EXFO Inc.
Q2 2016 Earnings Call Transcript

Published: 30 Mar 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the EXFO’s Second 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 March 29, 2016. I would now like to turn the conference over to Vance Oliver, Director of Investor Relations. Please go ahead.

[Vance Oliver:]

Good afternoon, and welcome to EXFO’s second 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 Commissions 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 Q2, 2016 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 over the call to Germain.

[Germain Lamonde:]

Thank you, Vance. Good afternoon everyone and thank you very much for joining for this quarterly call. I’m certainly very pleased today with the strong financial results for our second quarter and with our significant progress we’ve made at the midpoint of our fiscal 2016, and that’s both in terms of booking, in terms of gross margin, as well as in terms of adjusted EBITDA. So these results are providing clear evidence in my view that the key transformations we made last fiscal year, especially within our protocol product group, are starting to pay dividends and to deliver the expected results. But consequently, EXFO’s possible growth strategy has come together very nicely so far in our fiscal 2016. First, total bookings are up 9% in the year-to-date basis, and about 12% on a constant currency basis. This is not due to the growing faction of our Protocol-layer product group and the continuing strength of our physical layer product group. I’m glad to report that bookings are up in both product groups, but as well in all three geographic regions, meaning, the Americas, India, and Asia-Pacific. Secondly, we posted a 200 basis point increase in our gross margin to 64.1% in the first-half of 2016. This reflects the strengthening of our higher margin Protocol product offering, again, but particularly the growing success we are getting in our high-speed optical transport and our EXFO Xtract consist of assurance end to end network visibility solutions that are more software intensive and thus carrying higher gross margin. This places us at the top of our – at the top end of our 62% to 64% gross margin model after six months into fiscal 2016. Thirdly, our adjusted EBITDA stands at $10.6 million, or 9.7% of sales after the first-half of 2016. And this represents a greater than 140% year-on-year increase and all this despite still modest revenue growth. So in my view this demonstrates that we still have a lot of room to increase our adjusted EBITDA as we convert our substantial backlog and book-to-bill ratio into higher revenues during our second-half of this fiscal year. So, given our strong backlog and book-to-bill ratio of 1.09 so far in the first-half of 2016, and the fact that our second-half tends to be from a seasonality standpoint more profitable, we are in my book in an excellent positions to attain our annual target of $20 million in adjusted EBITDA. And I really believe it is safe at this stage to say that this target will be surpassed by, at least, $2 million. Let’s now talk about the traction we are getting in our protocol-layer product lines. I’d like to highlight the significant progress we’ve made so far in this higher margin product family and by posting a year-on-year sales and booking growth respectively of 8% and 18%. Bookings are positively robust for our 100-gig optical transport solutions and in our EXFO Xtract analytic software within this part of the product group. Market acceptance for EXFO Xtract solution has been positively strong, and we’re seeing a widening of our opportunity funnel that this solution is providing really unmatched scale, performance, visibility for network operators at a network, at a service, and the end-user level of experience to help maximize really the quality of experience that they can really deliver to their consumers. Lastly, during the Optical Fiber Conference in Anaheim, we also bolstered our Protocol offering with the unveiling of our new LTB-8 Rackmount Platform and our new 100-gig Power Blazer Multiservice Test Module that has been designed specifically for the lab and manufacturing markets. The highly scalable LTB-8 platform can simultaneously host eight multiservice 100-gig test blades and is ideally suited and designed for network system design development and deployment testing. This new 100-gig Power Blazer Module offers a full suite of advanced test functionalities to accelerate product development and verification, including multi-stage ODU multiplexing, multichannel OTN, advanced troubleshooting