EXFO Inc.
Q4 2014 Earnings Call Transcript

Published: 9 Oct 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 and Year-End Financial Results for Fiscal 2014 Conference Call. 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, October 08, 2014. I would now like to turn the conference over to Vance Oliver, Director of Investor Relations at EXFO. Please go ahead.

[Vance Oliver:]

Good afternoon, and welcome to EXFO’s fourth quarter conference call and year-end conference call for fiscal 2014. 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 our 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 our uncertainties, which may cause the actual results of our 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 to our IFRS results is available on our website at www.exfo.com/investors. All dollar amounts in this conference call are expressed in U.S. dollars unless otherwise indicated. So, without further delay, I’ll turn the call over to Germain.

[Germain Lamonde:]

Thanks, Vance, and good afternoon, everyone. Welcome to our Q4 and fiscal year-end conference for 2014. Fiscal 2014 has proven to be a challenging year for EXFO and frankly for most players in our state as the telecom industry has faced various headwinds including reduced spending of levels from Tier 1 network operators especially in America, level of activity which slowed down deployment mainly in the U.S. and the projects that got delayed on a level basis, some of the tier-1 network operators within their major occupational changes towards VoLTE, NFV or SDN technology and changes that will happen. So our own sales decreased by 4.7% to $230.8 million for fiscal 2014 while adjusted EBITDA totaled $14.4 million or 6.2% of sales. Although we cannot be satisfied with these results, I’d like to share a few important data points to shed some more light on EXFO’s performance in fiscal 2014. First, let me say that we closed '14 with bookings growth of 3% year-on-year to $240.4 million compared to $233.5 million during fiscal 2013, so that’s a $6.9 million increase in bookings. We delivered a book-to-bill ratio of 1.04 in 2014 versus 0.96 in fiscal 2013 in a sense due to nature of timing of orders that we received, we consume more or less around $30 million of backlog during 2013 that we have to replenish during our fiscal 2014. Had our backlog remained constant, our 2014 numbers would have been quite a bit superior, we would have posted both revenue growth and earnings growth. As a result on the segmented basis, physical layer and protocol layer revenues or sales decreased respectively by 6.3% year-on-year and 1.2%, however if you’re looking at the bookings side, both physical layer and protocol layer of product families have increased bookings by 3% each. After a challenging first quarter where bookings were down by 10%, we then posted year-on-year bookings growth between 6% and 10% in both the second, the third and the fourth quarter of 2014. This sequence of bookings increase gives me confidence that we finally reached an inflection point where we have resumed growth and our backlog stands now as a much better and much more manageable level, and as a result we are now entering in a new stage whereby our trend in booking growth will – now with our better backlog will help our visibility, our guidance predictability while allowing us to also be back now into delivering growth in revenues and driving more earnings to the bottom line. I will add also that our bookings reported for the regions in EMEA and APAC were both quite strong, both nearing 10% for the whole fiscal year. So as mentioned in previous calls, we invested in a new technology platform during fiscal 2013 that finally reached the market in the early part of 2014. So I’m pleased to report these key technology platforms who will be providing us of course with long-term key technology advantage in key technology areas, but I’m glad they finally now started to contribute to our bookings as early as the second quarter of 2014. Of course, our initial strategy did not stop there and as we proceeded through fiscal year '14 with ongoing innovation ranging from small product improvements with feature enhancements all the way up to real game-changing new products and solutions. In each case, our focus has always been on truly differentiating innovation that help EXFO to continue gaining market share but also accelerate our position in our key product initiatives that include of course strengthening EXFO’s market position in the critical wireless market, continuing our market share gaining with tier-1 network operators and accelerating our transformation from the best provider to more of a strategic solution partner to our customers. With these key strategic initiatives in mind, we launched during fiscal '14 total 24 highly differentiated solutions and new products. We proceeded with the acquisition – a very synergic acquisition of a Boston-based company called ByteSphere with the most scalable ascending (indiscernible) solution that have since been integrated into our active service assurance offering to offer unmatched visibility and reach across the networks. This new and improved service assurance solution that will provide not only the heath status of the network but also their overriding applications like IMS, VoLTE, Video so on and so forth. We’ve also acquired the assets of Aito Technologies, a leading customer experience assurance supplier based in Espoo, Finland and company Aito’s highly scalable technology and intuitive user interface with EXFO’s high performance wireless probes has created and is creating right now a whole new set of systems capabilities, offering unmatched visibilities into the wireless users’ experience which is so critical to tier 1 operators. These deals were not material from a financial viewpoint, they were both quite strategic as we’ve acquired technologies that are really enhancing EXFO’s position as a solutions provider in the wireless industry. So while we did that, our cash flow from operations was more than sufficient to pay for these transforming acquisitions and for other capital assets and investments that we done during fiscal year '14 and we’re able to post a $9.6 million increase in our cash flow and short-term investments to now reaching near $60 million that we’ve been strengthening and already strong and solid financial position and allowing EXFO to continue exploring other strategic acquisition opportunities. Now I’d like to talk about our growth strategies. Our growth strategy looking ahead into fiscal 2014, EXFO will continue to intensify its relationships and alignment with leading telecommunication executives at fixed and mobile network operators not only to better anticipate in response to their strategic needs but also to strengthen our position as a strategic partner that is solving their most critical business issues, given that the shift in capital spending by network operators from fixed to mobile network operators, from legacy to packet-based IT architecture and