EXFO Inc.
Q3 2018 Earnings Call Transcript

Published: 11 Jul 2018

[Operator:]

Please stand by, we are about to begin. Good day and welcome to the EXFO's Third Quarter Conference Call for Fiscal 2018. Today's conference is being recorded. At this time, I'd like to turn the conference over to Vance Oliver, Director of Investor Relations at EXFO. Please go ahead, sir.

[Vance Oliver:]

Good afternoon. And welcome to EXFO's third quarter conference call for fiscal 2018. 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 Commissions as well. Please note that non-IFRS numbers may be used during this conference call. A reconciliation of these non-IFRS results with our IFRS numbers is available in the Q3 2018 press 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:]

All right. Thank you, Vance, and good afternoon, everyone. Let me start off by saying I’d actually label our third quarter 2018 a good quarter for EXFO. Our organic business continued to deliver healthy growth while Astellia’s monitoring and services portfolio followed suit with revenue above $8.6 million and all that at the upper hand of our expectations. The solid execution across the combined organization allowed us to increase our sales by 23.4% year-over-year to $72.2 million which was near the top of our sales guidance for the third quarter of 2018. Now more specifically, we benefitted from a strong performance from our protocol-layer product line as well as revenue contributions from both the Astellia and Yenista Optics acquisitions. Now on an earnings per share basis, we did beat our outlook as well with an IFRS net loss of $6 million or loss of $0.11 per share in the third quarter. Also, we generated $4.6 million in cash flow from operations which really helped us again continued to rebuild our cash position. Looking at our physical layer product family first, sales have improved 6.7% year-over-year including as I mentioned earlier contribution from the Yenista Optics. As I have mentioned in previous calls, our physical layer continues to take advantage of our 100 gig investment cycle by virtue of our number one position globally in this fiber optics test equipment market and continued to see strong customer relationship with communication service providers and as well our web scale operators. Now turning on to our protocol layer product line, revenues have increased 60% year-over-year in the third quarter of 2018 including obviously the revenue contribution from Astellia. Excluding Astellia, our protocol sales still increased significantly in Q3 2018, which does demonstrate that other system base solutions are resonating well with our customers, as reflected by substantial contract of greater than 1 million for network topology software with our latest acquisition Ontology Systems. Of particular note, the revenue split between our physical and protocol-layer product lines has now narrowed from 70% and 30% a year ago in Q3, 2017 and now sits at 61% and 39% in our most recent quarter. Now clearly the acquisition of Astellia has bolstered our protocol revenue and this ratio should be further reduced as Astellia enters into a higher revenue generating period later in our calendar year as we continue to leverage the synergies. Equally important, our unique combination of hardware, software and professional services within our monitoring offering is helping communication service providers accelerate their software migration to a virtualized big data analytics environment with a vision towards a smarter network automation. The end result is that EXFO is in the process of creating genuine scale for our protocol business, particularly within the monitoring and analytics segments, which would enable us to become a much more relevant player and better absorb our fixed cost. At this point, I’d like to provide you with a quick update on our highly transformative Astellia acquisition. First, Astellia performed well in this first quarter under EXFO with previously mentioned revenue of $8.6 million in Q3 2018 especially