capabilities throughout the newly standardized CFP4 and QSFP28 interfaces that are especially designed for going high-speed in data center markets. So these latest product launches are amongst several key initiatives, aimed at creating sustainable advantage for EXFO continuing our growth trajectory and enabling us to capture more market share in the growing high-speed optical test market. We have a strong strategic and technology position in all segments of this market ranging from the labs to manufacturing to field deployment, but also expanding from low speed to the fast growth, one of the GIG segment onto next-generation 200 gig and 400 gig technologies. Turning on to our ongoing strength to – of our Physical-layer segment, sales were relatively flat year-on-year in the first-half of 2016, while bookings were up by nearly 5%. During the second quarter, we released TestFlow, a revolutionary cloud-based field automation solution that really allows communication service providers to automate complex and labor-intensive testing task like the fiber-to-the antenna, centralized [indiscernible] or small cells or fiber-to-the-home kind of deployments. So this innovative software solution, which runs on all portable FTB test platforms and modules. In short, the field technicians get the job done right the first-time, much faster and with flawless training to dramatically reduce deployment costs. In addition, all test results are dramatically stored in EXFO Xtract then analyzed and correlated to place network operators in full control of the deployment, assuring process compliance and test data integrity, regardless if the test was done by their employees or via outsource contractors. This new solution was launched at Mobile World Congress in Barcelona, last month, and is already creating a very positive market reaction. Continuing with Physical-layer product portfolio, we also seem to getting strength in our Optical Time-Domain Reflectometer or OTDR, a market in which EXFO dominates with nearly 50% global market share. We introduced a whole new family of OTDR that is redefining the industry-standards both in terms of getting specifications, but also time-saving features for the characterization of optical networks. We believe this latest solution, combined with our award-winning and patent protected iOLM software applications for automated fiber analysis will enable us to stay ahead of the competition in this very important market. The demand for 100-gig optical networking is certainly surging. Given these latest product innovations and several more internal initiatives, our protocol and Physical-layer offering are both very well-positioned to benefit from this growing trend on a global basis. We should continue to benefit from our global leadership position in fiber-optic, and 100-gig testing has fixed the network operators, Web 2.0, and data centers operators are exiting their plans to add capacity. Telling by discussions with customs and feedbacks received during OFC, I’m really optimistic that this high-speed investment cycle will continue fulfilling our physical and protocol product family having both of them to diversify growth in 2016, which internship positively impact our bottom line. Another very critical market drivers something around end to end network visibility, where EXFO is certainly gaining a lot of traction. Network operators are increasingly focused on driving most optimal quality of experience that is critical for their customers, white at the same time driving most optimal usage of the network assets. While NAV is gradually becoming a network reality and showing both quality of experience with minimal asset investments, is something, that’s a very bouncing challenge. This is where the value of our Xtract analytics and our increased focus on end-to-end visibility are really making difference, and we expect that significantly to do well in the quarters to come. Now it’s time to talk about our third quarter guidance and financial outlook for the next quarter. We’re forecasting sales to range between $59 million to $64 million for the reporting period that extends from March 1 to the end of May 2016. Looking at the profitability lines, our IFRS net earnings are expected to range between $0.03 to $0.07 per diluted share for the third quarter of 2016. IFRS net earnings include $0.01 per share in after-tax amortization of intangible assets and stock-based compensation costs, as well as $0.01 per share for a foreign exchange losses based on today’s exchange rate. So at this point, I’ll turn the call over to Pierre to discuss our financial numbers.

