EXFO Inc.
Q1 2015 Earnings Call Transcript

Published: 8 Jan 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to EXFO’s First Quarter Conference Call for Fiscal Year 2015. 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 7, 2015. I would now like to turn the conference over to Vance Oliver, Director of Investor Relations. Please go ahead, sir.

[Vance Oliver:]

Good afternoon, and welcome to EXFO’s first quarter conference call for fiscal 2015. 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/or 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 with our IFRS results is available in the Q1, 2015 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’ll turn the call over to Germain.

[Germain Lamonde:]

Thank you, Vance, and good afternoon, everyone. First to begin by wishing everybody a happy and prosperous 2015. Turning to our quarterly results we reported year-on-year increase in sales, gross margin and earnings in the first quarter of 2015 even though market demand remained muted. Our top line results were impacted by tougher market conditions than we had anticipated especially in EMEA and amongst tier one operators here in the Americas. As well ongoing planning by telecom operations to more from a hardware-centric to more of a software/and NFV architectures, from fixed to mobile networking structure and as well combined with some post-merger integration activities, all of these contributed to generating orders delays which led to lower revenues than expected. I am totally confident however that these trends were gradually turning to positive drivers as our fiscal ‘15 unfolds. The good news is that on IFRS earnings and adjusted EBITDA we’re pretty well in line with expectations, with year-on-year improvements. This was mainly accomplished through continued tight cost controls and favorable currency trends, both of which should continue to benefit us in the fiscal 2015. As you know EXFO has gradually been evolving from a box supplier into a solution of end-to-end solutions over the last years and this trend is simply accelerating as we go. This means that EXFO is increasingly pursuing larger opportunities with large network operators to ensure more complex -- to resolve more complex issues related to enhancement of their network deployment productivity, their quality of user experience or customer experience assurance and we are progressing towards these more solution-centric solution also means that we are increasingly facing longer processing cycle as well as higher risk in forecasting when the date of these orders will be actually received, given the larger size but also the fact that higher management networks are required over their approvals. Likewise revenue recognition cycles are also being extended while such deals may involve installation of hardware and software and customer acceptance and other aspects. I expect these issues to gradually resolve and develop and as we further expand into our solutions business. Here is an example of how this trend translates into the real world. We booked a large solution order in excess of $3 million during the month of December with a network operator located in the Americas. First we initially expected this order to be received during the first quarter of 2015 but the precise date of such large deal is somewhat hard to predict and therefore has been delayed to December, now it’s been booked. This order which will be recognized into revenues partially during our Q2, 2015 but the revenue of this order will be recognized during Q3 and Q4 of 2015 more into the second half of this fiscal year. So this is a perfect example of how our gradual evolution into a more end-to-end solution providers has been making our business more challenging from a forecasting point of view during the last several quarters. On the other hand we are increasingly feeling the traction for this sector each and every quarter as we are evolving with the growing needs of our customers to deliver higher margin end-to-end solutions. The solution focus represents an increasingly strong growth driver for revenues and earnings as we move through the second part of 2015. On that front I am glad that we reported that our two recent acquisitions of ByteSphere and Aito during fiscal 2014 have been rapidly integrated and we are now soon to be going to start benefiting from the great new