since this represents a seasonally soft period for their monitoring and analytics business. If you recall, their sales tends to be tilted more towards the second half of the calendar year. Second, the Astellia acquisition has positioned EXFO as a front runner for the communications industry massive transformation towards virtualization or NAV and 5G network architectures. In fact, we are preparing to deploy Astellia virtual monitoring solution for the Three U.K. network in early fall. This highly disruptive solution will enable Three UK which carries almost 40% of mobile data traffic in the United Kingdom to be fully virtualized and fully virtualized as traditional network using NAV network virtual functions and as well cloud-based technologies. Now key benefits to Three U.K. includes heightened network performance and service agility within a more and more cost-effective architecture. But what separates EXPO’s Astellia’s offering from the competition are around customer experience, management capabilities, like churn, customer churn prediction, customer segmentation and advanced quality of experience metrics for popular application like Facebook and YouTube. In short, this multiyear 10 million deal with Three U.K. has now placed EXFO at the forefront of network transformation and will be a valuable calling card and engagement tool with all of the other communication service providers around the world. Now third, the integration of Astellia is moving ahead smoothly based on our structured multiphase plan. Cross-selling opportunities within the combined sales force are now beginning to materialize for monitoring solution and test instruments, particularly for our optical solutions which we have a stronger sales cycle. Now with this, we also remain confident about achieving our $30 million adjusted EBITDA target for our fiscal 2019, which will be reached through cross-selling opportunities and operational efficiencies. Due to [pushed] [ph] out orders and ongoing integration of Astellia, that did slow down some of our sales, adjusted EBITDA in the fourth quarter – sorry, for the full fiscal year 2018 will now finish approximately at $20 million. Now, with regards to performance by our regions, Astellia’s impact on our geography revenue breakdown gave – highly concentrated - which is mainly concentrated in Europe, Middle East and Africa. We did experience a strong shift in revenue towards this region in our third quarter of 2018 with 35% of our sales coming from EMEA, compared to 20% in the same period in 2017. This latest acquisition has enabled EXFO to diversify its revenue base with more than one third of our sales coming now from EMEA along with 49% from America’s and 16% from Asia-Pac in the third quarter. In fact, EMEA sales surged 115% year-over-year in the third quarter of 2018, and even excluding Astellia’s revenue contribution our sales increased double-digit in this region, which reflects a return of customer spending in EMEA after a few years of pushed out investments due to various regulatory and as well economic reasons. Finally let me provide you with our guidance for Q4, 2018. We are forecasting IFRS sales between $68 million to $73 million for the reporting period extending from June 1, 2018 to August 31, 2018. It should be noted that are sales guidance for the fourth quarter of 2018 is being impacted by seasonality, notably the summer holidays in Europe and as well some of our orders that got pushed out into the next quarter. And the issue has also been amplified by the recent acquisition of Astellia and the integration process. Now looking at the bottom line, the IFRS net loss is expected to range between negative $0.05 to negative $0.01 per share for our fourth quarter of 2018. IFRS net loss includes $0.10 per share of in after-tax amortization of intangible assets, stock-based compensation cost and acquisitions related, fair value adjustment of deferred revenue. So at this point, I’d like to turn the call over to Pierre so we can discuss further our financials.