from hardware centric to virtualized environment, EXFO has continued to adapt its growth strategy during 2014 and is uniquely positioned at working to 2015 and beyond. In the next minute I’ll address growth imperative of 2015 and how we fair against them during the past year. So let’s talk first about the wireless market. Our first and most important (indiscernible) from our growth strategy consists of increasing our presence in the very critical and high growth wireless industry. Bookings with the wireless operators (indiscernible) reached an estimated 30% to 32% of our total bookings during fiscal 2014 versus an estimated 26% to 28% of bookings during 2013, so basically that’s approximately $18 million of growth in that segment. This is largely due to our focus on building relationships with wireless operators but also by creating unique solutions and portfolio mobile access, backhaul and core network capabilities. Example of some of these products, we launched an all-in-one optical Ethernet test solution that accelerates the deployment and troubleshooting of wireless backhaul, small cell, dash or [mutual] (ph) Ethernet networks during 2014. We introduced a service assurance solution that enables mobile operators to proactively monitor quality of experience of voice-over-LTE deployments. We also brought the market innovative new fiber probe that greatly accelerates connector inspections while removing the false positive that other products can introduce which is very important for the wireless industry which has typically less experience dealing with optical fibers. In addition, we combined the best-in-class 4G/LTE data capture and analysis capabilities of our [Power Pro] (ph) with customer experience analytics, a software from Aito Technologies to deliver a unique high-end wireless troubleshooting solution. In 2015, we plan to continue investing in wireless and including our market share in this strategic growth vector. The second critical area for us we need to continue to expand our share of wallet with tier-1 operators. It’s no secret that capital spending is highly concentrated amongst the tier-1 network operators on a global basis. The typical [para two] (ph) also applies very well to the telecom industry in which a small number of network operators are accounting for the vast majority of our telecom spending. As a result, EXFO has several initiatives in place to increase partnership and penetration with tier-1 network operators. We made significant progress with several tier-1 operators globally during 2014 and for example, we won an initial $2 million order in the global tier-1 mobile operator for Ethernet One, our centralized Ethernet assessment solution for wireless backhaul, small cell to Ethernet. Following orders with related annual maintenance contracts will also be continued into 2015 and beyond. We also secured a deal with a tier-1 network operator for a cloud-based EXFO Connect solution that increases productivity and reduces operating costs in field. Such a focus on tier-1 account is critical to growing revenues in 2015 and well beyond that. Third, we have also continued and we have gradually but significantly transformed EXFO from the hardware and box company into more of an advanced solution provider that is intensively leveraging software, smart [assets] (ph), systems in the cloud to enable our customers to get significant productivity enhancements in the relentless quest to reduce their OpEx while improving quality of experience for consumers. In our journey, we have acquired Brix Networks all the way back in 2008. In 2010, we launched the first and pretty much still today the market leader with our cloud-based EXFO Connect and we continue on that front to increase not only capacity but also more importantly its range of applications for EXFO Connect such as contractor modes, driving automation, driving uniformity, driving efficiency, maintenance and procedures while adding to its more matrix and analytics. We also brought unique iOLM and other solution and technologies over the last few years to again continue to take the guesswork and second drum roll out of the equation and drive the do-it-right-the-first-time mentality and capabilities within the industry. We’ve also brought BrixNGN monitoring solutions for voice-over-LTE and IMS deployments as well as our power ad hoc wireless probes combined with an [apex] (ph) software to provide enhanced network visibility and many more. So these solutions reflect an ongoing transformation at EXFO from single dedicated instruments to a more holistic solution offering since network operators favor suppliers who can not only providing the boxes but can resolve the entire puzzle for them, not only a piece of it. During this process, our discussions with customers have increasingly moved up the management chain to chief technology officers and chief operating officers, the VPs in network planning, network operations and so forth since we are becoming a genuine partner in their efforts to increase core capacity, quality of experience while reducing operating costs. Look for more high-margin, high-end solutions from EXFO in the future. Now let’s talk about how we can accelerate profitability. As you can see our growth strategy has been designed to deliver sales growth and I’m glad to prove now that we’ve got bookings growth in each of the last three quarters. We’re also focusing on delivering higher gross margin as we’ve proven in the last fiscal year, and that’s very quickly going to increase our profitability in the long term. In the third quarter of 2014, the trickle-down effect to the bottom line became apparent when we generated sales of $63.9 million and gross margin of 63.3% for an adjusted EBITDA margin of 11.5%. This robust quarter demonstrate the leverage in our operating model when we generate sales of about $60 million in gross margin, about 62% on the following basis. With our growth synergy is largely top line driven, we have also kept a very close eye on our costs. We actually achieved cost savings of $6.2 million during fiscal 2014 and $9 million during 2013. And the best is yet to come for EXFO with sustainable leverage in our operating model to reach our 15% adjusted EBITDA margin target in the not too distant future. Now I’d like to talk to you about our guidance for Q1 2015. Let me provide our financial outlook for the first quarter of fiscal '15. We’re forecasting sales to be between $58 million and $62 million for the first quarter, while IFRS net results should range between a loss of $0.01 per share to earnings of $0.03 per share. IFRS net results include $0.02 per share in after-tax amortization of intangible assets and stock-based compensation costs. This guidance was established by management based on existing backlog as of the date of this conference call; seasonality, expected bookings for the remaining of this quarter as well as the exchange rate as of the date of this call. At this point, I’ll turn the call over to Pierre to discuss our financials.