[Pierre Plamondon:]

Thank you, Germain, and good afternoon, everybody. Sales increased 5.1% to $53.6 million in the second quarter of 2016 from $51 million in the second quarter of 2015, but decreased 3% from $55.2 million in the first quarter of 2016. Bookings improved 9.2% to $59.7 million in the second quarter of 2016 from $54.7 million in the same period last year and up 2.1% from $58.5 million in the first quarter of 2016. It should be noted that our sales would have increased about 8% year-over-year on the constant currency basis, while bookings would have increased 12% year-over-year. Our book-to-bill ratio amounted to 1.11 in the second quarter of 2016, which build up our backlog and places us in the good position to accelerate sales growth in the second-half. Gross margin improved to 64.7% of sales in the second quarter of 2016 from 61.7% in the second quarter of 2015 and 63.5% in the first quarter 2016. Gross margin increased year-over-year and sequentially mainly due to improved sales of our Protocol-layer product line and subsequently a large contract with a Tier 1 operator or EXFO Xtract analytic solution, which deliver higher margin than our Physical-layer for the group based on the richer software content, as well as stronger U.S. dollar versus all the currency reduced our manufacturing cost and had a positive impact on our gross margins. While we are expecting a less favorable product mix in the third quarter and then negative impact on gross margin by a stronger Canadian dollars, we’re confident that we’ll close fiscal 2016 with our gross margin at the top of our guidance range of 62% to 64% for annual gross margin. In terms of operating expenses, selling and administrative expenses totaled $19.6 million, up 36.5% of sales in the second quarter of 2016 compared to $20.2 million, or 39.9% of sales in the same period last year and $20.3 million, or 36.7% of sales in the first quarter of 2016. The decrease in SG&A dollar year-over-year can be mainly attributed to a fiscal drop in the average value of the Canadian dollar and the euro versus the U.S. dollars, as well as the positive impact of our August 2015 restructuring plan. On the sequential basis, the decrease in SG&A dollars is already set to the significant decrease in the average value of the Canadian dollar compared to the U.S. dollars. These positive factor were partially offset by inflation and annual salary increases. Net R&D expenses reached $10.2 million, or 19% of sales in the second quarter of 2016, compared to $10.5 million, or 20.6% of sales in the same period last year and $9.9 million, or 18% of sales in the first quarter of 2016. Like wise, net R&D dollars decreased year-over-year based on the decrease in the average value of the Canadian dollar in euro compared to the U.S. and due to our latest restructuring plan. On the sequential basis, net R&D dollar slightly increased due to annual salary increases and benefits partially offset by our Canadian dollars. It should be noted that we take our operating expenses to increase in the third quarter, due to an anticipated increase in the value of Canadian dollar compared to the U.S. dollars. In fact, the average value of Canadian dollar in Q2 was 1.39, while we stand now at around 1.32, as well higher volume of sales and [indiscernible] also increased operating expenses in the third quarter. However, we expect that both SG&A and R&D expenses will remain in line with our prior guidance of 34% to 36% for SG&A and 17% to 19% for R&D for fiscal 2016. IFRS net earnings in the second quarter of 2016 totaled $4 million, or $0.07 per diluted share compared to $0.9 million, or $0.02 per diluted share in the same period last year and $1.8 million, or $0.03 per diluted share in the first quarter of 2016. IFRS net earnings in the second quarter 2016 included $0.3 million in after-tax amortization of intangible assets, $0.3 million in stock-based compensation costs and a foreign exchange gain of $1.1 million. Adjusted EBITDA amounted to $5.3 million, or 9.9% of sales, in the second quarter of 2016 compared to $1.2 million, or 2.3% of sales, in the second quarter of 2015 and $5.3 million, or 9.6% of sales, in the first quarter of 2016. Geographically, the Americas accounted for 49% of total sales in Q2 2016., Europe Middle East, Africa represents a 29%, while Asia-Pacific totaled 22%. In comparison, the sales split was 53%, 25% and 22% among the three geographic region in the second quarter of 2015. In terms of customer mix, our top customer accounted for 6.8% of total sales in Q2 2016, while our top three represented 13.2%. Turning to a few key points on the balance sheet, our cash position increased to $44.4 million at the end of Q2, 2016 from $29.4 million in the previous quarter. The significant increase is mainly due to $15.3 million in cash flow from our operation activities in Q2 2016. Finally, DSO decreased to 63 days in the second quarter of 2016 from 81 days in Q1 2016, while inventory turn decreased to 2.3 times from 2.6 times during the same period. At this time, I will now 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] One moment please for the first question. And your first question comes from the line of Thanos Moschopoulos.

