iscal 2011 once again proved to be a highly satisfying year based on delivering exceptional results and executing well against our strategic agenda. When I look back over the past year, the two main elements that stand out are growth and transformation.
Thanks to the support and confidence of customers worldwide, EXFO increased sales 33.0% (27% organic) to a record $269.7 million in 2011 on the heels of 32.4% growth (20% organic) in 2010. Consequently, it is fair to say that EXFO gained market share for a 26th consecutive year.
These results not only reflect stronger relationships with leading network equipment manufacturers (NEMs) and wireless/wireline operators, but also that our game-changing solutions are truly making a difference for them. EXFO solutions help NEMs bring their valuable innovations to market with higher quality and at a faster pace, while operators benefit by significantly reducing their operating expenses during the deployment, troubleshooting and management of their networks. The end-result is a better quality of experience (QoE) for their end-customers.
On a segmented basis, we delivered more than 25% sales growth across our three main product groups (Optical, Protocol and Copper Access) and sales regions (Americas, EMEA and Asia-Pacific). In addition, our top customer accounted for 7.2% of sales and top three 16.3% in 2011, demonstrating that EXFO's growth was achieved across the board with little concentration in terms of product, region or customer.
Looking at earnings, we generated a record of $30.6 million in adjusted EBITDA* in fiscal 2011. At first glance, adjusted EBITDA increased by a modest 12.0% year-over-year from $27.3 million in 2010. However, excluding foreign exchange losses of $3.8 million and $1.5 million in 2011 and 2010, respectively, our adjusted EBITDA would have been up nearly 20% year-over-year.
I am particularly proud of the improvement we have made to our operating model during the past eight years and I firmly believe we are well positioned to continue along that path. Telecom sales increased by a CAGR of 23.8% from fiscal 2004 to 2011, while our adjusted EBITDA margin moved from -1.1% to 11.3% (12.7% excluding a foreign exchange loss of $3.8 million) during the same period.
Our gross margin, meanwhile, improved in eight of the last nine years with the only exception occurring in 2011. I am confident that our gross margin will resume its ascent mainly driven by rapid sales growth of higher-margin Protocol solutions. This segment, which generated a CAGR of 56.7% over the last five years, reached 40% of total revenues in 2011 and should continue along a strong growth curve.
By maintaining the right balance between sales growth and profitability, we are targeting an EBITDA margin approaching 15% under favorable market conditions. I believe this higher EBITDA margin profile will be achieved based on better absorption of the fixed costs involved in running a global operation, gaining better leverage from our R&D and market development initiatives, and generating an annual revenue run-rate of more than $400 million.
Following is a list of our key accomplishments in fiscal 2011:
- Increased sales 33.0% to a record $269.7 million, or 27.1% on an organic basis
- Improved Optical, Protocol and Copper Access sales 27.9%, 38.4% and 37.8%, respectively
- Raised sales by 29.3% in the Americas, 41.7% in Europe, Middle East and Africa (EMEA), and 29.8% in Asia-Pacific
- Enhanced wireless sales from 0% to 20-22% of total revenues in the last four years
- Generated a record of $30.6 million in adjusted EBITDA, or 11.3% of sales (12.7% excluding impact of foreign exchange loss)
- Delivered $23.3 million in cash flows from operations
- Strengthened competitive position with new, game-changing solutions
EXFO has transformed itself in a number of ways in order to better position itself for long-term growth opportunities and value-creation objectives:
- We increased our presence in the high-growth wireless market to 20-22% of total revenues in fiscal 2011 from 16%-18% in 2010. In 2011, we became a preferred supplier to the three leading network equipment manufacturers on a global basis and expanded our relationships into their fast-growing managed services activities. At same time, our 3G and LTE test technologies were adapted to address the larger and higher-growth network operator market.
We continued evolving from a "box" to "solutions" supplier to help network operators become more productive while reducing their operating expenses.
- As part of the test and service assurance industry's top-five suppliers, we accelerated the transition from being an "international" to a truly "global" player, which was initiated a few years ago with the creation of our wholly-owned manufacturing facility in China and R&D software center in India. In 2011, we continued to strategically expand our R&D, manufacturing, sales and support operations to provide us with a market edge where it matters, while enhancing our focus on execution and productivity.