[Pierre Plamondon:]

Thank you, Germain. Good afternoon, everybody. Annual sales decreased 4.7% to 230.8 million in fiscal '14 from 242.2 million in 2013. The year-over-year decrease in sales can be mainly explained by the timing of orders that we received in fiscal '14 which resulted in a significant increase in our backlog at the end of 2014 compared to 2013. We are increasingly receiving larger system-based orders, which take longer time recognizing to revenue and therefore they increase our backlog. Bookings increased 2% to 240 million in 2014 from 233.5 million in 2013 for a book-to-bill ratio of 1.04. All the three major regions delivered a year-over-year growth in bookings in 2014 compared to the previous year. As Germain mentioned, we faced a number of headwinds in 2014 including reduced spending in the Americas, especially in the first half of the fiscal year as more than 55% of orders from that region were received in the second half of the year. In the fourth quarter of 2014, sales totaled 59.7 million while bookings reached 57.3 million for a book-to-bill ratio of 0.96. For the year, gross margin improved to 62.4% of sales from 61.8% in 2013 and in the fourth quarter of 2014, gross margin reached 63% of sales. Our gross margin increased on an annual basis mainly because we sold more software-intensive solutions with higher margin in 2014. This positive impact was partially offset by a lower sales volume, which resulted in a lower absorption of fixed manufacturing costs and also pricing pressure on certain product lines. We believe that our gross margin will range between 63% and 65% in fiscal 2015 based on higher sales volumes and improved product mix. Moving to operating expenses, selling and administrative expenses amounted to 86.4 million in 2014 compared to 88.8 million in 2013. In the fourth quarter of 2014, SG&A expenses totaled 21.5 million. The decrease in SG&A dollar in 2014 can be attributed to a tight control of expenses and increase in the average value of the U.S. dollar compared to the Canadian dollar year-over-year as roughly one-third of these expenses are incurred in Canadian dollars as we report in U.S. dollar, and also lower commission expenses paid out on lower sales volume. As a percentage of sales, SG&A expenses reached 37.4% in 2014. We expect our SG&A expenses will range between 34% and 36% in fiscal '15. Net R&D expenses totaled 44.8 million in 2014 compared to 45.4 million in 2013. In the fourth quarter of 2014, net R&D expenses amounted to 10.8 million. The decrease in net R&D dollars in 2014 is mainly due to the year-over-year increase in the average value of the U.S. dollar versus the Canadian dollar as well compared to the Indian rupee since most of our R&D expenses are incurred into these two latter two currencies while we report our results in U.S. dollars. This decreased, however, was partially offset by a lower Canadian incentive tax rate and grant received in 2014, which has an impact estimated to about 1 million of actual R&D expenses in fiscal '14 compared to fiscal 2013. As a percentage of sales, net R&D expenses attained 19.4% in 2014. We expect our net R&D expenses will range between 18% and 20% of sales in fiscal 2015. This range considering the impact of the reduction of the research and development tax credit rate in Canada is estimated to an initial 800k for fiscal 2015. As previously mentioned, we benefitted from cost saving of 6.2 million in our OpEx in 2014 including 3.3 million in depreciation and amortization expenses. In fiscal 2014, IFRS net earnings totaled 0.8 million or $0.01 per diluted share including 4.1 million in after-tax amortization of intangible assets, 1.7 million in stock-based compensation costs and the foreign exchange gain of 1.6 million. In the fourth quarter of 2014, IFRS net earnings totaled 1.2 million or $0.02 per diluted share including 1.1 million in after-tax amortization of intangible assets and 0.4 million in stock-based compensation costs and a foreign exchange loss of 0.3 million. In terms of geography, the Americas accounted for 53% of sales in fiscal '14. Europe, Middle East, Africa represented 28%, while Asia Pacific totaled 19%. Looking at customer diversification, our top customer accounted for 6.1% of sales in fiscal '14 while our top three represented 11.6% of sales. As Germain mentioned, our cash position increased to 59.8 million at the end of fiscal '14 from 50.2 million in 2013. In 2014, we generated 19.8 million in cash flow from operation. This amount was partially offset by 7.9 million for the purchase of capital assets including the asset of ByteSphere and Aito Technologies, 0.9 million for the redemption of share capital under our share repurchase program and 0.3 million for finance payment of our long-term debt. We also recorded an unrealized foreign exchange loss of 1.2 million on our cash and short-term investments denominated in Canadian dollars. Finally, DSOs decreased to 70 days in the fourth quarter of 2014 from 76 days in the third quarter while inventory turns remained flat at 2.5 times in Q4 2014 compared to the previous quarter. At this time, I would turn the call over to the operator for the start of the Q&A. thank you.