[Thanos Moschopoulos:]

Hi, good afternoon. Germain, could you elaborate a little in terms of the strength of the pipeline you are seeing on the Xtract solution? I mean, obviously there was a key contributor to the quarter, sounds like, you’re getting some good traction there. Has it been mostly focused from North American customers at this point, in terms of the interest you are seeing, or is it more global than that?

[Germain Lamonde:]

Thanks, Thanos, for the question. Very good question. Yes, indeed our Xtract solution is actually getting a lot of traction. That traction is pretty widespread as a bigger concentration of our opportunities and successes so far in the Americas region. But frankly, the trend in which we are playing with that solution is a very global trend. And we are expanding now our commitment, our discussions with more customers globally. But frankly, this has been more successful so far in the Americas with a growing success in the rest of the world.

[Thanos Moschopoulos:]

Okay, it’s good to hear. And then on 100G you mentioned a strong interest in that area. Should that be sufficient to drive some sustained growth in the physical layer side, I mean, obviously protocol would be a higher growth area, but would you expect to see a physical-layer test be a good growth sector for you as well over the coming months?

[Germain Lamonde:]

Absolutely, Thanos, this is a very good comment. And in fact, this is exactly, where we’re expecting the trend towards like higher speed, 100 Gig networking for whatever the application, it being the end-user it being the datacenter, or Web 2.0 what have you. The – that trend is, first of all it’s a global trend. And you’re right, it’s actually pulling more business for us in terms of our leadership position in Optics where we are testing basically all parameters better than anyone else in this industry and that’s where we have such a strong market share. And from a protocol standpoint, the one of the gigs, especially with the new announcements we made on that specific portfolio is getting us extremely well-positioned. So that’s a space where I believe we have a strong advantage that we should be able to deliver in the quarters to come.

[Thanos Moschopoulos:]

Okay. On the OpEx side, should we be looking for any significant changes in the coming months, or just typical modest inflationary increases and minor headcount growth?

[Germain Lamonde:]

I think it would be just basic and minor increases. FX is probably the biggest contributor of that, again dollar has got a little bit stronger and that’s the main factor beside that, not a lot of hiring, and it is going to be fairly minimal and basically it’s going to be a pretty much standstill from an OpEx standpoint beyond the FX.

[Thanos Moschopoulos:]

Okay. And then maybe one last one for Pierre. Anything in particular that drove the DSO decrease this quarter?

[Pierre Plamondon:]

Yes, I’m very pleased with the team that we work very hard to be able to collect our account more on time. So that we were able to collect some of the accounts on a regular basis, and the fact also we have been a bit less backend loaded, so that there also to collect our account on time.

[Thanos Moschopoulos:]

Okay. And so might it be sustainable at these levels hopefully?

[Pierre Plamondon:]

It would be linked to their growth in sales as well. So if we grow our sales as we expect, the receivable will increase as well.

[Thanos Moschopoulos:]

Right. I mean, the actual the days sales – DSOs – okay. All right. Thank you.

[Pierre Plamondon:]

Hey, it’s hard to predict that to maintain the associated same level, but that was a very good execution here.

[Thanos Moschopoulos:]

Yes. Okay, great. I’m glad to see the traction in the stronger growth. I’ll pass the line. Thank you.

[Pierre Plamondon:]

Thank you very much, Thanos, and have a wonderful evening.

[Operator:]

And your next question comes from the line of Deepak Kaushal.

[Deepak Kaushal:]

Hi, good evening, guys. Can you hear me?

[Germain Lamonde:]

Very well, Deepak.

[Deepak Kaushal:]

Thanks for taking my questions, I appreciate it always. And so, Germain, I wanted to ask you a little more about the new platform for strategy for lab testing. I was wondering if you could elaborate on that a little bit to-date and a little bit more, and perhaps offer a sense of how big your lab focused businesses today and how much you expect that to grow in the coming years?