solutions we are just about to be launching. So stay tuned on that front there’s some exciting news coming up. No doubt in my mind these small tuck-on acquisitions will create great value for EXFO and we will not hesitate to continue on that path in the future as a great way to accelerate value of shareholders by these small value-add acquisitions. Regarding 2015 I expect market conditions to gradually improve especially in the Americas and APAC regions with capital spending amongst network operators to gradually pickup during this new end of the year and thus allowing EXFO to deliver stronger second half in our fiscal 2015. However whether we are talking about 4G LTE, voice-over-LTE small cell deployment of 1 gig in the metro deployment has been business drivers we believe that the underlying fundamentals are very comforting for operators to accelerate their investment in these critical technology areas as they really create value for them. As a result we should witness a similar revenue pattern as of last year with a stronger sales and earnings contribution during the second half of 2015. We anticipate a stronger second half will be supported by a book-to-bill ratio that should be well above one during this second quarter based upon the booking of larger system-based orders and renewal of annual maintenance contracts that are recognized ratably over a 12 month period. So the big difference between this fiscal year 2015 and last year 2014 is that our backlog was about $10 million higher at the beginning of fiscal 2015, our end markets are more promising, especially in the Americas where it was very challenging last fiscal year, and our solutions offering is much stronger based on these data points. So based on these data points we remain confident about earning single-digit revenue growth in fiscal 2015 and significant improvements in profitability with continued focus on delivering higher margins software and data solutions and maintaining tight cost controls while benefitting from positive currency trends. Now I'd like to talk to you about some highlights on the SIB. So I’ll provide you with more of the information on the rationale behind the announcement of the Substantially Assured Bid or SIB. We have put forth a Canadian $30 million towards the repurchase of EXFO subordinate voting shares through a modified Dutch auction process. This is a standard method to buy back shares for cancellation and improve liquidity event for shareholders. We believe our current share price does not reflect the true value of the company nor its future growth prospects. So we believe that we have set a growth strategy in place and based on delivering market share gains and tight and higher gross margin in order to improve profitability. So we remain fully committed to generating 15% of EBITDA margins in the medium term. Same way we do realize however that some institutions and individual shareholders may want to recover their investment in a quicker timeframe, so as their own investment criteria and horizons might differ from one investor to the other. From EXFO's perspective we have the cash position of US$57.6 million and no debt. So we believe this offering is a good use of cash and should generate value for the remaining shareholders while at the same time not preventing us in investing in our R&D plan, market investment plan as well as continuing with small tuck on acquisitions. I'll move now to guidance. With that been said let me provide you our financial outlook for the second quarter 2015. So considering the seasonally, typically seasonally soft second quarter we are forecasting sale of between $52 million and $53 million which is up from last year at $51.2 million. And that's for the reporting period of December 1st to the end of February 2015. But as previously mentioned, we expect a book-to-bill ratio above one for the second quarter supported by large system-based orders and annual maintenance contract renewals. Following at the bottom line -- looking at the bottom line now, IFRS results are expected to range between a net loss of $0.03 per share to net earnings of $0.01 per share for the second quarter of 2015. Note that IFRS net results include $0.02 per share in after tax amortization of intangible assets and stock-based compensation cost. So at this point, I'll turn the call over to Pierre to discuss our financials.