[Pierre Plamondon:]

Thank you, Philippe. Sales increased 23.4% to $72.2 million in the third quarter of 2018, from $58.5 million in the third quarter of 2017. Astellia sales were reduced by $0.9 million to account for the fair value adjustment of deferred revenue and contributed $8.6 million in revenue in this third quarter of 2018. Gross margin before depreciation and amortization reached 59.9% of sales in the third quarter of 2018 compared to 58% in the same period of 2017. The reduction in Astellia sales by $0.9 million to account for the fair value of adjustment of deferred revenue lowered our gross margin by 0.5% in the third quarter. Please note also that in Q3, 2017 gross margin included restructuring charges for severance payment and inventory write-offs that accounted for 2.7%. Also, Astellia monitoring and service revenue as a lower gross margin profile than our historical gross margin since it’s service rate of revenue are more important than as [Indiscernible]. In terms of operating expenses, selling and administrative expenses totaled $26 million or 35.9% of sales in the third quarter of 2018 compared to $22.6 million or -- 38.6% of sales in the same period last year. The year-over-year increase in SG&A dollars is largely due to headcount and cost following the acquisition of both Astellia and Yenista in fiscal 2018 as well as a decrease year-over-year in the average value of the U.S. dollar compared to other currency which has a negative effect on our SG&A expenses year-over-year. These expenses were partially offset by the effect of the restructuring plan implemented in Q3, 2017. Net R&D expenses amounted to $16.1 million or 22.3% of sales in the third quarter of 2018 compared to $13.3 million or 22.7% of sales in the third quarter of 2017. Likewise, the increase in net R&D expenses year-over-year can be explained by the headcount and cost from the Astellia and Yenista acquisition in fiscal 2018, as well as the decrease in the average value of the U.S. dollar compared to other currency. Also these expenses were partially offset by the effect of the restructuring plan implemented in Q3, 2017. IFRS net loss in the third quarter of 2018 totaled $6 million or minus $0.11 per share compared to a loss of $4.3 million or minus $0.08 per share in the third quarter of 2017. Astellia net loss amounted to $6.2 million in the third quarter of 2018 including $3.1 million in after tax amortization of acquired intangible asset. IFRS net loss in the third quarter of 2018 included $4.1 million in after tax amortization of intangible asset, $0.4 million in stock-based compensation cost, $0.9 million for the acquisition related fair value adjustment of deferred revenues and the foreign exchange gain of $0.2 million. Adjusted EBITDA totaled $2.5 million or 3.5% of sale in the third quarter of fiscal 2018 compared to $2.3 million or 3.9% of sale in the third quarter of 2017. Astellia negatively impacted adjusted EBITDA by $2.2 million in Q3, 2018. As Philippe mentioned, geographically the Americas accounted for 49% of total sales in Q3, 2018 roughly that is Africa represented 35% while Asia-Pacific totaled 16%. In comparison, the sales peak [ph] last year was 63%, 20% and 18% among the three geographic regions in the third quarter of 2017. In terms of customer mix, our top customer accounted for 5.7% of total sales in Q3 2018 while our top three represented 15.2%. Turning to a few key points on the balance sheet. Our cash position increased $5.9 million to $19.5 million at the end of Q3 2018 from $13.6 million in the previous quarter. This $5.9 million increase is due to cash flow from operation of $4.7 million and a bank loan increase of $9.2 million in the third quarter of 2018. These cash amounts were partially offset by $3.7 million for the final payment of share in the Astellia acquisition, $3.4 million for depreciated cash balance asset and $0.8 million for the repayment of the long term debt. At this point, I would turn the call over to the operator for the start of the Q&A. Thank you.

[Vance Oliver:]

Melisa, if you could go ahead with the Q&A

[Operator:]

Certainly. [Operator Instructions] And our first question will come from Robert Young with Canaccord Genuity.

[Robert Young:]

Hi, good evening. First thing I want to talk about is about gross margins. The last quarter you had said that you could hit 61% to 63% for fiscal 2018, but we are seeing gross margins decline quarter-over-quarter in Q1, Q2 and Q3. It seems as though you are expecting EBITDA to inflect upwards so should we still be thinking about gross margin range or should we lighten up there as well?

[Pierre Plamondon:]

For this year, the impact of [indiscernible] a little bit lower our gross margins, okay and therefore probably the growth margin for the whole year should be around 61%.

[Robert Young:]

61%, okay. I mean – and then I’ll talk about your lowered EBITDA expectation for this fiscal year. Last quarter you had said that you could potentially get to $30 million plus in 2019, is that still a potential scenario?

[Philippe Morin:]

Yes, so as I mentioned Robert we are still aiming to achieve that at least $30 million of EBITDA next year and it’s going to come from as we mentioned cross selling opportunities of both Astellia and their Optical portfolio and as well operational efficiencies and if we need to we’ll be looking at our expense line to actually get to that level.

[Robert Young:]

Okay, great. And so year-to-date EBITDA you are right around maybe a little further than the half way to $20 million, so that suggests you’ve got a lot of confidence in the level of EBITDA you are going to generate in Q4 and is there anything you can – any detail you can provide, where does that confidence come from?

[Pierre Plamondon:]

This is quite typical [indiscernible] with the summer holidays expenses tend to be lower with the vacation time, okay. So if you look to the previous quarter last year, we did $8.5 million of adjusted EBITDA in Q4 2017, so because this is [indiscernible], so our expense line tend to be lower, travel is also lower, so that bring us some comfort to have a better gross adjusted EBITDA for Q4.