[Germain Lamonde:]

Well, actually many thanks. Very interestingly here, in fact, we’re leveraging a lot of our investments and transformations we did during 2014, 2015. We’re really leveraging a lot of the technology we developed at that time. So basically, we already expanding into a new market we’ve not been covering very extensively in the past. It’s a fairly good size market, where we’re combining the potential for both the transport and the optical businesses in which we’re quite active. We were talking $100 million plus market in which today for EXFO globally speaking, this is less than 5% of our business that has been within that segment. That’s a segment that has got a lot of potential for growth, especially with the fact that, high-speed networking is on a rise. We think our position in that segment is extremely strong, differentiation is extremely well defined, very well-positioned. So basically it’s a space in which there are few players, where we intend to take a larger share in the years to come. So it’s a good segment for us. We’re naturally – we have presence in the past. We do have presence to-date, but it’s not been a real focus area for us, but pretty more focus, we can expect to be able to deliver some good growth in that segment in the quarters to come.

[Deepak Kaushal:]

Okay, great. Thanks. It’s helpful. I’m looking forward to progress there. Last quarter you also mentioned some optimism or expressed optimism on the Chinese market, despite the economic weakness at the time. What have you seen in that market since you spoke last quarter and how have you progressed against that opportunity?

[Germain Lamonde:]

Yes, in fact, it’s a very good question. In fact, first of all I really [indiscernible] still a firm believer that antenna has a good potential, especially with the fact there were pent-up demand that was created during 2015, especially with a lot of investigation that was done within China to slowdown procurement processes. There is a strong demand and that strong demand is going to be materialized probably within the next four to eight months. And I really believe it’s always very well-positioned in China market. We have a longstanding presence. We have sales offices across the country. We have the strong team, and we’re very well-positioned with all three major operators. So I’m very confident this could be a good area for us in the quarters to come.

[Deepak Kaushal:]

Okay. And that the – I guess, converting that demand over the next four to eight months, is that built into your current outlook in your target of – I think you said $23 million EBITDA for the year?

[Germain Lamonde:]

We said that we will surpass our $20 million target by at least two so…

[Deepak Kaushal:]

That should be okay…

[Germain Lamonde:]

It’s part of our plan, sure.

[Deepak Kaushal:]

So, the group from China is part of that plan?

[Germain Lamonde:]

Yes, it’s part of our plan absolutely…

[Deepak Kaushal:]

Okay, great. And I have one final question for Pierre. Pierre, just a quick question on tax rate, I’m not sure if I missed it in prepared remarks. What’s the outlook that we should expect for taxes?

[Pierre Plamondon:]

The taxes is going to range about 40% from the – depending of the range that we’re looking to be let’s say between 30% – yes about 40% would be 40% to 50% depend the non-taxable element that we had in our tax reconciliations.

[Deepak Kaushal:]

Okay, that’s helpful. Thanks again. I’ll pass the line and look forward to your Investor Day.

[Pierre Plamondon:]

Thank you, Deepak, looking forward to see you in Toronto.

[Operator:]

And your next question comes from the line of Robert Young.

[Robert Young:]

Hi, good evening.

[Germain Lamonde:]

Good evening Robert.

[Robert Young:]

I just had a couple of questions about the cadence of bookings here, last quarter you had strong bookings and the referred revenue was below that bookings level, and again good strong bookings this quarter. And it looks as though you’re looking for revenue above that level of booking. So is this timing of some of that conversion of bookings over the last two quarters is some of the bookings from last quarterfalling into Q3? And then second part of that question is I know that in Q2 typically last quarter we see a lot of service renewal, which I typically think of as that’s rated piece of revenue over the year. So I assume that in Q2 that the bookings will be less would convert less into Q3. And so I’m a bit worried that this revenue range you’ve given in maybe if you could comment on those two pieces that would be great?