[Pierre Plamondon:]

Thank you Germain. Good afternoon everybody. Sales increased 1.2% to $56.7 million in the first quarter 2015 from $56 million in the first quarter of '14 but decreased 5.1% from $59.7 million in the fourth quarter of 2014. Booking decreased 6.2% to $54.2 million in the first quarter of 2015 from $57.9 million in the same period last year and 5.4% from $57.2 million in the fourth quarter of 2014. Our book-to-bill ratio amounted to 0.96 in the first quarter of '15. As Germain mentioned, our sales and booking numbers were both affected by lower market demand in our first quarter. We also experienced growing pain related to managing more complex multi-million dollar deal with prolonged purchasing and revenue recognition cycles. Gross margin reached 62.6% of sale in the first quarter of 2015 compared to 62.2% in the first quarter of 2014 and 63% in the fourth quarter of 2014. Gross margin increased year-over-year mainly because product mix was more tilted towards more higher margin software intensive solution in Q1 '15. On a sequential basis, our gross margin slightly decreased since our lower sales volume caused a lower absorption of fixed cost. In terms of operating expenses, selling and administrative expenses totaled $21million, or 37.1% of sales in the first quarter of 2015 compared to $21.7 million or 38.8% of sales, in the same period last year and $21.5 million or 35.9% of sales in the fourth quarter of 2014. SG&A dollar decreased year-over-year and sequentially mainly due to a tight control on expenses and a decrease in the average value of the Canadian dollar and the euro compared to the U.S. dollars. As you know a significant portion of our SG&A expenses are in Canadian dollar and euros while we report or furnish our results in U.S. dollars. Net R&D expenses reached $11.7 million or 20.6% of sales in the first quarter of 2015 compared to $11.3 million or 20.1% of sale in the same period last year and $10.8 million or 18.2% of sale in the fourth quarter of 2014. Net R&D dollar increased year-over-year due to mix and timing of project as well as lower Canadian and provincial tax credit earned in Q1 2015 following tax law change in Canada. These items were partially offset by the decrease in the average value of the Canadian dollar compared to the U.S. dollar as well. On a sequential basis the increase in Q1, 2015 can be mainly attributed to the fact that net R&D expenses were seasonally lower in the previous quarter due to summer holidays. Also this increase was partially offset by the decrease in the average value Canadian dollar and euro compared to the U.S. in the first quarter. IFRS net earnings in the first quarter 2015 totaled $1.5 million or $0.02 per diluted share, compared to a net loss of $0.7 million or $0.01 per share in the same period last year and net earnings of $1.2 million or $0.02 per diluted share in the fourth quarter of 2014. IFRS net earnings in the first quarter of 2015 included $1 million in after-tax amortization of intangible assets, $0.4 million in stock-based compensation costs and a foreign exchange gain of $2 million. Adjusted EBITDA amounted to $3.2 million or 5.6% of sales in the first quarter of 2015 compared to $2.3 million or 4.1% of sales in the first quarter of 2014 and $5.8 million or 9.6% of sales in the fourth quarter of 2014. Geographically the Americas accounted for 48% of total sales in Q1, Europe, Middle East, Africa represented 32% while Asia-Pacific totaled 20%. In comparison the same split was 51%, 29% and 20% among the three geographic regions in the first quarter of 2014. In term of customer mix, our top customer accounting for 4.1% of total sale in Q1 ’15, while our top three represented 11.1%. Turning to a few key points on the balance sheet, our cash position decreased to $57.6 million at the end of Q1, 2015 from $59.8 million in the previous quarter. And expressed in Canadian dollar our cash balance at the end of quarter amounted to over C$65 million. This $2.2 million decrease is mainly due to $0.9 million for the redemption of share capital under our share buyback program, $0.8 million for the purchase of capital assets and $2.5 million for unrealized foreign exchange loss from cash and short-term investments denominated in Canadian dollars. These items were partially offset by $1.9 million in cash flow from operating activities in the first quarter. Finally DSOs increased to 77 days in the first quarter of 2015 from 70 days in Q4 ’14 while inventory turns remained flat at 2.5 times during the same period. Now I will turn the call over to the operator for the start of the Q&A.

[Vance Oliver:]

Operator, you may go ahead with the Q&A.

[Operator:]

Certainly. Thank you. [Operator Instructions]. Your first question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Please proceed with your question.

[Thanos Moschopoulos:]

Hi, good afternoon. Germain, it sounds like you're expressing some optimism regarding the outlook for the Americas as the year progresses. And could you provide maybe some color in terms of what's driving that? Are you seeing some tangible signs of activity picking up in your discussions with customers?

[Germain Lamonde:]

Absolutely, I would say that I remain [indiscernible] and say that the market by itself is necessarily going to be recovering all that much but what I'm trying to say here is voice the fact that our engagement with our customers in regard to solution and our discussion at the executive level is extremely encouraging. We're getting clear feedbacks and clear directions. So things are really on the move on that front. And that's the reason for my optimism. Am I calling about or talking about a market recovery at large I tend to be a bit more careful about calling such an announcement, but our position in the marketplace our engagement with all the products in which we're discussing and so forth is are extremely encouraging.

[Thanos Moschopoulos:]

So to be clear you're talking about -- we're talking about an uptick in the second half of the year, that's primarily going to be driven by market share gain on the basis of your new solutions.

[Germain Lamonde:]

Yeah, I think we like to count a lot more on market share gains because that’s the one thing we can control and market recovery is something that we love to benefit from. But that's not something on which we make a specific announcements because it's not something we do control.

[Thanos Moschopoulos:]

Fair enough. And in terms of the pipeline outlook it remains very much the case that so the main driver is wireless more so than your other solutions.

[Germain Lamonde:]

Yeah, but the whole wireless segment has been one in which we delivered growth. We talked about fiscal year '14 where our growth in that segment was in an order of about 18% growth in order received from the wireless industry at large. I remain very optimistic about that segment. The good news is the wireless segment becomes now gradually a bigger and bigger portion of our revenues and therefore has got more ability to move the needle basically for us which means having really a major impact. So last year we saw bookings being up by more or so around 3% up substantially in the wireless segment and down by about 3ish percentage points in the fixed network industry if you will. And I expect that trend to continue for us and the good news is wireless now is becoming a bigger plate, or a third of our business and will continue to have a bigger and bigger impact as we grow.