[Operator:]

Thank you. (Operator Instructions). Our first question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Please go ahead with your question.

[Thanos Moschopoulos:]

Hi. Good afternoon. Germain, from your prepared remarks it sounds like you’re seeing some gradual improvement in the end markets although revenues for the August quarter were a little weak relative to the bookings that you had heading into the quarter, and so what should our takeaway be? Was it just that? There was maybe some temporary weakness towards the end of the quarter that has not resolved or maybe provide some color in terms of the current environment that you’re seeing? Thank you.

[Germain Lamonde:]

Yes, good question, Thanos, so simply in fact I think I’m glad that Q4 marks growth versus Q4 last year and so that’s our third consecutive quarter of year-on-year booking growth. So the trend is actually quite encouraging, so that’s good on that front. Q4 is a summer quarter, so it’s always a lower quarter on a bookings viewpoint. The fabric of the timing sometime of the orders makes it that there is revenue recognition and longer revenue cycle, but there is nothing major there. In fact I think we’re pleased to see that the trend from the bookings to be up year-on-year is continuing for a third quarter in a row.

[Thanos Moschopoulos:]

Okay. And then from a geographic perspective, it seems if I’m doing the math correctly, that EMEA and APAC were maybe a little soft in Q4. And so again if we look out from a bookings perspective and looking out to longer term, what are you seeing in those regions?

[Germain Lamonde:]

Yes, I’m glad to say that our bookings in EMEA and APAC were both up year-on-year in the range of 10% for both these regions from an annual basis. During fiscal year '14, the market in Americas has been certainly the most challenging. I don’t think it comes as a surprise. That’s where basically at the end of the day for the full fiscal year, we ended up with booking is about flat year-on-year, slightly negative just by a couple of percentage points. It’s not big but it’s still in a market where it’s been the most difficult for us. I am optimistic about the trend and the continuation that we’ve got there and we see over in Asia. I think Asia is a great region. I expect India to continue to perform very well moving into 2015 and I would expect to see and we have a number of clear indications right now that although America is a bit challenging, but I expect America to be back into growth mode.

[Thanos Moschopoulos:]

Okay. So the apparent revenue declines in EMEA and APAC for Q4 specifically again more reflective of maybe some summer weakness rather than any trends.

