Germain LamondeChairman, CEO and Founder
In fiscal 2016, EXFO reaped the benefits of key transformations initiated over prior years, especially in the areas of high-speed optical and wireless testing, Xtract analytics software and overall operational efficiency. Our financial performance was a firm step in the right direction, demonstrating significant earnings leverage in our operating model as we scaled up our business and maintained a tight focus on profitability and execution.
For our customers: we continued to strengthen EXFO’s capabilities and credentials as a genuine trusted advisor, whether addressing fixed, mobile, webscale, data center or cable operators’ requirements. We delivered what EXFO does best—market-driven test and systems-based innovation to elevate our strategic relevance and to help communications service providers (CSPs) deliver on their strategic initiatives.
For our shareholders: we generated strong financial results for almost every metric, including surpassing our annual $20 million adjusted EBITDA1 target by reaching $22.0 million (up 60% year-over-year), while strengthening our market position and remaining focused on expanding profitability for the long term.
Below I offer additional data points related to 2016, while providing an update on our long-term strategy.
Revenue growth of 4.7% (bookings growth of 7.7%). As the telecom industry continued gradually moving towards an increasingly NFV and SDN-centric network architecture and despite currency headwinds, we generated revenue and bookings growth of 4.7% and 7.7%, respectively, (+6% and +9% on a constant currency basis2) while strengthening our order book (book-to-bill ratio of 1.03). These results were achieved thanks to a combination of market growth, share gains and entering new addressable markets:
These key wins benefited our Physical and Protocol-layer product groups. As expected, both generated sales growth to the height of 5.4% and 3.4%, respectively, and bookings growth of 7.4% and 8.3%. I expect both product groups will deliver growth again in 2017 based on the robust markets they address, strong benefits of our highly differentiated offering and the strengthening of our go-to-market model.
Net earnings growth of 68% (60% in adjusted EBITDA). Raising profitability is management’s central focus and I am pleased we made significant strides against this objective in 2016. These results were primarily driven by:
As a leader in optical, high-speed transport and fixed/mobile broadband access network testing, EXFO is increasingly positioning itself as the trusted advisor to CSPs. Our highly differentiated test automation capabilities are becoming more and more synergistic and relevant for the high-growth, end-to-end network visibility market, where EXFO is helping CSPs maximize quality of user experience (QoE) and mitigate network investments. This, in turn, is helping CSPs accelerate revenue and profitability, while improving ARPU (average revenue per user) and customer retention. Below are more details about our strategy.
Field test automation. While it is common knowledge field testing is an integral part of EXFO’s DNA and 30-plus year market leadership, fewer people realize that a large part of our success has come from bringing to market disruptive concepts that provide CSPs with test automation, productivity enhancements and reduced truck rolls. Over the years, we have introduced many innovations like our ground-breaking iOLM software for OTDR analysis, unique auto-focus, auto-center and auto-analysis connector inspection probes and many other game-changing innovations. We will continue disrupting our industry with market-driven initiatives; below are some more examples.
Test automation and 3D analytics. EXFO’s expertise in field test has been leveraged across our systems offering in which our solutions mine data from a wider range of physical and virtual sources (test instruments, active and passive test probes, and third-party network elements). As we move along this transformation path, we are enhancing EXFO’s relevance to customers and their executives by strengthening long-term partnerships as well as delivering stickier products, systems and service revenue.
Click to enlargeAs unveiled during our Investor Day in 2016, our unique test instrument and systems expertise is part of our strategy to gradually transform EXFO from a box supplier to a “trusted advisor” that CSP executives can rely upon to assure a sound test and service assurance solution is an integral part of their plans from Day 1.
Thanks to closer relationships with chief technology officers, VPs of network planning and other telecom executives, we are getting involved earlier in their strategic initiatives to design smarter networks aimed at delivering a plethora of new services at an unprecedented scale. We can thus bring a greater contribution to their initiatives like deployments of hybrid networks (physical and virtual) offering best-in-class performance and QoE, or while they are steering capital investments toward 100G/200G/400G, 4G/5G, NFV/SDN, IoT, Cloud/datacenters or fixed/mobile broadband access. We have come a long way along this journey by transforming our global sales organization and go-to-market strategy, and we have already cumulated significant wins for our systems and solutions business that we intend to leverage and replicate globally to drive market share gains and revenue growth.
About one year ago, Philippe Morin, whom I have known for more than 15 years, joined EXFO as Chief Operating Officer. I had several objectives in mind when making this well-thought out decision: accelerate the transformation of our sales organization, especially at the executive level; improve our go-to-market efficiency to drive more revenue per head and thus reduce SG&A margin; increase market penetration in the high-growth, 100G+ optical test market with both CSPs and network equipment manufacturers; and strengthen EXFO’s management bench.
I am very pleased with Philippe’s contributions so far and my plan remains intact to elevate him to the CEO position some time during 2017, while I will then assume the Executive Chairman role on a full-time basis. I am convinced the combination of new ideas from Philippe with my long-term industry experience will create long-term value for EXFO, while securing a strong succession plan. We are jointly committed to keep building EXFO into the uncontested leader in the markets we serve, while accelerating growth and value creation.
EXFO had a solid balance sheet with a cash position of $47.3 million and no debt at the end of fiscal 2016. While organic growth remains our No. 1 priority, we intend to increase our focus on partnerships and acquisitions to accelerate leadership in strategic, high-growth markets. On the acquisition front, we typically target companies that fit into our “3S” acquisition strategy, namely Small, Synergistic and Strategic to maximize value creation. The asset acquisition of Absolute Analysis in late October perfectly reflects this thinking. This relatively small acquisition brings a highly strategic optical RF test technology that has already been synergistically integrated into the industry’s only all-in-one optical, transport and RF tester for the high-growth, smart-RAN deployment market. As EXFO’s largest shareholder, I will remain highly focused on maximizing value creation with the right mix of organic growth, partnerships and acquisitions, while staying on the sidelines for large-scale share buybacks or paying out dividends.
In closing, I am thankful to our shareholders for their confidence, our Board members for their guidance and the entire EXFO team for its great contribution. Altogether, I trust we will keep pushing EXFO to the next level.
Sincerely, Germain LamondeChairman, CEO and Founder
November 28, 2016
1Adjusted EBITDA represents net earnings before interest, income taxes, depreciation and amortization, stock-based compensation costs and foreign exchange gain or loss.
2Constant currency data represents data before foreign currency impact. Data for the current period is translated using foreign exchange rates of the corresponding period from the previous year.
3Gross margin before depreciation and amortization represents sales less cost of sales, excluding depreciation and amortization.