[Robert Young:]

Okay, so mostly seasonality and then the contribution of Astellia, okay. And then last question for me, I think what I’ll ask in the past you’ve talked about having a really strong pipeline not the backlog but rather a pipeline of opportunities in the – on the protocol side if you could talk about how the market has reacted to Astellia, the combination with Astellia and if that’s impacted that pipeline and is there any change in the conversion, are you still having a hard time with larger programs, is there any change in the conversion of that pipeline in the bookings as you look out over the remainder of 2018 and 2019, and then I’ll pass the line.

[Philippe Morin:]

Yes, so the sales cycle, to start off with your last question there, Robert, the sales cycle for the protocol side of the business with Astellia or without Astellia is – because of systems it tends to be software based, systems based and professional services as well the sales cycle is pretty much the same with or without Astellia, so that’s continuing to do that. The pipeline to your point, we are continuing to see a healthy pipeline obviously with the Astellia acquisition, our scale and credibility in the monitoring and analytics market especially in the context of mobility, in the context of virtualization and the context of the three U.K. deal that I just mentioned about is absolutely allowing us to have a quite different engagement with – especially with existing what I would call EXFO customers and we are starting to see that reflected in some of our pipeline and some of the wins that we are starting to bring into Q3 and as well what we are looking at Q4. So and obviously that gives us the confidence for our guidance for the EBITDA for next year as well.

[Robert Young:]

Okay and is there any reluctance that you have seen in your customers around larger deals or is it – well just leave it there, is there any reluctance on larger deals?

[Philippe Morin:]

No. And I do think I’ve had a chance to be on the road and meet customers, the Astellia customers along with EXFO customer, and no, I think it’s a very strong enforcement of our strategic acquisition. And actually they want us to get more involved and really help them with their network transformation whether the virtualization, getting ready for 5G on both optical and as well and some of the analytics that they'll need and require from the point of view of the evolution of the network.

[Robert Young:]

Okay. Then you've not seen any kind of delays on larger deal just from like -- just the way that your customers are dealing with their customers, I guess?

[Philippe Morin:]

No, Robert. As far as we haven't seen any particular deals, so far it’s pretty much the same pattern as we've seen in the past.

[Robert Young:]

Okay. Thanks. I'll pass the line.

[Philippe Morin:]

Thank you.

[Operator:]

Our next question will come from Tim Savageaux from Northland.

[Tim Savageaux:]

Hi. Good afternoon. The question on the guidance and I think that range also include the similar type of adjustment that you saw for Astellia. Although given the commentary around integration issues and order push outs, are we to infer there that you expect Protocol revenues to be down sequentially in Q4? Historically, you've seen a pretty strong seasonal uptick the last two years within Protocol without Astellia, I guess you don't expect that to materialize perhaps due to issues involved with the integration. Maybe if you could just overall talk on sequential expectations for what's a kind of flattish topline guide on Physical versus Protocol?

[Philippe Morin:]

Yes. And part of the revenue guidance we provided Tim, Astellia will represent about 7 million this quarter in Q4. So I'll give you better view. And then again from a point of view of the rest of the business between the Physical and Protocol I think it's – we're not expecting any either seasonality or worse than seasonality in terms of reduction on either the Protocol or Physical. As we get into this particular quarter we obviously we have to deal with vacation and then so on, so that's the key thing in terms of the Protocol business and making sure that they're not scheduled at the end of the quarter, we need to make sure that we push them as early into the quarter as possible.

[Tim Savageaux:]

Okay. So flattish ex-Astellia, although again historically you have for whatever reason, I'm not sure what the drivers have been seeing that kind of seasonal uptick on the Protocol side for the last couple of years. Over on the Physical side, at least given your commentary on the call, it sounds like demand trends remain pretty solid there and I guess kind of a flat sequential guide would imply some pretty good year-over-year growth. I wondered if you can comment more broadly on trends on the optical test side of that?

