EXFO Inc.
Q1 2016 Earnings Call Transcript

Published: 7 Jan 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to EXFO's First Quarter Conference Call for Fiscal 2016. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded Wednesday, January 6, 2016. I would now like to turn the conference over to Vance Oliver, Director, Investor Relations. Please go ahead.

[Vance Oliver:]

Good afternoon, and welcome to EXFO's first quarter conference call for Fiscal 2016. With me on the line today are Germain Lamonde, EXFO's Chairman, President and CEO; and Pierre Plamondon, Vice President of Finance and CFO. 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, which is on file 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 detailed reconciliation of these non-IFRS results with our IFRS results is available in the Q1, 2016 press release on our website. All dollar amounts in this conference call are expressed in US dollars unless otherwise indicated. So without further delay, I will turn the call over to Germain.

[Germain Lamonde:]

Thank you very much, Vance and good afternoon everyone. Let me first wish everyone of you a happy healthy and prosperous 2016. So let's talk about our Q1 2016 results. I'm pleased the quarter unfolded pretty much as expected and that we are starting to enjoy healthy benefits or early benefits from the transformations implemented during our fiscal 2015. So key highlights for the first quarter are including a booking increase of 7.8% year-on-year to $58.5 million, driven both by Physical and Protocol product groups and specifically from the Americas region. Sales reached $55.2 million, down 2.7% year-on-year but it would have been slightly up on a constant currency basis. Our book-to-bill ratio ended at 1.06 in the first quarter of 2016 reflecting the fact that we're becoming increasingly solution-centric with some system orders not having been recognized during the first quarter. Gross margin improved to 63.5%, our highest quarterly margin since the second quarter of 2012, and our adjusted EBITDA reached a healthy $5.3 million or 9.6% of sales, up 65% for the same period last year. With this in mind, I believe we're in-line with our first quarter -- with our fiscal 2016 target of delivering an adjusted EBITDA growth of 40% to achieve $20 million or above. This would barely require 3% revenue growth year-on-year given the reductions in operating costs from the transformations that have been made during -- through fiscal 2015, our restructuring and expense reduction efforts and the impact of currencies. So overall I'm quite satisfied with our first quarter financial results, but even more so with the fact that these results are starting to show clear signs that the significant transformations we implemented during fiscal 2015 are starting to bear fruit. Let me provide you with more details on this aspect. As you'll likely have noticed in our press release just issued we have decided from now on to provide quarterly booking and revenue results for both our Physical and Protocol-layer product groups. I believe this will go a long way in helping analysts and shareholders to get a deeper understanding of our business and our foreign exchange impacts. While sales were down, given timing of orders in the first quarter of 2016, I'm pleased to report that bookings were up in both segments and I remain confident that sales of both product groups will be up year-on-year by the time the fiscal year is over. Turning now to our Physical-layer segment, as you know this segment includes our optical and copper product lines. It performed very well in fiscal 2015 delivering 9.1% revenue growth. New -- a few additional data points here, while booking growth in this segment during Q1 was solid at 4%, especially strong in North America. Our number one position in the portable optical testing markets was once again confirmed recently by Frost & Sullivan with a market share gain, meaning in terms of sales increase of 6%, [indiscernible] to 2016 due to the deep -- to the depth and breadth of our product offering and our portfolio and the very strong brand reputation that we have in that particular segment. We are expecting a continued surge in demand over the next several years in optical communications with the increased fiber deployment, both between and within data centers, in core networks and deeper into the metro and access networks, whether this is in fiber-to-the-home, fiber-to-the-curb or fiber-to-the antenna. As a result these segments will continue to do well. Now let's talk about our Protocol product group. This product group includes Ethernet testing, service assurance, wireless technologies as well as our new analytics offering, resulting from our ByteSphere and Aito acquisitions, plus internal development efforts. You'll remember that this segment proved to be challenging during our fiscal 2015, especially given the important transformation that we were implementing. I'm glad to report that we did have near 20% bookings growth in Q1, 2016. Revenue was nonetheless down by 2.7% year-on-year due to the timing of orders and the more system-dependent nature or system-based nature of the segment where some deals may take longer sometime to be recognized. The booking growth in Protocol over the last few quarters is starting to demonstrate that the transformations we implemented last year are starting to pay off. Let me expand a little bit on these transformations and why I'm confident this critical Protocol segment would be back to growth for our fiscal 2016. First let me talk about our EXFO Xtract, our best-in-class and highly scalable analytics solution, on which we invested during fiscal 2015 and 2014 following the acquisitions of ByteSphere and Aito. Xtract delivers a flexible correlation of diverse data sources to provide end-to-end performance visibility of fixed and mobile networks at the network, at the services and the consumer levels and Xtract also provides them with prioritization to help maximize a critical quality of