[Germain Lamonde:]

Yes, I think it’s more of a reflection of the temporary weakness and also sometime the revenues not really match the booking profile sometime because of systems where revenue recognition could be a little longer.

[Thanos Moschopoulos:]

Okay. And then last quarter you highlighted the three wireless deals you had amongst teir-1 operators, and so can you update us in terms of the timeframe for those rollouts?

[Germain Lamonde:]

Yes, well, things are going well. Some of that is actually taking a little longer than expected. It’s nothing to do with (indiscernible) technology. This is sometimes just the cycle that these operators are going with. So our guidance for Q1 '15 does not include these two deals to bring any significant contribution, so that’s more planned for Q2.

[Thanos Moschopoulos:]

Okay. And maybe one last one, a question for Pierre, what level of Forex translation gain or loss are you building into your earnings guidance for next quarter?

[Pierre Plamondon:]

It’s about 0.5 million gain based on the currency that is generating that we have today.

[Thanos Moschopoulos:]

Okay. Perfect. Thank you. I’ll pass the line.

[Germain Lamonde:]

Thank you very much, Thanos.

[Operator:]

Our next question comes from the line of Scott Penner with TD Securities. Please go ahead with your question.

[Scott Penner:]

Hi, Germain. Can you just talk maybe about the market growth that you’re seeing in the physical and the protocol markets and how do you think your share has changed over the last year?

[Germain Lamonde:]

Very good question, Scott, thanks. We reported basically that revenues have declined in each of these two product groups. We’ve also reported that the bookings have been up in each of these product groups. So bookings are up by 3% and 3% respectively in both of these product groups. I believe that bookings are a good indication that we have gained I believe market share globally in these two areas. I think we have to say that the end markets have been a little bit difficult; 3% doesn’t seem to be a big number to claim that we’ve grown faster than the end market, but my belief right now is that the end markets have been rather, I would say, sluggish but probably stable running around like the 0%, the stability that we’re more than into growth in the last 12 months. So I believe we’ve been doing some modest market share gains. What I’m more interested into and more pleased with is the fact that we have really been strengthening our product position and our market position thanks to of course a couple of acquisitions, but we talk about very key new technology platforms that were launched about a year ago now, they are starting to make an impact in the marketplace, but what’s interesting now that these key technology platforms have been released. We’re not at a point where we’ve been launching during the last fiscal year. We’ve been back into our normal motive launching a lot of new products and solutions, so the innovation machinery is really back in order.

[Scott Penner:]

And just switching gears, I guess, on the cash position being quite strong at the end of the quarter, what are the plans or priorities right now for the usage of cash? I mean do you expect to more fully utilize a share repurchase plan given the share price or acquisitions or just what can you tell us about the priorities?

[Germain Lamonde:]

Well, I would say that the priority for the time being is not to be super aggressive in buying shares, but frankly I think we have a program in place and we intend to continue to support our share price, especially at the level it’s at right now. So we don’t intend to buy too much. There’s a catch 22 because of course we don’t have a lot of shares in circulation, but we feel that this is highly creative for us as an organization to utilize some of our cash towards that end. We’re also quite pleased that our cash has gone up, despite the fact we’ve done acquisitions this year that means these are already paid for, so that’s great. We’ll be able to generate enough cash to pay for these acquisitions and we’ll continue to be looking for strategic acquisitions that can really help us make a difference as we’re continuing on our journey to grow our business with the wireless industry with tier-1 operators and also becoming increasingly more and more of a solutions provider.

[Scott Penner:]

And lastly, when we’re looking at the growth in bookings for the last couple of quarters being kind of 6% to 8% year-over-year, is that a – just trying to get a sense for you feeling or view on next year. Is that as good any indication as the revenue growth potential for the coming year?

[Germain Lamonde:]

I think it’s clearly a good indication. I was mentioning the last quarter call that we had to sort of rebuild some sort of a backlog. Our backlog had been going down through fiscal year '13. Now we’re back now in a position that is a lot more comfortable, so there’s always a matter of sometime timing of orders and really recognition. Some of our business has evolved gradually over the last several years to be more and more into systems and solutions that incline sometime in longer revenue cycle, but clearly I believe this trend of getting quarter bookings to be up, I’m quite optimistic it’s going to be a continuation in the quarters to come. And clearly there’s no question it’s going to start to flow now into the top line from a growth point of view.

[Scott Penner:]

Okay, appreciate it. Best of luck.

[Germain Lamonde:]

Thank you.

[Operator:]

Our next question comes from the line of Deepak Kaushal with GMP Securities. Please go ahead with your question.