[Germain Lamonde:]

Very good comment Robert, first of all you’re right that in our second quarter there’s typically a good portion of maintenance renewal and that’s basically partially into Q1 and a bit of that is in Q2. So we had some of that in both Q1 and Q2, which basically are part of the reason of our strong book-to-bill ratio. The second element I’d like to point is that we’ve been increasingly successful in getting to more systems and solutions especially we’re providing more visibility for a quality of experience across the whole networks. Some of these systems would be sometimes book in a given quarter and recognize in one or sometime more than one quarter. In this case here we said the investments we’ve been doing all the booking we believe beside the maintenance contracts that you referred to. The vast majority of all the bookings that we have been talking about here is to be recognized within this fiscal year. So that’s given us a good position for entering into the second half adding a backlog position that’s quite a bit better.

[Robert Young:]

Okay, and then through last year there were some delays you had seen in EMEA and North America and seen some of that improve. Have all those delays pull down like have you been able to end that or are you still seeing some delays from some customers?

[Germain Lamonde:]

Well, we’d love to get all orders to come faster, but I would say that looking aside basically I would say that the situation is actually gone a little better. The first of all I’m glad to report that as much as throughout the whole of our fiscal 2015 EMEA was the only drag on our business when we reported basically bookings growth and revenue growth in both America and APAC, but India was quite a bit of challenge on last fiscal year. Our business right now is actually going better so far and this fiscal year, we’re reporting all three regions to be delivering bookings growth, so that’s encouraging. And there is nothing to report that would be negative across the Americas market. I would say I would tend to say the Americas market right now, especially U.S. market to be on a strong stance with good opportunity. We see number of large operators having massive plans or important plans in adding capacity and upgrading their networks for the next generation. So I think it’s – the market situation although will not – I will never say that the market conditions are easy. They will not be easy. I think it’s a situation where our position to marketplace is extremely strong. We’ve transformed substantially through the last fiscal year that has two fiscal years. We’re in a very good position strategically. We’re well positioned across a whole product portfolio. And I think that’s for us now to go and be aggressive and getting market share.

[Robert Young:]

Okay, sounds great. And then the last – over the last year or two years some of the visibility you’ve seen has been made it a little bit difficult for EXFO management set achievable guidance. And I was wondering if you could talk about where you sit today, your confidence relative to previous – it seem visibility improve, are you more confident now and the guidance you’re giving than in previous periods and then I guess I have one last question after that and I’ll pass the line.

[Germain Lamonde:]

Okay, thanks a lot. It’s a very good question and not an easy one in fact to answer, so in a way you’re indirectly asking whether we think that our guidance are more safe and more sound and more laid back in a way. I will say that we have clearly more visibility better. We’re in a better position to provide guidance. It’s the fact we have a bit of backlog is clearly playing in our favor. There is no question about that. I will say that generally speaking, our visibility and tracking and we were pretty disciplined around deal management, around final management, that is actually getting better. I’m quite pleased in fact as you all know with basically added a new COO to the organization, Philippe Morin and he is actually to helping us in fact in driving basically slightly better the sales process and so forth. I think it’s actually better on that front. But frankly I would say that the – I will say that the market conditions have gone a whole lot better. But they didn’t getting better. I will say that to a good degree. Our transformations we were basically going through in the last fiscal years have also been implemented given us basic – high speed optical networking and optical segment and so and so forth, we have the better position. Xtract, started to really get serious customer engagement. I will say more towards the tail end of the summer. We started to get success only this fiscal year. Revenue in the last fiscal year was very much close to zero. So this year was trying to get some serious traction, it’s really driving a little of our business from a visibility standpoint of end-to-end at that point. So many of these factors are coming into play now and that’s helping us to be more confident about the second half of this fiscal year and about our end markets in general.

[Robert Young:]

Okay and then just a clarification. I think Pierre you said that orders are backend load. I think – but previous quarter in Q1 as well, I think you said that orders were backend loaded and did I hear that correctly?

[Pierre Plamondon:]

The accounts payable or less backend loaded in Q2, so that’s ours to collect balance pretty quicker.