- We continued to move up the value chain by developing solutions for Tier-1 network operators. As the clear second-largest supplier of portable test solutions, EXFO is benefitting from the larger operators increasingly regarding us as a strong alternative to their existing suppliers. Given EXFO's reputation for quality and support but, more importantly, as the recognized leader for designing innovative solutions, we are increasingly being contacted by customers to participate in projects.
- We divested our Life Sciences and Industrial business in early fiscal 2011 to focus exclusively on the telecom test and service assurance market—our core market which offers solid long-term growth perspectives.
- Finally, we continued evolving from a "box" to "solutions" supplier to help network operators become more productive while reducing their operating expenses. As a result, we are progressively being elevated to the role of strategic partner with customers thanks to solutions like:
- FTB Ecosystem—EXFO Connect and EXFO Store are transforming the 30,000+ compliant base of FTB test platforms into connected, value-added productivity solutions.
- EtherSAM—A standards-based test method pioneered by EXFO is rendering Ethernet services qualification up to 8x faster and 100% right the first time.
- iOLM—Characterizes PON and FTTH networks up to 6x faster than traditional OTDRs and 100% flawlessly to avoid costly training or further truck rolls. Consolidates our 50%+ share in the OTDR market.
- BrixHawk Ecosystem—Combines our NetHawk and Brix technologies into a common hardware and software suite of solutions for 2G/3G/LTE protocol analysis in the lab and field, both for distributed testing and service assurance.
A World of Opportunities
As an always-on, fully connected society is becoming commonplace around the world, the most progressive network operators are steering their investment strategies toward convergence of fixed and mobile networks over a common IMS core, broadband access via PON or VDSL2 technologies, higher-speed 40G and 100G networks, and 3G and 4G/LTE deployments.
Latest reports from Cisco forecast that the number of devices connected to wireline and wireless IP networks will reach almost 15 billion in 2015 (twice the worldwide population), while video in its various forms will account for approximately 90% of global consumer traffic. These long-term trends are resulting in several market opportunities for an innovative company like EXFO:
- High growth in 40G and 100G markets where EXFO has a full offering to test optical dispersion, optical modulation, OTU4-over-Ethernet, both for network operators and network manufacturers, as well as for large data centers in deployments of cloud-based solutions.
- Massive 3G and 4G/LTE network investments for years to come, a sector in which EXFO offers leading solutions like protocol analyzers, network simulators, IMS testing from core-to-edge, and testing from wireless backhaul to network monitoring.
- High-speed access networks where EXFO will benefit from healthy investments in PON, FTTH and VDSL2 technologies—areas where EXFO is a clear leader.
Corporate Performance Objectives
Turning to our fiscal 2010-2012 Corporate Performance Objectives, we remain on track two years into our three-year plan with a sales CAGR of 25.4%, gross margin of 62.7%, and a 45.4% CAGR for adjusted EBITDA in dollars.
Despite entering fiscal 2012 amidst a challenging global economy, I remain convinced that telecom is likely the industry with the most economic resilience and that EXFO is better positioned than ever to take advantage of intermediate and long-term growth trends. Network operators, after all, must maintain their investments and deployment efforts to cope with bandwidth demand and IP convergence, while reducing their costs. We also demonstrated in the past that a difficult environment can represent a great opportunity for value creation.
* EBITDA is defined as net earnings (loss) before interest, income taxes, amortization of property, plant and equipment, amortization of intangible assets, impairment of goodwill and extraordinary gain. Adjusted EBITDA represents EBITDA excluding the gain from the disposal of discontinued operations.
New Board Members
Following the year-end, we expanded our Board of Directors with the appointments of Darryl Edwards and Susan Spradley. Both Mr. Edwards and Ms. Spradley have enjoyed distinguished careers in the telecom industry, notably in the wireless sector. They bring a wealth of industry knowledge, business relationships and operational excellence from leading network equipment manufacturers that should benefit the whole company.
In closing, I would like to thank all our stakeholders—customers, employees and shareholders—for your ongoing commitment to EXFO. With such strong support, I am confident that we will eventually achieve our vision of becoming the undisputed leader in the global telecom test and service assurance industry.
Chairman, President and CEO
October 11, 2011