[Deepak Kaushal:]

Hi. Good evening. Thanks for taking my questions. Germain, I did want to ask you more – a little bit about the growth. You mentioned that the wireless deals that you should start recognizing revenue from starting in Q2 next year, how much of your growth expectations for next year depend on that? And then on a flipside of that – outside of that, what other business is falling off if the growth is primarily being driven by those wireless deals?

[Germain Lamonde:]

First of all, it’s a great pleasure taking your question and back into our belief into growth, our guidance for Q1 is already better than – the low end of our guidance is already better than what we did in Q1 last year, so I think we’re confident about delivering growth. These two deals, as I said, first of all the good news is that it’s not like they’re up in the air, so there’s purchase orders. Sometimes it’s really about revenue recognition. The good news is we’re providing a guidance to be up year-on-year for Q1 with not even accounting yet for these two deals. So I think the best is yet to come, which means we should be able to leverage that positively in Q2 and beyond. So these deals are not deals that are at risk, not deals that we’re waiting for, it’s just deals that are confirmed and that’s partially in part – it’s part of our backlog right now, so I’m quite optimistic about that. So I believe that the main focus for us is to make sure that these wins in many cases being very unique and advanced solution is completely unmatched in the industry is to assure them we can package them and reproduce these wins with more tier-1 operators globally. And so that’s really the focus that we’ve got and it’s clear that it’s really going to help our business this year.

[Deepak Kaushal:]

Okay, great. That’s very helpful. Thank you. And you did mention to another questioner that you expect the U.S. market to grow next year. What do you specifically see changing between now and next year that will bring back spending from U.S. customers or North American customers?

[Germain Lamonde:]

Well, a couple of items of course and although I remain more cautious about the America market, don’t get me wrong, a number of elements gives me some little comfort that we’re going to see some growth into the U.S. market. First of all, I will say that while NAV and other initiatives that are right now making some operators to maybe hold in their decisions, that’s pushing them to run a network a little harder until some of it comes to market and NAV is not going to be a major play into the telecom industry in Canada '15, Canada '16 there’s a lot of work that needs to get done before they become a significant part. What people have been waiting a little bit right now is making the networks to be run little harder right now. The more you run your network hard, the more you need service assurance, the more you need to invest into solutions. I think that our position has also got substantially better from the products point of view that I can feel confident about our ability to be packing to gaining more market share moving forward.

[Deepak Kaushal:]

Okay, great. That’s perfect. And then just one final question before I pass the line. You did mention a transition towards advanced solutions and having some maintenance revenue. Are you able to characterize what kind of percentage recurring revenue is as a total and how you might expect that to grow going forward?

[Germain Lamonde:]

It would be such a grey zone in how we would define this that frankly I don’t think we’re going to take an attempt to try to split the revenues. Solutions can be as complex as enabling basically dashboards, KPIs, analytics and so on for a wireless network, service assurance where we have probes nationwide, things like that which is a very big system. It could be as simple as – some solutions can be as simple as putting an automation on portable instrument, it allows them to do the job by just pushing one button and removing basically the smart from the technicians using the products. So there’s a lot of variations there and frankly if I was to give a number, it could be judged in any way, shape or form without a true sense. So I’m going to be staying away from that.

[Deepak Kaushal:]

Okay. So maybe if I ask it in a more qualitative way, does this decrease your risk of achieving growth going forward as you deploy more advanced solutions?

[Germain Lamonde:]

Clearly. I think a couple of points that it does is that as these systems and solutions are being deployed and it’s not something we started in fact yesterday. This is something we’ve been going through for quite a number of years. We didn’t really talk much about this but we’ve been going with solutions like EXFO Connect all the way back four years ago, we talked about this, our assurance business now for six years. There’s a lot of things that we bring to market that are a lot more than just instruments. We’re transforming the way people used to be looking at a [dataset] (ph) that’s being just like a box you carry around in the field to do the job to now make it to be an intrinsic part of procedures to help telecom operators to productize, to automate, to get productivity out of their field crews or even to leverage the same sort of methodologies and productivity out of contractors. So we want to get a lot more data collection. When you got to the field, yes, you can capture test results but you can capture a whole lot more information if you wish because we’re connection to the next. So there’s multiple ways we can create value by capturing information and automate the process to bring this all up into the cloud and provide visibility. And we’ve been through this journey of transforming this business for the last four, five years and I think it’s just getting increasingly better now with our new platforms being launched with our new key architectures being launched that we will be taking more and more advantage of it.