experience and even provide predictive capabilities to help operators plan capacity or avoid outages. As outlined during our last conference call EXFO has successfully completed an initial deployment last September of a proof-of-concept of Xtract with a tier I network operator and I'm pleased to confirm that we've now received an initial order of $1.7 million on Xtract in December from this customer and this deal is actually going to be recognized within this quarter. Also during the first quarter we obtained an order from another leading operator for $1.2 million for which EXFO Xtract solution was the critical piece, both in terms of dollars and the strategic reason why we won that deal. While there should be more Xtract orders to come from these major operators, either for analytics or for probes these strategic wins will also prove to be great references for EXFO Xtract in this rapidly growing analytics segment. Interestingly each Xtract sales will also pull in additional revenues for our active/passive NAV or mobile probes while driving advanced professional services orders and more recurring revenues moving forward. While Xtract was formally launched during March 2015’s World Mobile Congress exhibition in Barcelona, our funnel for this unique solution is growing very rapidly and several engagements are taking place with a number of leading operators both in fixed and mobile networks. Following Xtract, let's now talk about the other transformations discussed during our quarterly call last October and within my letter to shareholders back in November. So for example our wireless technology that we acquired from NetHawk. The transformation implemented here have allowed us to increase market focus, expand our addressable market while reducing costs. So I'm pleased to report that we delivered a good year-on-year bookings growth during the first quarter of 2016. Similarly we greatly increased time-to-market and R&D efficiency in our Ethernet testing offering thanks to our unified code base. This allowed us to regain our technology leadership position in that segment, especially in the wireless and 100-gig test segment. I'm glad to report that there as well we are back to year-on-year bookings growth in Q1 and we have important new product announcements to come in the very near future. So given these very positive results from Xtract and our 2015 transformation, I'm increasingly confident that our protocol product group will be back to revenue growth in fiscal 2016. I also expect the same from our physical-layer product group. So looking ahead there is also a few additional points that I'd like to discuss. I'm very pleased with our recent progress with our focus on solutions. While this transformation will continue over time we're already starting to enjoy some of the financial benefits and this is creating a path for EXFO to become more strategic partner and to generate more recurring revenues over time. In addition I'm happy to report that the Americas region performed well during the last quarter. This is a clear sign that our technology leadership is making EXFO increasingly relevant in that region which is typically a very sophisticated and cutting edge market. I am also encouraged with the strong fiber deployment cycle that we should be experiencing over the next years to come. EXFO is very uniquely positioned to take advantage of this particular wave in the industry. And similarly the growth in high speed optical networking, whether we are talking about [indiscernible] upgrades in the long haul and metro networks, in data centers interconnects or for web-scale operators we should also continue to -- to continue strong and again EXFO is well and is very well positioned to take advantage of this opportunity. Last but clearly not the least I am also very happy with the recent addition of Philippe Morin to the newly created position of COO. So Philippe has now been on board for nearly two months now and there is no question in my mind it is really earning great value here. He has been very well received within EXFO. His really strong focus is on improving all aspects of our go-to-market initiatives while getting deeply involved in our product and solution strategy. His joining with EXFO was a clear win for both our customers, our shareholders and for the whole of EXFO including our employees. So I am confident his contribution will be gradually felt in the quarters to come. So Philippe will be with us at the AGM tomorrow at 9 o’clock at the St. Andrews Club & Conference Centre in Toronto for more information. We’re also planning on holding the Analyst Day sometime in April or May this year which will allow everyone more time to discuss with him and obtain additional update on EXFO’s business. So overall the transformation we’ve been implemented -- that have been implemented during fiscal 2015 and the addition of Philippe to the team are making me very confident that both our product groups will deliver growth in fiscal 2016. Now let’s talk about our guidance for the second quarter. Second quarter is typically the more challenging from the seasonal standpoint given that it includes the holiday season, the Chinese New Year and the typical new budget rollout for most of our customers. Given the above we are forecasting sales to be between $52 million and $57 million for the reporting period, extending from the December the 1st to the end of February and in comparison we did about $51 million for the same period last year in 2015. That [indiscernible] now we’re looking at the bottom-line. IFRS net earnings are expected to range between $0.04 to $0.08 per diluted share for the second quarter of 2016. IFRS net earnings include $0.01 per share in after tax amortization of intangible assets and stock-based compensation balance. It should also be noted that we anticipate a foreign exchange gain of about $0.04 per share for the second quarter based on today’s exchange rate. So at this point I will turn the call over to Pierre to discuss our financials.