[Thanos Moschopoulos:]

Great. Just a couple of quick ones for Pierre. The Canadian dollar obviously had a very big move against the U.S. dollar in recent week. And so can you remind us in terms of your susceptivity on that front, the proportion of your OpEx and cost of goods that are Canadian dollar denominated.

[Pierre Plamondon:]

Yeah, on the Canadian revenue terms -- coverage is probably about 25% in the cost-to-goods sold, okay, about exposed at 35% in the G&A and 55% in R&D.

[Thanos Moschopoulos:]

Great, and what level of ForEx translation gain or loss is in your guidance next quarter?

[Pierre Plamondon:]

We -- in the guidance today we base on the currency close of today as well we are expecting about 1 million [ph] point change gain in our numbers.

[Thanos Moschopoulos:]

Great. And then as far as your OpEx outlook would you remain within the target operating model you provided in the past as the year progresses?

[Pierre Plamondon:]

We keep the same target that we have for the whole fiscal year to deliver SG&A in the range of 34%, 36% net R&D between 18% and 20% and still looking for gross margin between 63% and 65%. So we are a little bit shy in the first quarter but I don't see any reason why we won't be able to reach those targets that we have fixed for the year.

[Germain Lamonde:]

And our CapEx will remain low as you pointed out, yes absolutely.

[Thanos Moschopoulos:]

That's great. And finally I applaud your decision on the Substantially Assured Bid I think it's always a good idea to return a capital to shareholders and with that I'll pass the line, thank you.

[Germain Lamonde:]

Thank you.

[Pierre Plamondon:]

Thank you.

[Operator:]

Our next question comes from the line of Doug Taylor from TD Securities. Please proceed.

[Doug Taylor:]

Thanks. Good evening, guys. Can you speak to the revenue and bookings performance of your optical versus IT-based solutions, both in growth in bookings?

[Germain Lamonde:]

Yeah, we're not going to discuss a lot about this. It’s not something that we disclose on a quarterly basis. We do once a year at the end of the fiscal year. So we’ll group, basically we grouped as you know what we call the physical layer testing which is optical, copper and so on and the performance of fiscal year ‘14 there from a bookings point of view were both segments were the same more or less like a 3% each growth between that and the overall family of portable test solutions. I am not going to disclose numbers for this quarter but I expect as we keep growing this business in this fiscal year that our portable segment will actually overtake the physical layer segment.

[Doug Taylor:]

Okay. On the SIB, I guess you still have roughly $30 million in cash. What level of capital is required for you to continue to run the business and therefore what you have left over there you could use for some more tuck-in acquisitions?

[Germain Lamonde:]

Yes, we still have a fair amount of room to do some additional acquisitions and the typical acquisition we have done in the past you have seen in the last two acquisitions we never really disclosed the amount of these acquisitions but we said that collectively the two of them were less than $5 million. So that gives you an idea that we can do very value add acquisitions of critical technologies and not having to spend that much. So I still believe we’ve got a good position where we could do acquisitions of that nature but even bigger than that and what we need in fact from a balance sheet point of view to run the business keeping in mind that we’ve got -- note that we have hard assets, we own buildings and so on. We have line of credit and what have you. So we have room if we wanted to move for other acquisition.

[Doug Taylor:]

Okay and Germain I wonder if you will volunteer whether you will be participating in the SIB yourself?

[Germain Lamonde:]

No, I am not going to be participating.

[Doug Taylor:]

Okay, thank you I will pass the line.

[Germain Lamonde:]

That’s a good question, thanks Doug, for your questions.

[Operator:]

Our next question comes from the line of Robert Young with Cannacord Genuity. Please process.

[Robert Young:]

Hi good evening. I maybe I can continue one of Doug’s question, the level of cash, are you concerned at all that some lenders might see that as a low level of looking back in the balance sheet? I don’t think you have ever tested this level of cash after this SIB. So do you expect that there is going to be any issue with competitors attacking a weaker balance sheet?