[Philippe Morin:]

Yes. Tim, as you know, we have a very strong position on the optical front both from a point of view of our one position and then with the market continue to invest in metro deployment and the market continue to be with the webscale guys deploying continue to put the data centers and looking at data center interconnect. We continue to see strong momentum there and continue the same kind of drivers that we've seen and whether it's at 100-gig or starting to also look that fall more into the Protocol side, but getting 400-gig being deployed as well. So overall the whole Physical-layer product line we're seeing from this quarter versus last year, I mean, it's over 6% of growth and we do think that overall the market trends continue and that tends to favor us because of our strong position in optical and 100-gig.

[Tim Savageaux:]

And just follow-up on that then I'll pass it along. You've seen that 6% growth number pretty consistently I'd seen for the last two years, so I kind of back into what you're guiding for Q4 as I guess what sort of growth might be on the Physical side might be informing your 30 million EBITDA target scenario. Do you expect any acceleration there? Or may a continuation of this kind of mid single-digit type growth profile on the Physical?

[Philippe Morin:]

Yes. Now you got a mid single-digit. I think that Tim, just an interesting dynamic for me and I don't know if you cut that in my – the whole European market is even obviously it started as a bit contribution to our growth, but if you take Astellia we are continue to see some really good strong coming out of Europe. And we are starting to see more fiber deployment starting to happen in Europe. Where in the past we've seen mainly in North America, right, and so the – that's an interesting aspect here of our goal is just start to see a bit more geography diversity on optical fiber deployment.

[Tim Savageaux:]

Right. Well, and you appear to be able to achieve that maybe with less concentration with your largest customer? So I mean, that would appear that some indication that that growth is broadening out even within the optical side?

[Philippe Morin:]

Correct. And obviously Astellia does change the dynamic of our top customers obviously.

[Tim Savageaux:]

Of course, yes. There's some math involved as well. All right. Thanks guys. I'll pass it on.

[Philippe Morin:]

Thank you, Tim.

[Operator:]

Next we'll take a question from Justin Keywood with GMP Securities.

[Justin Keywood:]

Hi. Thanks for taking my call. I'm wondering if you could break out the EBITDA contribution for EXFO versus Astellia in the quarter?

[Pierre Plamondon:]

Yes. So we did overall 2.5 million adjusted EBITDA for the whole corporation and bringing negative EBITDA 2.2, so the while EXFO – former EXFO would have been 4.7 million adjusted EBITDA.

[Philippe Morin:]

So, Justin, if we look at our press release we did make a comment that from a year to-date both Astellia performance as we expected and then as well the EXFO from a year to-date was also from a point of view of our – of what where our guidance was performing according to plan. So obviously with Q4 coming along as I mentioned with some of the projects being pushed out into seasonality, this is where it got us to the readjust again our revenue guidance to the level we just did and then bringing our EBITDA outlook to 20 million.

[Justin Keywood:]

Okay. Thank you. And then the organic bookings growth, I think I calculated at 3% year-over-year. I just was anticipating that to be a bit higher just given some of the positive trends. Is there anything specific to account for that?

[Pierre Plamondon:]

Yes. Now as I mentioned again the bookings growth and part of it what I just said some of the larger system contracts – further contracts we're hoping to pull [ph] and that been pushed out in to next quarter. So, on the Physical side, yes, so I'm not sure. So that's why probably the way I would answer that point.

[Justin Keywood:]

Okay. And then on the expected sales synergy between the two companies, now, I think last quarter you mentioned it in the range of 10 to 20 million. Any update there?

[Pierre Plamondon:]

Yes, that's – again in terms of achieving the synergy that's kind of the target we're still looking at, the 10 to 20 million. Again both combination of optical test solution, but as well looking at finding cross-selling opportunities of Astellia's solutions into our existing EXFO account. But I do want to highlight the fact that in order to make sure that we will get to the 30 million EBITDA. We will be also looking at some of our operational efficiencies. And then if we need to we'll look at our expense line as well as if we require to make sure we achieve that EBITDA target.