[Pierre Plamondon:]

Thank you, Germain. Good afternoon, everybody. Sales decreased 2.6% to $55.2 million in the first quarter 2016 from $56.7 million in the first quarter 2015 and 2.4% from $56.6 million in the fourth quarter 2015. Meanwhile booking increased 7.8% to $58.5 million in the first quarter 2016 from $54.2 million in the same period last year and 6.5% from $54.9 million in the fourth quarter 2015. Our sales would have been slightly increased year-over-year on the constant currency basis while booking would have increased by more than 10% year-over-year. In addition our orders were heavily back-end loaded, which didn’t give us enough time to convert all of them into revenue before the end of the quarter. Our book-to-bill ratio amounted to a solid 1.06 in the first quarter 2016. Gross margin improved to 63.5% of sale in the first quarter of 2016, from 62.6% in the first quarter 2015 and 61.2% in the fourth quarter 2015. On a year-over-year basis gross margin increased mainly due to a favorable product and geographical mix compared to the first quarter 2015. In terms of operating expenses, selling and administrative expenses totaled $20.3 million or 36.7% of sales in the first quarter of 2016 compared to $21 million or 37.4% of sales in the same period of last year and $20.5 million or 36.2% of sales in the fourth quarter of 2015. The decrease in SG&A dollar year-over-year can be attributed to a drop in the average value of the Canadian dollar and the euro versus the US dollars as well as the positive impact of our restructuring plan. Net R&D expenses reached $9.9 million or 18% of sales in the first quarter 2016 compared to $11.7 million or 20.6% of sales in the same period last year and $10.9 million or 19.3% of sales in the fourth quarter of 2015. Likewise, net R&D dollar decreased year-over-year due to the decrease of the average value of the Canadian dollar and euro versus the US dollars as well as our latest restructuring plans. Overall, our SG&A and net R&D expenses decreased by a total of $2.5 million or 7.6% year-over-year since the decrease of the average value of the Canadian dollars and euro compared to the US dollar as well as the impact of our restructuring costs -- our restructuring plan more than offset inflation cost, and general salary increase over the year. IFRS net earnings in the first quarter of 2016 totaled $1.8 million or $0.03 per diluted share compared to $1.5 million or $0.02 per diluted share in the same period last year and $2.3 million or $0.04 per diluted share in the fourth quarter of 2015. IFRS net earnings in the first quarter of 2016 included $0.3 million in after-tax amortization of intangible assets, $0.4 million in stock-based compensation costs and the foreign exchange gain of $0.3 million. Adjusted EBITDA amounted to $5.3 million or 9.6% of sales in the first quarter of 2016 compared to $3.2 million or 5.6% of sales in the first quarter of 2015 and $5 million or 8.8% of sales in the fourth quarter of 2015. Geographically the Americas accounted for 56% of total sale in Q1 2016, Europe Middle East, Africa represented 26%, while Asia-Pacific totaled 18%. In comparison the sales split was 48%, 32% and 20% among the three geographic region in the first quarter 2015. As you can see, sales to the Americas, especially in the US improved significantly year-over-year with the strong penetration into Tier 1 accounts. In terms of customer mix, our top customer accounted for 8.2% of total sale in Q1, 2016 while our top three represented 18.2%. Turning to a few key points in the balance sheet, our cash position increased to $29.4 million at the end of Q1, 2016 from $27.4 million in the previous quarter. This $2 million increase is mainly due to a $3.2 million in cash flow from our operating activities which was partially offset by $1.3 million for depreciation [ph] of capital asset. Finally DSO decreased to 81 [ph] days in the first quarter of 2016 from 78 days in Q4 '15 while inventory turn decreased to 2.6 times from 3.1 times during the same period. At this point I would turn the call over to the operator for the start of the Q&A. thank you.