[Robert Young:]

Right, so then the backend load in Q1 that continued strong into the beginning of Q2. Would that be the way to read as it slowed down since then or it stayed strong?

[Pierre Plamondon:]

In fact we do read is that bookings have tended in fact to be and it’s not excluded to EXFO it’s pretty generalized across the telecom industry and many industries I should say is that bookings have tended to be with more backend loaded when use to be. It’s not like we book three months in a row exactly the same amount of bookings. The type of more backend loaded bookings standpoint is trading a challenge from early recognition where we are in this last quarter, we were able to get more revenues during the first month of the quarter helping P&L or helping finance to get better revenue within the first month and that’s driving our cash position to a better level.

[Robert Young:]

Right, okay. Thanks for answering my questions. I’ll pass a line.

[Pierre Plamondon:]

Thank you very much Robert.

[Operator:]

And your next question comes from the line of Tim Savageaux, Northland Capital Markets.

[Germain Lamonde:]

Good evening, Tim.

[Operator:]

Tim, your line is open.

[Tim Savageaux:]

Was I on mute there? Can you hear me now?

[Germain Lamonde:]

Oh, yes absolutely.

[Tim Savageaux:]

Okay, sorry about that. Well, what I said that you missed was congratulations on the good results and outlook.

[Germain Lamonde:]

Thank you very much.

[Tim Savageaux:]

You’re welcome. I had a couple questions here and you may really following on your comments about fairly strong U.S. market with major carriers, looking to upgrade certainly, out above, so we hear a fair a bit about continued activity of Verizon and actually other major carriers on the metro side, that would seem to contrast at least to some degree with your results in the quarter in the Americas, which were down pretty meaningfully from a revenue standpoint at least, on a sequential basis and also physical layer result while realizing there’s sometimes some of the 100-gig stuff is in protocol, but a lot of the fiber is in Physical-layer. Add to that a lower top three revenue concentration, and it looks like you might have seen a bit of an air pocket with one of the major U.S. carriers in the quarter, at least, from a revenue standpoint. So I wonder if you could reconcile this is relatively positive overall backdrop for the U.S. market with what we saw in terms of results in the quarter in protocol in Americas on a sequential basis?

[Germain Lamonde:]

Okay, all right. So it’s a very good question. If you take each of the segments one by one, first of all, I would like to mention the fact that bookings and revenue recognition sometime can be deferred. And so there could be delays between – so basically whether we talked about strong growth in bookings in America and then still like very strong on that front. And there’s not been any air pocket as you suggested from any of the large operators. Generally speaking things are going pretty well and it’s been more of a matter of timing than anything else. There’s no major reasons to be worried about the balance of the way, things are going right now. We talked about our optical and bioptical – in both optical and transport, what we call transport, which is really our business from a 100-gig testing or capacity testing. So basically, the bookings in both product groups, both the Physical, which is testing the Physical-layer is actually been up. It’s not been up by that much, but it’s up basically year-on-year for the same quarter. And I see more attention to the year-on-year in the quarter lead, because of course keep in mind that our second quarter tends to be from a seasonality standpoint of a bit of a more challenging quarter, given the fact that includes December and January. So that’s why I’m talking more about the year-on-year and Q-on-Q, if you will. So optical did well and I’m quite pleased with the way things are going on that front. And our biggest growth from the booking standpoint really came from the protocol segment, where we went from $22 million to $25 million, $26 million. I think it’s actually quite encouraging with that front.

[Tim Savageaux:]

And just to follow-on right there. I mentioned that protocol booking was principally on the kind of service assurance and analytics side, and so do you saw some strengths in gross margin as a result, as we look for your guidance heading forward it would seem though you would expect gross margins to come back down. Should we still within your range, I imagine, but back towards the lower end. Should we read into that an expectation for that physical and protocol kind of mix to reverse a little bit see some protocol come down a bit physical go up or some change in that mix driving those margins?