[Germain Lamonde:]

No, not at all, and in fact when you look back, Robert to our historical cash generated we’ve been generating more or less like around $20 million of cash year-in year-out. So I don’t think that this is actually weakness any way [ph] you perform but this is a signal we are giving to the street that we’ve got confidence in our organization, in our plans, in our strategy and our ability to grow the business.

[Robert Young:]

Okay, great, that’s good to hear. The Q1 typically it’s a stronger order quarter except for last year. Is there anything you can talk about the seasonality of orders, is there some change, am I reading that wrong, was there budget flush [ph] that didn’t come through that might have been in the past and is there anything you can talk about pace of bookings in the quarter?

[Germain Lamonde:]

Yes it’s a very good question Robert. My answer here is a bit of a generic answer in the sense that what we’ve seen in the industry overall and I don’t think it’s unique to EXFO, is we tend to see less budget flush [ph] than we used to see, let’s say going back five or ten years ago. So many large tier 1 operators have started in fact to tighten their belt when they came to their Q4 even their Q3 for some large carriers without going to the specifics of each of them. So it’s been gradually moving away this trend of big budget flush out. So that’s one thing. Secondly for us as far as we are concerned our second quarter includes basically December, January, February, typically a time where it’s a bit of a completion of fiscal year or calendar year for operators and the beginning of a new fiscal year so typically what we tend to see is more acceleration towards the tail end of January and so on. Already we have had a good December but also what’s critical, what’s unique about our Q2 for us is the fact that we do have significant amount of contract renewals for systems and service assurance and basically supporting the systems that we’ve got deployed and this is basically a growing number basically and we’re glad to say that this whole aspect of service deals is now in fact above 10%, where the 13.5% it’s a new number we have been reporting and it’s a growing number. So that’s very encouraging on that front. So this is recurring revenue And it’s a growing numbers so, that’s encouraging at that front so, this is recurring revenue and the bulk of that is actually typically being booked during our second quarter which makes our Q2 typically from bookings point of view getting better and better but some of that is actually being recognized over 12 months. I hope that, that…

[Robert Young:]

Okay. Yeah, no that’s great. The renewable, the maintenance contracts and recurring revenue renewals can you share how much of that falls in to Q2? None of it falls into Q1, is it typically a Q2 event?

[Germain Lamonde:]

Well Q2 is typically the biggest quarter, you know we are talking in neighborhood of $8 million, $10 million, somewhat in that range. So there is more and more of that and that’s really about Q2. Some of that might come into Q1 but it’s typically really into Q2 that we get the bulk of these renewals.

[Robert Young:]

Okay. And is there anything you talk about the pace of bookings through the quarter from September, October, November. We have seen a steady improvement. It seems as though some of the U.S. carriers were peeling back some of the CapEx expectation. Did you see that improve through the quarter or is there trend to make out of that?

[Germain Lamonde:]

We got a bit of the trend towards being back end loaded. I can’t say that we have been as back end loaded as we normally been. So I think in a sense that shows to the fact that some larger deals that were expected to come in November did not really make but really came a bit later than that, actually.

[Robert Young:]

Okay. And last question for me. Sorry, go ahead.

[Germain Lamonde:]

No, go ahead.

[Robert Young:]

Okay, last question from me was just about the wireless deal, the large Tier-1 wireless deal you talked about. Last quarter you talked about a couple of wireless deals that were going to fall in Q2 is this new deal one of those or will this be three large Tier-1 wireless deals are coming in on Q2-Q3?

[Germain Lamonde:]

Well, it’s a different deal. I didn’t say it was wireless. It’s actually -- it’s a solutions deal, it’s in the range of $3 million, slightly above $3 million. I didn’t really say it was wireless, I didn’t say either it was a Tier-1 operator. So it’s neither one of the other actually. It is just a demonstration, the attraction is actually quite there when it comes to us becoming increasingly successful at the solutions front.

[Robert Young:]

Okay, thanks for answering my questions.

[Germain Lamonde:]

Many thanks, Robert. Have a good evening.

[Operator:]

Our next question comes from the line of Angelica Uruena with GMP Securities. Please proceed.

[Angelica Uruena:]

Hi, thanks for taking my question. Just expanding on Thanos’ question in regards to the U.S. market in particular, what do you specifically see changing between 2014 and 2015 that’s going to bring back spending from U.S. customers? I know you had said you had seen encouraging signs but I just wonder if you can elaborate on that a little.