[Deepak Kaushal:]

Okay. Thank you. That’s very helpful. I will pass the line.

[Germain Lamonde:]

Thank you very much, Deepak.

[Operator:]

Our next question comes from the line of Robin Manson-Hing with CIBC. Please go ahead with your question.

[Robin Manson-Hing:]

Hi. In terms of wireless revenue growth, what were the biggest contributors to the increase?

[Germain Lamonde:]

Very good question, Robin. In fact there’s a number of fronts in which we made some very strong wins. The products that we sell to the wireless industry and I explained this once a year when we provide this metric because it can be very easily taken wrongly understood. It means that products like optical instruments or 1 gig, 10 gig testers and so forth that are being used by the wireless industry are accounted. So part of our growth this year in the wireless industry is a wide range of aspects and products and solutions and systems. Our potable instruments have been very well received with the wireless operators or deployment of fiber-to-the-antenna into the dash environment or putting more wireless backhaul, more fiber and more wireless capabilities has been using a lot of our optical instruments, our 10 gig test sets and so on and so forth. We’ve got also very good successes with our product areas like service assurance to ensure visibility for all network elements or all (indiscernible) and all the MMEs into the network. We’re able to probe tens of thousands, in fact hundreds of thousands of antennas and measure to each of these antennas like 10 times a second to really get the help of the network in the real time, full time basis. It’s been really on the growth. We’ve got growth as well in our potable analyzers and our potable simulators and many of our solution we bring for the wireless industry. So I’m quite glad to state that if you take the middle point of our range because these are estimations, but if you take the middle point of that range, we have probably grown our bookings in that segment by some in the range of about $18 million which would be like about 18%, so that’s quite good. And that means that the rest of our business is being maybe after the wireless has been slightly negative but not by much. We’re already been able now to start delivering stability in our fixed business, if you will, but delivering growth in bookings in our wireless industry and I’m quite pleased with that.

[Robin Manson-Hing:]

So the takeaway for me is fiber-to-the-tower, fiber-to-the-antenna is kind of the primarily driver, wireless service assurance kind of the secondary driver, is that correct?

[Germain Lamonde:]

Yes, we’d say maybe the first might be the instruments part of it. The service assurance piece is also quite important. The instrument piece, they’re close to be (indiscernible) but maybe the potable piece is maybe a little bit more – yes, you’re right.

[Robin Manson-Hing:]

That’s good. And then if we were to go to – I know you don’t break out physical, you don’t break out optical versus copper anymore. But just is there any sort of detail you can give as to the decrease there like what were the positive drivers and what were the negative drivers in terms of products?

[Germain Lamonde:]

Yes, I’m not going to give like as you said like breakdown. We break it down by physical that includes both optics and the copper part. I will say clearly the optical part has really been into very high demand. We’re clearly getting market share in that segment and quite happy about this. Growth in bookings there is very good, I’m quite happy. On the [cell] (ph) side, we may have had a little bit of decline but it’s not significant from a dollars point of view. This is a segment – the copper side where the focus whether this from our own organizations, from our own R&D or for that sake also from the customers’ point of view when we’re talking to telecom operators, the tier 1s, the AT&Ts, the Verizons and so on and so forth, the focus that we have on wireless is so critical and broadband-to-the-home is so critical and many countries have got their focus around like where do we bring and how do we bring more fibers into the market. Now with that being said, we’re optimistic about the copper side. We have a little engagement with tier-1 operators and I believe this is still having a lot of legs for growth but don’t expect anything significant on the copper side.

[Robin Manson-Hing:]

Okay, that’s good. And I’m going to ask you about protocol. Any further color in terms of your product line there in terms of what did well and – it’s pretty much a flat year-over-year it looks like, what’s done well and what maybe has struggled a bit?

[Germain Lamonde:]

Bookings were up a little bit right about 3% there as well. I think we could have done better. I think there’s a lot of good things that has just recently been launched and I think we’re going to get acceleration on that front. I’m quite optimistic we can see accelerations in booking in the protocol layer side. So I think we’ve got very good product positioning. There were a few things we were waiting to launch, now it’s fully available in the marketplace, it’s been released and I think it’s going to start to have a significant impact in our fiscal year '15

[Robin Manson-Hing:]

Okay. So new products more so than driving growth in the next year or so versus something that’s out there right now? Did I hear that correct?