[Vance Oliver:]

Operator, Q&A please?

[Operator:]

[Operator Instructions]. Your first question comes from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos:]

Hi, good afternoon. Germain, could you maybe provide us with some context in terms of the environment you're seeing, as far as the strength in the Americas, was that just primarily driven by the traction of your solutions specifically or is that also a bit of a better environment there as well?

[Germain Lamonde:]

It's fairly wide ranging basically. I would say pretty much all of our product offering has been giving very good results in the last quarter in terms of bookings. I'm glad to report that our top three customers in the last quarter were all within the Americas zone, specifically within the America zone and very strongly as well with the top, this is the typical suspects, the tier 1 operators that you can talk about here in America. So I would say generally speaking the -- I am not going to call a massive like opening up the purse strings from an expense point of view, but I would say what we are doing is increasingly, extremely strategic for them, our business from the solutions point of view is really helping them to get visibility and drive profitability if you will.

[Thanos Moschopoulos:]

And if we look at sort of the geographic mix in your pipeline and in your backlog would it also be -- are the trends consistent, are you seeing more of that strength being disproportionally weighted towards the Americas?

[Germain Lamonde:]

That trend is little bit consistent, meaning like our funnel is actually quite strong, but when we look at solutions it's specifically strong in America. Our engagement level and the relationship has probably been a little bit stronger as well but fundamentally I would say that the trend is actually quite good there in the Americas region. And EMEA is basically starting off on a better foot than it did in fact in the last fiscal year. If you remember in fact 2015 we had EMEA in through a tough time. It’s actually looking better this year.

[Thanos Moschopoulos:]

Okay. And just to help us quantify the currency impact on revenues if we look at your guidance for Q2 it’s about 7% growth at the midpoint of the range. In constant currency what kind of growth would that be, might it be somewhere above 10% or how much of an impact could there be year-over-year?

[Pierre Plamondon:]

The impact of the [foreign exchange] [ph] contract that will be recognized again say would be about $1 million next quarter, okay, compared to close to $900 K this quarter. So this is roughly it will be the same impact. So in constant currency probably will be a little bit higher.

[Germain Lamonde:]

So it’s basically impact is reducing sales by that much basically.

[Thanos Moschopoulos:]

Okay. And maybe couple more for Pierre, the taxes were higher than you had guided for this quarter. Was there just a question of geographic mix and what should we look for going forward on the taxes?

[Pierre Plamondon:]

It's mostly geographic mix and the fact that and again as we were expecting a loss of foreign exchange and we had the gain so those element are not taxable so this is the main reason for that.

[Thanos Moschopoulos:]

Okay. So then no real change over your long-term tax plans then?

[Pierre Plamondon:]

No, it will depend on the currency for sure but for this quarter for second quarter we are expecting about 20%-25% income tax on the earnings before taxes right now in the guidance.

[Thanos Moschopoulos:]

Okay. And then on the margins you said that that was driven predominantly by the product mix and the geography mix. What should we be looking for through the balance of the year?

[Germain Lamonde:]

Well, I would say that the product mix should be contributing in fact through the fiscal year. I expect fiscal year 2016 to be a better year when it comes to our higher margin product offering and same way basically we are expecting the Americas region to be a stronger contributor. So overall we’re expecting our gross margin this year to be in between 62% to 64% on average for the whole fiscal year and we’re going to push hard to stick to the sort of gross margin we had in the last quarter.

[Thanos Moschopoulos:]

Okay great. Good to see some revenue growth returning to the business and I’ll pass the line.

[Germain Lamonde:]

Thank you so much for very good questions.

[Operator:]

The next question comes from Deepak Kaushal with GMP Securities.

[Deepak Kaushal:]

Hi guys. Thanks for taking my questions. I just wanted to follow-up -- good to speak with you again and Happy New Year. Excuse me I just wanted to follow-up on Thanos’ questions about geography, comments on the Asia Pacific market last quarter you were quite optimistic about how that market would shape up for this year. Any changes you are seeing there or are you still feeling positive there?