[Germain Lamonde:]

Well a couple of factors, of course we talked about situations like significant amount of consolidation taking place in the Americas market. A lot of these deals are actually, we talked in the past that when two of our customers are merging sometimes what it means is that it’s a slowdown of activity because you know there is a time during which the transaction is in hold before being consumed. So that’s typically a slowdown for our activity. Many of these deals now have been done. So this is something of the past to some degree. We will still see some consolidation, but I think 2014 has probably marked, Canada has been a high point for activity. Secondly many operators have been thinking about their strategy moving forward for NFV, SDN and virtualization of networks and all that is going to be a play for them. So that created some sort of pause while their strategy was being enacted. Now that you know for many of them this is done now. They know where they want to go and same thing we are very well positioned for that trend. So I believe this will be a positive impact for us moving forward. Fundamentally also we have strengthened our solutions approach as many operators are moving towards more aggressive wireless, less about wire line, more about how we go aggressively about automating inside out testing, how we can get productivity enhancements quality of experience and improvement and so on and so forth. This is exactly the area where we have been investing and getting basically stronger portfolio of solutions to be helping us to be very well aligned with that trend where they have to be investing for their business. So in one, in a nutshell that’s why we are more optimistic that A, to some degree while the market is we believe going to be somewhat better but I don’t want to have to introduce as much as our ability to gain share in this market.

[Angelica Uruena:]

Okay, great, thanks. And then just on the M&A front, has does your strategy or outlook changed over the past couple months.

[Germain Lamonde:]

Well, not really any change Angelica. Frankly, we've always remained acquisitive and fair believer that there is great opportunities for EXFO to continue to expand its capabilities of portfolio and its technology reach if you will. We are constantly looking and talking and analyzing deals. It has to make sense for our shareholders for us to be moving. As I said in the past I have got no ego about making an acquisition for the sake of making the acquisitions. It's really about our ability to generate value for shareholders thanks to these acquisitions. And on that front we remain acquisitive. We are looking at opportunities and we're always looking for things that really makes value for our shareholders.

[Angelica Uruena:]

Okay great, and just my last question I know you touched on that 15% EBITDA margin target. Just specifics on timing of that if you have any update.

[Germain Lamonde:]

Yeah, there is no update per se to what we said in the past is that as we are getting closer to, as we're going to progress towards the $300 million market or revenue level we are -- our plan is really to be delivering this 15% EBITDA. That's really something that we're really looking at doing. I don't -- I never said we will do it of course in 2015 and your question does not imply that either. But our plan is to be able to deliver this in the mid-term basis, mid-term be -- is three years. We're not -- we're bit vague on that on purpose but that's really something we take very seriously at EXFO, and I'm very committed in fact in getting that done.

[Angelica Uruena:]

Okay great. Thank you so much.

[Germain Lamonde:]

Thank you very much Angelica.

[Operator:]

[Operator Instructions]. And our next question comes from the line of Robin Manson-Hing with CIBC. Please proceed.

[Robin Manson-Hing:]

Thank you. So Germain did the turning around, I mean you're talking about SDN and NFV coming -- becoming a bigger part of telecom business. And EXFO historically has not necessarily benefitted -- you wouldn't think would not benefit necessarily from these trends, but you've talked about a solutions deal, a large solutions deal and in the past you've also talked about sort of this becoming a bigger part of the company and your FTB products and EXFO connect having large traction out there and it seems like you perhaps maybe there is some leverage off that and service assurance which SDN and NFV have. I don't know what this -- like what is your plan to your vision over the next few years to turn the business around? Is it we would involve those sort of things like do you have traction with your equipment and your solution out there to kind a leverage that with assurance?

