation we did this quarter, I really like how the teams we're executing and where we're heading for our full fiscal year, but still lot of work ahead of us.

[Robert Young:]

And then the year-over-year gross margin, I mean the growth in the SASS business I would've expected that the margins would have been higher. I think you mentioned earlier in the call that that might have been related to professional services and the Astellia business. Did you say that, maybe you could flush that out a bit for me?

[Philippe Morin:]

Yes, that's what we said. So, again, as we fully capture the full quarter of Astellia this quarter and its professional services, it does, from a percentage point of view, pressure on our margins versus the overall corporate level. But I want to reiterate, Robert that professional services solution is absolutely critical for us as part of our solutions moving into SASS. It provides, obviously, stickiness with regards to our solutions, whether it's on ran optimization, or passive deployment, or in the case of our tier 1 network topology, you get now a three-year professional services multi-year deal, three year deal that continues to bring revenue and as well stickiness to the relationships. What we need to continue to focus on obviously is improving the margins on that business. And then that's where we're putting a lot of focus on that as we continue to get a better understanding of that business and as well as we continue to see the market dynamics going forward.

[Robert Young:]

And looking forward, you just had a large booking I think that wouldn't in the Astellia business, which we expect the gross margins to be held back by the Astellia business in the second-half? Or would you be reiterating that 59% to 61% range. How should we think about the strengths in bookings?

[Germain Lamonde:]

Exactly like you said, Robert. We're reiterating that range. And again, compared to Q2, in Q2, we'll have a full quarter now of comparison between last year and with the Astellia being fully on that. From a range point of view, just to maybe qualify a bit. We'll probably be closer to the lower end of that range than the upper end of the range, or more closer to the 59%.

[Robert Young:]

Okay, maybe two questions. If I exclude that large order in Astellia book-to-bill negative in both the T&M business and the SASS, and so is that a seasonality factor. How should we think about the strength of bookings? Because it sounds like you're very bullish on where you are right now. But excluding that Astellia order, you wouldn't have had very strong bookings this quarter?

[Philippe Morin:]

Yes, just to clarify. So if you extract -- first of all, it's not Astellia. If you extract the Ontology bookings, as you mentioned, we would still be book-to-bill in growth, so it's not lower.

[Pierre Plamondon:]

Total booking for Q2 is $76 million and total booking Q2 '18 is $65.5 million…

[Robert Young:]

So you're saying if you extract the Ontology deal, it's still positive, it's still above one.

[Philippe Morin:]

And then on the T&M side, again, I'll reiterate. I know, I really like to see -- the momentum we're having on fiber, the momentum we're getting on 100 gig if you look at first half, I think we got to look at it from a first half point of view, because versus first half 2018 and we've got all 9% growth. So we did $100 million in first half 2018 and then $109 million this first half. I think that’s the way you should look at it. So, a book-to-bill that's greater than one and it's reflecting the nice momentum we're having on that business.

[Germain Lamonde:]

Yes, and I would say that removing the largest deal in any given quarter is always a bit of an unfair comparison. In fact, we need to take out basically the largest deal of the third quarter if we want to compare apples-to-apples. We always have, like of course 4.9 is a bigger than average, but there's always like pretty good size deals every quarter.

[Robert Young:]

I think maybe I misread, I think Astellia is like $10.3 million contribution. And when I read that, I think I assume that would have been one deal but that’s simply -- you're talking about that’s not one deal, that’s several deals?

[Pierre Plamondon:]

Correct, that's right.

[Robert Young:]

And then maybe just last one little question, lot of talk in Mobile World Congress around Edge compute. You talked about strength of your solution at the Edge. Is that the commentary you had before, was it around this Edge compute new driver in network, or is that something that would be an additional thing that actually we might see in the future? And I'll pass it on.

[Germain Lamonde:]

So Edge compute, so the dynamic I was talking about was more about the fiber densification associated with putting small cells and putting more antennas into the edge of the network. Now, when you start talking about Edge computing, there's a bit of dynamic that I mentioned earlier about the data center interconnect. And so our data centers gets deployed more and more towards the Edge, they'll tend to be interconnected at 100 gig, they'll be interconnected in the data centers with optical fiber. So that dynamic will also be good for EXFO as we start seeing more volume with Edge computing being done, because they'll be obviously data centers that will need to be interconnected with fiber.

[Operator:]

We'll go next to Richard Tse [Multiple Speakers]…

[Germain Lamonde:]

So, let me conclude the call…

[Richard Tse:]

Just a quick question for me. From a capital allocation standpoint for the rest of this year, how are you guys thinking about acquisitions in the context that you've had obviously a series of acquisitions in the past few years? Are you on-hold now, or are you still looking for opportunities? Just the commentary on that, please? Thank you.

[Germain Lamonde:]

Well, basically, that's a very good question. In fact, we tend to be conservative when it comes to acquisition. We've been doing a few significant acquisitions in the short amount of time with the idea to transform to a new SASS business that we felt was very important for us to have critical mass in this segment. We have made a point to work for at least 18 months, with minimal acquisition with the intent to replenish our balance sheet, which as you're pointing out we're starting to get done. On the short-term basis, I wouldn't any acquisition any meaningful acquisitions to occur. But we're firm believers that acquisition is going to be part of our long-term mix. So we said 18 months to be site building, rebuilding our cash. We're now being post steady and we're now at 14 or 15 months now. It doesn't mean that 18 months sharp, we'll get something else then. But the good news is we're progressing in the direction now where we can start to address additional areas and consider additional deals. And this will be in three months, six months, or 12 months, there's no guarantee of any point but you should expect smaller acquisitions for the next ones to come in play.

[Philippe Morin:]

And then, Richard, just add to this. I mean, for me the last three acquisitions have been we're integrating them, we're on track with all the integration with EXFO optics, which is Yenista which is performing now well, you heard that into our opening comments. Ontology is really an important set of functionalities that we believe we can bring even more relevancy in. And then with the Astellia, it's slightly a bit more than a year. We'll bring that into our overall portfolio, really leveraging what we have in terms of that -- whether it's the RAN optimization , the passive portfolio and then really helping us gain more relevance in our customers. So lots of work still to do in terms of getting the full benefit of these acquisitions, but we're absolutely on the right track there and we've got to continue to make sure that we get the returns following those acquisitions.

[Operator:]

And we have no more questions at this time. So I hand the call back over to Philippe Morin for any additional or closing comments.

[Philippe Morin:]

All right, thank you very much. So just a few key takeaways before we conclude this call. So first, again, we're very happy with what we delivered as an outstanding second quarter results with both strong revenue, bookings growth, profitability and as well, cash flow generation. Again, I'll reiterate that through Mobile World Congress, through OST and multiple-multiple customer meetings, our unique value proposition resonates really well with our customers. And as our solutions really help our customers transform the network by enabling them with fiber build-outs, deepen the network edge, helping them get ready for 5G wireless deployment and as well, network virtualization. So clearly, we're – EXFO is on the track with a profitable growth strategy, and that's done in a very rapidly transforming industry. And then finally EXFO is on target with our business plan at the halfway mark of our fiscal 2019. We reported double-digit sales growth, double-digit bookings growth. And we're on the right path to achieve the $24 million adjusted EBITDA goal for our fiscal year 2019. So at this point, this concludes our Q2, 2019 conference call. On behalf of the entire EXFO team, thank you very much for joining us today. Thank you.

[Operator:]

That does conclude today's conference. We thank you for your participation.