[Germain Lamonde:]

No, I am still optimistic about the APAC region with people referring sometime about the investment and the CapEx budget that will actually take place in the China market I expect in our industry specifically test and service assurance business to be a good year. As far as we’re concerned there is pent-up demand that really has been created in fact in the last 12 or 18 months given investigation that were taking place in the main three local operators. I think we have a very strong position for the segment. Generally speaking I think we are in a good position to continue to gain market share in the Asia Pacific region. I'm pleased with our overall result in the last fiscal year in that segment although it was a tight market but we did well from a market share point of view.

[Deepak Kaushal:]

Okay, and I wanted to go deeper into the data center market opportunity that you’ve talked about. Would this market and going after this market require a new sales team or new sales process and some investment in that area, and perhaps that could lead into a broader question on potential changes in the go-to-market strategy that you're contemplating or that Philippe is contemplating as he comes into the organization.

[Germain Lamonde:]

Okay. Well basically going after the datacenter market in fact is I would say first of all the interconnected datacenter is very much like an area that we have - it's the same go-to-market strategy, there's not a whole lot of change there. Going with the datacenters for the intra-buildings type of connectivity, there is some specific channels that we're actually looking at in building. We've also build some specific products although the majority of our product offering is pretty agnostic, whether this is actually sold within or outside of datacenters or basically the regular market if you will. So on that front, we are tweaking our channels for the intra-building a bit more and we're strengthening our offering both for intra and in between datacenters.

[Deepak Kaushal:]

And relative sizes of those, would you expect the inter -- them to be equally sized or one bigger than the other?

[Germain Lamonde:]

They are fairly different markets, in fact at the end of the day, the intra-datacenter is a -- I mean it's - they're fairly different end markets but they're both fairly important. Size is a bit bigger on the intra-datacenter in the sense that it also covers enterprises at large and it's more than just datacenters when you look to this, it's also contractors. There is a wide range of end customers that have very similar requirements than the intra-building datacenters. And we're really gearing up for this both from a product point of view and also from the sales point of view. The inter or in between datacenters is a business that we've got already some market share but we believe that we can gain substantially more market share with basically a better focus from the sales point of view.

[Deepak Kaushal:]

Okay, great. Thank you that's very helpful. I go to want to ask if you open to disclosing some metrics, are you able to give us a sense of what percentage of revenue is recurring in the quarter? And can we assume all the Xtract revenue is going to recur on a quarterly basis.

[Germain Lamonde:]

Yeah, I don't think we can actually give a specific number for the last quarter but I think what we stated is that for fiscal year of 2015, we were standing at 13% of recurring revenue and which includes basically a number of elements inclusive of service agreements and some repairs and so on.

[Deepak Kaushal:]

And do you have a target for fiscal '16?

[Germain Lamonde:]

No we don't have the specific target but we intend to be growing that percentage.

[Deepak Kaushal:]

Okay. And on the gross margin side, protocol is higher. Any specific details you can give us on the gross margin split between protocol and physical.

[Germain Lamonde:]

What we said in the fact is historically is more like the protocol layer side is more turning towards the 70% ish versus the 60ish for the physical layer side. So basically there is 70%, 75% let's say for the protocol side. So that's more, as much as we're going to grow that segment we should be able to expand our margin overall as an organization.

[Deepak Kaushal:]

Okay great that's very helpful. Thank you and I will pass the line.

[Germain Lamonde:]

Thank you very much for your question Deepak. Have a good day.

[Operator:]

Your next question comes from Tim Savageaux with Northland.

[Tim Savageaux:]

Hi, good afternoon. Can you hear me okay?

[Germain Lamonde:]

Absolutely Tim. How are you?

[Tim Savageaux:]

I'm doing well, thanks very much. And thank you for the segment breakout. That is fantastic. It actually leads me into my first question, really coming off that gross margin question which is, it looks like at least from a revenue perspective and I'll get to bookings in a minute that your mix got a lot more physical heavy, yet your gross margin was up about sequentially which is sort of not what you would think, given that last comment about the relative margins between protocol and physical. So I guess my first question would be kind of what happened there? You must have had a pretty meaningfully positive mix shift within physical I assume.