[Germain Lamonde:]

Yes. In 2015 – I would say that probably 2014 in terms of market share, we’ve probably done little gains or close to standstill. We’ve gained share in the physical here but maybe standstill or little share in the protocol layer side, but I believe the trend will be that we’ll be better positioned to gain shares and I believe this end market will at some stage reaccelerate. I’m quite pleased with the strong results we got generally speaking without making any divide between the two groups of products, but our gains and growth in bookings, if you will, into EMEA and APAC I’m very quite pleased with this. The two of them are in the neighborhood of about 10% for each region.

[Robin Manson-Hing:]

Okay. Last clarification question here. So are we talking generally about modules for your FTB or are we talking about – in terms of your products, are we talking about like what sort of mix are we talking about in terms of what you think can do better in 2015?

[Germain Lamonde:]

Are you thinking about the protocol here still, Robin?

[Robin Manson-Hing:]

Yes, some on the protocol layer just so I can get some thinking about what’s kind of driving that area?

[Germain Lamonde:]

The protocol layer basically, this is a combination – our success has been a combination of our modules and our platforms and also a combination of our capabilities in the wireless side which is part of our protocol’s business. It’s also a combination of our service assurance business where we build systems, so pretty much all three contributed with the last two probably more than first.

[Robin Manson-Hing:]

Okay. Thank you.

[Germain Lamonde:]

Thank you very much, Robin.

[Operator:]

Our next question is a follow-up question from the line of Scott Penner with TD Securities. Please go ahead with your question.

[Scott Penner:]

Pierre, can you just help me square up the tax rate? Looking at the income taxes of 4.5 million versus your – before income tax of 5.3 million, what is the actual cash tax rate that you’re paying right now and what should it be next year?

[Pierre Plamondon:]

It’s a good question and it’s one we require good information about where we’re going to make the profit and the loss, okay. The fact that the tax rate is distortion is mainly because we have some non-taxable element as some non-deductible element, okay. And I would refer you to the notes in the financial statement where we explained, but the main reason is the fact that we have some unrecognized deferred income tax asset in some subsidy on which we are not able to account for income tax asset, okay. And the next big thing is really non-deductible expense, so for example time compensation expenses is a non-deductible expense in Canada. So you’re not going to recover any taxes on that. So depending what is the mix of the profit between all different subsidiaries, the tax rate could change year-over-year. So this is the main explanation.

[Scott Penner:]

And what should it be next year just – maybe just the income statement rate then?

[Pierre Plamondon:]

Yes, I think for the year we should look toward 35% maybe based on the best guesstimation that we can do today.

[Scott Penner:]

Okay. Thank you.

[Operator:]

Our last question comes from the line of Deepak Kaushal with GMP Securities. Please go ahead with your question.

[Deepak Kaushal:]

Hi. Thanks again. A couple of housekeeping questions for Pierre. Pierre, could you give us a sense of how amortization of intangibles are expected to wind down over the next year and what your CapEx expectations are for the coming year? Thank you.

[Pierre Plamondon:]

Okay. So we are expecting the net acquisition will be fully amortized in the second half of this fiscal year, so over the year we’re expecting the amortization of intangible asset probably will decrease by 1 million to stand to about 3.3, 2.5 something like that. And your next question was – could you…?

[Deepak Kaushal:]

CapEx expectations.

[Pierre Plamondon:]

Okay, CapEx, about the same level that we had this year. We had about 8 million, so this is about what we have in our plan right now.

[Deepak Kaushal:]

Okay. Thank you so much.

[Germain Lamonde:]

So is there anymore questions on the line?

[Operator:]

There are no further questions over the phone lines at this time.

[Germain Lamonde:]

Okay, so since there are no further questions, I’d like to just provide a few summaries and comments before we conclude this call today. First of all, EXFO has coped with a number of industry headwinds in fiscal year 2014, but I’m pleased with our increase in bookings in the last three quarters, year-on-year in each of our product groups and 3% in regions like EMEA and APAC. I’m pleased with the trend in bookings. I think overall it bodes well entering 2015. Secondly, we strengthened our backlog, our market position which should help us deliver profitable growth in 2 015. We have significantly continued to transform our business throughout 2014 with significant acquisitions with key wins in the tier-1 operator market and continue to get stronger in wireless industry with tier-1 operators and transforming towards being a solution provider. And finally, I remain highly committed to raise our adjusted EBITDA and to reach our adjusted EBITDA margin to the 15% in the not too distant future. So at this point, on behalf of the entire EXFO team, thank you very much for everyone for joining this call today.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.