[Justin Keywood:]

Understood. And that sale synergy if I were to be equated to the EBITDA guidance for 2019, does that factor in kind of the lower end at 10 million or the higher end at 20 million?

[Pierre Plamondon:]

I guess, I would say we're still kind of doing that – as we do account planning and sales plan and that's kind of still the rate we're using, Justin, I mean that's what we got to make sure as we plan for that range. And as I said operational efficiency for some reason we're not getting as much as the cross-selling opportunities. If required we'll either look at operational efficiencies to get there or through our expense line?

[Philippe Morin:]

Maybe Justin just to add for the first question for the booking, you have to remind that we have a very strong booking layer in last quarter last year when 47 million with large order on copper access [ph] mainly, okay. This quarter we are close to 44.7 or 44.8 which is dually [ph] compared to 41.4 that we had in the last quarter in Q2, 2018. So we did increase sequentially nicely on the Physical-layer. So we did achieve very well in Q3, 2017, at 47 million, it was probably a record, okay. So this is just an adjustment, as we did very well sequentially on the Physical-layer side.

[Justin Keywood:]

Got it. That's helpful. And thank you for taking my questions.

[Philippe Morin:]

Thank you.

[Operator:]

Next, our question comes from CIBC, Todd Copeland.

[Todd Copeland:]

Good evening everyone. I wanted to ask you about Astellia's visibility into 5G pilots and trials, and then ultimate commercial deployment. I just wanted to see if can give us key milestones to watch for that you're looking for either pilot orders and how should that play out over the next year or two? Thanks very much.

[Pierre Plamondon:]

Todd, I would actually answer it not just from an Astellia point of view, but let me start from an EXFO at the corporate level. I mean, the way we're looking at 5G that it's got a multi-phased infrastructure approach. The first one is as you're probably familiar is the optical fiber built-out as our customers are going to be looking out how do you bring more fiber to the antenna so you can get more capacity. And that's not just in the context of 5G but as well in the context of 4G and 4G plus and all of the other LTE plus and all of the other upgrades that we're starting to see for our service providers to continue to bring more bandwidth to the users. And so that's a reflection again of our optical strength and we're seeing that as I said earlier to Tim's question not just in Americas but now we're starting to see as well that happening in Europe. With regards to the pure 5G radio kind of upgrades, I do that think as we're getting engaged to help our customers look at providing monitoring solutions, analytics solutions to help them on the customer churns and network KPIs and so on. We do see that again there is this wave of new investment going not necessary on 5G but as I said 4G coverage and 4G plus investment and we're starting to see some of our customers looking at POCs where fixed wireless access as of kind of the first phase. But real deployment for 5G in terms of radio upgrade we really view it as more going to be in the 20202 range. But as I said there will be investments and preparation for the radio upgrade that will start from fiber to potentially going into an interest step of 4G upgrades and then we'll be obviously will to provide our solutions from Astellia from a point of view of monitoring, troubleshooting and analytic tools.

[Todd Copeland:]

So that makes sense with what the U.S. carriers are talking about. Do you know enough today to say Astellia is going to get a footprint in your core U.S. customers from the optical side, so they've evaluated it, so confidentially say, you'll see that volume – that benefit of that volume deployment in the 2020 timeframe or whenever its happen. Does that still have to be decided on from Astellia's perspective?

[Philippe Morin:]

What we absolutely want to do, our strategy Todd is that we are – we want to leverage the Three UK multiyear, their multiyear $10 million contract that I've mentioned earlier. We do believe that particular deployment is a really game changing deployment, virtual cloud network-based solution for a 4G network, but allowing them to really have a cost effective network deployment with much more information around customer experience and Astellia is at the heart of that solution along with other partners. We believe that solution will be a great calling card and a great tool to start engaging our North American customers. It is a long sale cycle as you know on the system size when you talk about software, when we talk about analytics, and enriching and big data solutions. So we still have some work to do there and will -- the intent is for us to really intercept that 5G infrastructure cycle there that that as you said you're starting -- that you've highlighted in North America, so we – the intent is to really to start getting intercept and getting our solutions into those service providers as that they at the start looking at the 5G deployment.