[Germain Lamonde:]

I would say the geographic portion has really being the biggest impact and it's a very good observation on your part. So the geographic portion has had a significant impact here in our margin. I would say even within the specific product groups what we saw in fact it's got some variability. BUT you're right that the mix is not being more protocol that much than it has been historically.

[Tim Savageaux:]

Okay. And then kind of looking at your guidance, and assuming we've seen protocol orders pick-up a bit. Assuming maybe that mix moves back toward the protocol side at least a little bit. I imagine that your -- it appears that you are expecting gross margins to stay at current levels or maybe even increase given the sort of bottom line guidance that I see you putting up, is that fair to say or do you look at that mix shift as a one-time thing?

[Germain Lamonde:]

There wasn't, no, there is no one time thing. But [indiscernible] again, hence we are expecting the gross margin to be little lower as we are not able to absorb our all the fixed costs. But at the top and again hence should be able to get -- to deliver that we did in Q1.

[Tim Savageaux:]

Great. Okay and then focusing back on the segment breakout. It looks like you've had a pretty nice, at least sequential uptick in bookings on the physical side. Something on the order of 10% it would seem and that looks to be also coincident with strength among North American tier I carriers. Can we infer strength there from large historic customers who might be getting under way with major 100 gig metro roll outs or are there additional or other drivers for this sequential strength on the physical side?

[Germain Lamonde:]

That's a very good question. First, that we would look at 100 gig roll out and we let's say upgrading fiber from 10 gig to 100 gig. This would not fall into the physical-layer measurement. In fact we are doing the split internally is physical-layer as we did testing the optical fiber and the traffic on top would be part of our protocols business. So basically it's more about the deployment of more fiber or the test of these fibers to support the high speed rate. So one of the gig rate testing would be really more in our protocol-layer test. So sorry for this. It sounds like a bit of a complex data point. But just to avoid the confusion here on that front. But to your question the tier I operators that we do quite a bit of business with are quite engaged into 100 gig roll out. So that drives some of our physical layer product and sales including like testing the optical fiber for upgradability from 10 gig to 40 gig to 100 gig and has also being driving some of our business as well from a protocol testing side where we've got a very strong position as well in the 100 gig testing arena, including with some of the tier I operators here in America. So your point is right.

[Tim Savageaux:]

Right and I think the difference we are talking about here is testing for the presence of the signal at all or the nature of the fiber versus the specific line rate and I get that. One final question, I mean as we've seen at least what looks to be a pretty broad based rebound in optical deployment in China, that's been consistently I think pretty strong on the access side, but maybe a rebound on the backhaul and backbone side. I wonder if you can make any comments on trends in the Chinese market either in the quarter or from a bookings perspective?

[Germain Lamonde:]

Yeah, in the last quarter China was not particularly strong for us. It has been basically pretty much of an average quarter from a booking standpoint. Nonetheless we are firm believers that this is a certain [ph] end market for the long run where we've had a long standing presence and where in the same vein many of the operators did not get as aggressive during the last 12 or 18 months. They are going with deployments given lot of internal politics and investigations going on.

[Tim Savageaux:]

All right. Well, I'll pass it on and thanks once again for the enhanced disclosure and transparency.

[Germain Lamonde:]

Pleasure Tim.

[Operator:]

[Operator Instructions] Your next question comes from Kris Thompson with National Bank.

[Kris Thompson:]

Thanks. Germain, are you able to disclose your current headcount? I think it was 1,499 at the end of Q4, just want a get a handle where you at today and if had done your cost restructuring program with regards to the headcount.

[Germain Lamonde:]

Yeah, it's about 1,550 more or less.

[Kris Thompson:]

Okay. So it would actually increase sequentially?

[Germain Lamonde:]

Very slightly. It's more like about specific positions that were basically planned.

[Kris Thompson:]

Okay. And maybe Pierre on the R&D, I don’t have your full 10-Q. Are you able to disclose your gross R&D in the quarter?

[Pierre Plamondon:]

The gross R&D was…

[Germain Lamonde:]

We used to report both gross and net and we thought that for most people it was…

[Pierre Plamondon:]

Gross is $11.3 million and R&D tax credit grant [ph] is $1.3 million for a net of $9.9 million.