[Germain Lamonde:]

So, good string of question. Let me take in terms of when you take them in the right order. You mentioned first of all that maybe it means that it’s more as assurance than in terms of strength in our Protocols business. In fact, on Protocol business as you may recall, it’s mostly three portion of one of which is our transport layer, which is a significant part of our business. That segment was actually doing very well from the booking standpoint. Our – since assurance business did also fairly well within the last quarter, that’s a quarter where there’s a lot of maintenance contracts and so forth it did fairly well and we have a simulator business units where we’re simulating basically network capacity, which also did very well in the last quarter. So there’s not any sub-segments within this Protocol, although we’re not giving specific numbers. But everyone of these segments did fairly well within the last quarter. You’ve suggested that the mix in gross margin for the next quarter we alluded to that fact that, it maybe below. In fact, we’re quite happy that we stand above the range right now. Our range for the year is 2% to 64%. We finished the first-half at 64.1%. We’re still seeing that we’re going to finish this fiscal year in the high-end of that range. We’re not saying, we’re going to be above that range, but we think we’re going to be within the high-end of that range, which means that Q2 was outstanding, Q1 was quite good. We think we’re going to continue to be better in great year-on-year improvement in our gross margin profile, and that’s going to be with more growth in the second-half in our Physical air testing. But also we think that Protocol will also do well. So we’re not pointing really to a massive change versus the first-half, and second-half should also be quite strong.

[Pierre Plamondon:]

And also again that the currency would have a negative impact on the margin due to the – can’t give and I guess, a lot stronger in the beginning of Q3 compared to what we had in Q2.

[Tim Savageaux:]

Right. So not just the OpEx, but the gross margin as well. And so…

[Pierre Plamondon:]

Yes.

[Tim Savageaux:]

…can you specifically say you expect the gross margins below the low-end of the typical range in Q3, because I may have missed that?

[Pierre Plamondon:]

No, we loaded that. We said, we’re going to finish this fiscal year in the high [Multiple Speakers]

[Tim Savageaux:]

Just the end of that. Fair enough. And then I would add one more question right along those lines actually, which is – so I heard the high-end of the gross margin range. I – you also went through the OpEx ranges, I think 34 to 36 on SG&A, if I wrote that, and I may have missed R&D, it’s 16 to 18 I think but…

[Germain Lamonde:]

17 to 19 the range. So if you look at that with, we don’t fall within the – those guidelines for the full-year.

[Tim Savageaux:]

Okay. So the commentary was within that range for the year?

[Germain Lamonde:]

Yes.

[Tim Savageaux:]

Great. Understood. Thank you very much. I’ll pass it on.

[Germain Lamonde:]

Thank you, Tim.

[Operator:]

[Operator Instructions]

[Pierre Plamondon:]

All right, operator, turn the call back to our CEO for final remarks please?

[Operator:]

I would now like to turn the call back over to Germain Lamonde, CEO.

[Germain Lamonde:]

Thank you very much. So, basically, thanks everyone for joining for this call. And I would like to just provide a few key takeaways before we conclude this call. As I said and I’m quite pleased overall with the fact that, we’re very well-positioned. Thanks to some of the key transformation we’ve implemented during the last fiscal year. So first of all, we did a diversified financial results in both the first and the second quarter of this fiscal year. And with basically both delivering improved bookings, improved gross margin as well, adjusted EBITDA on a year-on-year basis. Secondly, we’re benefiting from growing demand for high-speed optical networking, the virtue of our leadership position in fiber optics and one of the gig network testing. Thirdly, we believe that both our Physical and Protocol product groups will deliver healthy sales growth in our fiscal 2016. They’re both delivering good bookings growth and as well all three regions are delivering booking growth so far. And fourthly, based on our book-to-bill ratio, we had one in the first-half of 2016, and considering the side of the second-half is certainly the strongest. We should surpass our $20 million adjusted EBITDA target for the fiscal year by at least $2 million or more. And finally, I would like to invite institutional investors and analysts to attend our Investor Day, which would be held on April 22 from 10