[Todd Copeland:]

Okay. That's great. Appreciate the color. Thanks very much.

[Philippe Morin:]

Thank you.

[Operator:]

[Operator Instructions] Your next question will come from Richard Tse with National Bank Financial.

[Richard Tse:]

Yes. Thank you. Philippe, just wondering if you could maybe give us a bit more color in terms of what needs to be done on the integration side, maybe a bit of color in terms of where you sort of fell back a little in the quarter and going forward what needs be done there?

[Philippe Morin:]

Yes, Richard, again I want to reiterate. I mean, it is a – for the size of our company it is a complex integration that we're going through, because as most you know where we're talking about slightly less than 400 people being added to our 1500 people into different geography. We've – as I said, the innovation has been going really well. The last phase that we just did Richard was bringing up the R&D team along with the PLM teams together and we've actually leverage that to really take the opportunity to reorganize EXFO, so that we can really get better velocity and better synergies in terms of how we are looking at enhancing our solutions and portfolio. That just been done last month. We’re now moving into another phase and if your members we did the sales integration and so on that was previous. So now were moving into the next phase of portfolio integration, looking at obviously continue to do more work on our monitoring technology, looking at emerging the technologies. So that's a bit more complex. This is again that would start get reflect in terms of plan of record, but we do believe already that we're going to have a very, very differentiated offer when you start leveraging our test and measurement solutions that we've go and obviously our optical position and you're now bringing what we had in terms of our monitoring capability on our service assurance and out fiber monitoring capacity. Now you add that to the Astellia team. That's now what we're going to that next phase. And as I said so far I'm very happy with how the integration has being going. Part of the complex integration is when you get teams together like that is just to maintain the focus on your sales team, maintaining the focus on cadence, on the POs and that what from my point of view as I mentioned from the guidance in Q4. We did have a bit of an impact there because I think of all the activities and internal activities that took. But overall we're really feeling that from a point of view of setting ourselves up for 2019 our fiscal year which is about to start very quickly in September, that's going to be really important to set everything in motion to get that integration done and really being able to leverage our new portfolio with our customers in the market.

[Richard Tse:]

Okay. That's very helpful. Thank you. So with respect to go-to market strategies in terms of mining each other sort of respective install based. I don't what as we can sort of put on scale of one or 10. It sounds like you're really, really hairstyle. Is that fair statement?

[Philippe Morin:]

Yes. So the first state of integrating the teams together that's on the scale one to 10, we're at 10, but now in the next phase of just taking whatever solution we have today and go and sell. We're going through that training cycle and now you're going especially when you talk about our system sales, we're now engaging, we're now starting to do some quotes. So that to me is kind of the on the scale of five you know in terms of the being able to start engaging. And then we're looking at 2019 to start closing those deals and bring those synergies into our financial results.

[Richard Tse:]

Okay. And then you provide some color in terms of the mix early in your comments, Physical, Protocol. Is there in your head some ideal mix here going forward that you'd like to get to or where you think that the business will be most optimized at?

[Philippe Morin:]

I guess that’s a good question, Richard. I mean for me it’s the most optimized mix has got to be the ones that are going to bring the highest EBITDA for our business. Obviously we like where we are doing on Optical, we liked our position, we like the growth we are getting and so we got to continue to focus on revenue growth, but as well profitable growth in that segment, on the physical segment, and then with the Astellia, the monitoring in analytics followed by the software. And how do we bring more of that software solutions and then there is obviously the professional services aspect that kind of brings our overall percentage margin down because of the nature of it, but I do think that as we get the growth on both the – especially on the SA [ph] and getting this scale I’m hoping that we will cover our fixed cost and that should will flow through down to our EBITDA. Now whether it’s a – to your question specifically we got the model that says it should be – should it be 70, 60, 60, 40 or 50

[Richard Tse:]

Okay, that’s great. Thank you.