[Kris Thompson:]

Okay. So that’s pretty normal which is R&D level looks pretty there is that a good steady state kind of figure to think about going forward?

[Pierre Plamondon:]

Yes because all the research plans that we have done in Q4 has been reflected. So this is proper run rate to consider there probably. But we need to consider that January 1st we have salary increase to account but I think that probably you will be in the good range for the R&D expenses.

[Kris Thompson:]

Okay that’s great. While I have you there Pierre the FX, your foreign exchange exposure can you outline the net impact on your EBITDA? Do you have that available?

[Pierre Plamondon:]

Yeah, I think the way I would answer it is probably $0.01 the U.S. compared to Canadian the impact on the OpEx is about $150 K per quarter.

[Kris Thompson:]

Okay that’s helpful. And Germain you mentioned some Xtract trials in your opening commentary could you give us an idea of the size of that pipeline should they execute into orders?

[Germain Lamonde:]

This is a very good question, we're not going to give necessarily all the numbers here but what’s very exciting about this is, it’s a very good question that you are asking Kris, is we launched that product during World Mobile Congress back in March last year, which really got ready to go to market with the said product that got into field trials more like around the summer time frame. And ever since we had the portfolio the funnel is really doing there very nicely to be quite meaningful. With that being said we are talking clearly $10 million plus we’re in the good size from a funnel point of view and the flow time frame. What’s very exciting about this is our unique differentiation at EXFO there really is the fact that we can bring underneath the same analytics both our active probes passive probes as well like we call them sometime the walking probes meaning we can use the regular cell phone to turn that into a probe that will actually be providing data from a consumer qualitative experience standpoint. And all this can get correlated and analyzed through the same analytics. And that’s something that’s extremely unique in the industry and we can even take data from other probe vendors or other sources of information. So great trend and every dollar of analytics typically will bring additional sales of probes and professional services and even more like recurring revenue. So this is very exciting area and I am very, very pleased that we’ve made investments through fiscal 2014 fiscal 2015 with these acquisitions and now we’re turning this into something that’s going to have meaningful impact in our business in this fiscal year.

[Kris Thompson:]

Thanks Germain, that’s helpful. And would you point out to any particular competitors against you with product or I mean would NetScout kind of comes to mind with the recent Danaher acquisition?

[Germain Lamonde:]

I mean NetScout is clearly one of the company that we compete against sometime there is no questions about it and they’re clearly a strong market leader in that particular segment. Our offerings tend to be fairly differentiated. So we are not typically in a pure overlap type of situation but that’s one company that we can met we could met other organizations in the industry but number one I would say is going to be NetScout.

[Kris Thompson:]

So the first order you mentioned for Xtract the $1.7 million it sounds like the sales cycle is four or five months or so, so by this time next…

[Germain Lamonde:]

Hello, are you still there Kris? I think we lost you. Operator?

[Operator:]

His line disconnected.

[Germain Lamonde:]

Okay. So maybe we should take the next caller.

[Operator:]

And at this time there are no further questions. I will turn the call back over to the CEO for closing remarks.

[Germain Lamonde:]

Okay, well thank you very much then. So just a few key takeaway before we conclude this conference call today. First of all we did have very strong financial results in Q1 2016 with 7.8% growth in bookings, best gross margin in all the three years and 65% growth in adjusted EBITDA year-on-year. So that quite pleased with that. Secondly our Xtract analytics offering is repeatedly getting traction with -- orders from major network operators. That’s serve us very well as reference wins moving forward. And it will help us to accelerate our solutions growth in the quarters to come. Thirdly the transformation implemented, I'm feeling strongly that both our product groups moving growth during our fiscal 2016. And all these positive indicators are making me feel confident that we're on track to achieve our 40% growth in adjusted EBITDA margin during fiscal 2016 to achieve our $20 million target that we have in this fiscal year. And finally, I'd like to remind you that EXFO will be holding tomorrow its annual meeting of shareholders on Thursday at 9 o'clock at San -- club at conference center. This is on the 16th floor here in Toronto. So both shareholders and analysts are welcome to attend. So at this point this concludes our first quarter 2016 conference call. And on behalf of the entire EXFO team, thank you for joining us today.

[Operator:]

Thank you for your participation. This concludes today's conference call. You may now disconnect.