[Germain Lamonde:]

Absolutely, I mean this is a very good question, Robin and thanks for asking. There is a number of ways by which EXFO is going to benefit from this trend towards more of a virtual network environment. First of all ensuring quality of experience in the virtualized network is going to be far more complex and it does have a bit [ph]. This means that for sure this is creating significant opportunities for our active service assurance play whereby we can actually dynamically validate the performance of the network for any other parameters, as a lot of our solutions are dynamically allowing them to get that visibility on the end-to-end quality of experience the consumers will actually be enjoying. And that's really a very high value for network operators as they're evolving and planning to deploy this virtualized environment. Believe me in a fixed network environment ensuring quality of experience has always been challenging. In a virtualized environment it may be just much more challenging. So that's for sure. In this vein we've already, without -- we didn't disclose to a great detail that but we've been not only involved but also winning deals. Sometimes some of these deals are small from a starting point but already we're getting solutions and trends into networks that have got to do with exactly that model of any of the virtualized environment. So it's going to be clearly a strong driver for wireless testing, it’s going to be a strong driver for our service assurance play. And as well for our whole EXFO connect strategy because the whole thing is really is how network competitors can increasingly get productivity in their construction and deployment but also making sure they reuse the data that is generated as they build the network, as they test the network, as they construct it, but also as they run it. So I think. So I think all of these points are being connected. The acquisitions that we’ve done are really perfectly inline with ensuring customer experience, what we call customer experience assurance and helping from an end-to-end point of view. In the next few weeks we’ve got some very interesting announcements which I consider to be strategic new products being introduced in the marketplace and if you make it World Mobile Congress Robin you are most welcome to come and see us. We’re going to hold a session with our analyst as we have some interesting stuff being introduced at that show.

[Robin Manson-Hing:]

Okay that’s good and you talked about data collection there, I mean would that be another portion of potential revenue stream for EXFO?

[Germain Lamonde:]

Sure, we are not taking anything to market it’s not going to be about increased revenue traction. So yes we are really going after that for sure and as we do this we’re going to be increasing not only our revenue level but also our recurring revenue level and what we are talking a few years ago, about two years ago when we launched -- three years ago when we launched EXFO Connect that our recurring revenue model was below 10%. We’re gladly reporting now that we are at 13.5% not just about EXFO Connect it’s about a number of initiatives that we’ve got underway by which we are increasingly returning more and more recurring revenues and you can expect that trend to continue. Again without wanting to create some false expectations we will not be a 50% or 75% of our revenues being recurring but you are going to see that 13% to gradually keep moving up as we go.

[Robin Manson-Hing:]

Okay. And I guess maybe last question and probably the fairly large purchasing you guys are doing $30 million, I mean is this -- do you see EXFO in the next few years being a public company. How do you feel about I mean maybe potentially make sense for EXFO to become private what are your thoughts there?

[Germain Lamonde:]

My thought is clearly not to bring the company private. I think really the idea here is and we’ve done that already once back in 2008, so it’s not a precedent. This is the second time in our history that we do an SIB and it’s really reflection of the recent pressure on the EXFO share price. So we wanted to create liquidity event for shareholders who might prefer at this juncture to dilute the stock of EXFO. We are firmly versed in our strategy we are firmly versed in our ability to generate growth in revenues and earnings and basically this is just an opportunity we’re leaving open for people to make their own judgment but we are committed to grow the business and increase value for shareholders and that by itself is also going to be a way to create value for shareholders.

[Robin Manson-Hing:]

Okay, thanks a lot.

[Germain Lamonde:]

Thank you very much, Robin.

[Operator:]

And there are no further questions at this time. So I will now turn the call back to EXFO’s CEO Germain Lamonde for concluding remarks.

[Germain Lamonde:]

Well, excellent. Thank you very much. So just a few takeaways before we conclude this call for this first quarter of 2015. First of all we witnessed muted market demand in our Q1, 2015 but still we delivered revenue, gross margin expansion and significant earnings improvements. Second sales should follow about the same profile in 2015 as in our fiscal year 2014. This means we expect improvement in the second half of fiscal 2015 based on anticipated revenue recognition of larger system based orders and network operator spending patterns. Thirdly, we believe our announced SIB offering is a good use of cash for the company and it will open options while creating value for shareholders. And finally I want to remind you that EXFO will be holding its Annual General Meeting of shareholders on Thursday the 9th at 10 o’clock at the St. Andrews Club and Conference Center, 16th floor here in Toronto. So both shareholders and analysts are welcome to attend. At this point this concludes our Q1, 2015 conference call and on behalf of the entire EXFO team I thank you very much for joining us today.

[Operator:]

Ladies and gentlemen that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.