[Operator:]

[Operator Instructions] We do have a follow up from Tim Savageaux from Northland.

[Tim Savageaux:]

Hi, I want to follow up with a question on Astellia and seasonality I guess you had indicated previously that the typical pattern was second half calendar year to see some strength obviously you are not seeing that in terms of the guide and inciting kind of integration and seasonal issues, given your kind of comments about fiscal 2019 rapidly approaching, I wonder then if we might expect some kind of significant rebound on the Astellia side in your fiscal Q1 given what was expected to be an uptick in Q4. And whether for the full year in 2019 I think you had indicated Astellia did something on the order of $45 million, $46 million in revenue kind of in their last fiscal year or on a run rate basis you know do you think you can grow from that level in fiscal 2019? Thanks.

[Philippe Morin:]

Yes, so Tim let me just clarify. So they did in 2017 calendar, Astellia did $41 million of revenue, so that’s what they did. Yes, so obviously their calendar would fall into our Q1 and a portion of our Q2. And then they have a business that has a backlog which has some of – because of professional services, because of the project milestones some revenue recognition that will take place into effectively our Q1 and Q2, so that obviously we will take into account when we provide a color on our Q1 for our fiscal year 2019. For now, I think for me that’s a real focus on delivering what we just guided for Q4 completing the integration getting us up from a portfolio point of view, the sales team, R&D, PLM and really getting focused on one getting a full year of Astellia into our portfolio and making sure that we both leverage the backlog and the revenue wreck [ph] that they’ve got but it’s still ultimately with the new bookings that we will be bringing into our business.

[Tim Savageaux:]

Sorry, just a follow up there. Well I guess just a question on the revised baseline there, whatever the run rate is call it $41 million and I’ll come back and ask again whether you think you are going to be able to grow from that level in fiscal 2019?

[Philippe Morin:]

Well again, it’s really at the end of the day Tim, as I mentioned many a times this Astellia acquisition is about growth, it’s about getting us to the next level and it’s going to be a combination obviously of making that at overall monitoring and analytics business grow. So whether it’s obviously the Astellia portfolio along with the Ontology acquisition I mean that’s the idea for us is to really get ourselves to that higher scale and then being more relevant in the market. So I think as we get into 2019 in Q1 we’ll be able to provide more color there.

[Tim Savageaux:]

Okay, thanks.

[Operator:]

And that does conclude our question and answer session for today. And at this time, I’d like to turn the call back over to CEO, Philippe Morin for closing remarks.

[Philippe Morin:]

So thank you. And so just again to conclude the call just a few key takeaways. So first of all, strong execution across the board did allow EXFO to increase our sales by 23.4% year-on-year to $72 million in our third quarter and that was near the top end of our guidance and we did beat our EPS outlook. Second, Astellia’s monitoring and services portfolio performed well in our first quarter here, first full quarter under EXFO with the revenue of $8.6 million but if you take into account the $0.9 million of account for acquisitions related, Astellia actually delivered $9.5 million of business. So again, a really good performance there as we had talked about in our last quarter. And then finally our sales guidance for the fourth quarter of 2018 is being impacted by seasonality, especially with the summer holidays coming upon us and then some of the orders as I mentioned has been pushed back at the end of our quarter there. But we are absolutely confident about achieving our $30 million of adjusted EBITDA in our fiscal year of 2019 which will again be achieved through cross selling opportunities, operational efficiencies and as I mentioned earlier if we need to we will if required we will also look at our expenses line to make sure that we achieve that $30 million. So at this point, on behalf of the entire EXFO team, I want to thank you for joining u today. Thank you.

[Operator:]

That does conclude our conference for today. Thank you for your participation.