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Philippe Morin

Chief Executive Officer

Philippe Morin
Philippe Morin

Dear shareholders,

Fiscal 2018 proved to be a year of strategic transformations as EXFO accelerated its development into a supplier of software-intensive, end-to-end solutions for next-generation networks. As communications service providers continued to transform and modernize their networks, EXFO positioned itself for the two main industry growth drivers: fiber buildouts to the network edge and the 5G investment cycle.

First, we developed highly differentiated solutions in-house to enable fiber buildouts and high-speed deployments closer to the network edge. As the world’s No. 1 supplier in optical and high-speed transport testing, we intend to build on this position by leveraging the automation capabilities of our solutions and capitalizing on new revenue streams. For example, our new 400G compact test solution features automation capabilities that we can monetize.

Our optical test portfolio also gained traction with mobile network operators (MNOs), who are busy densifying their networks with small cells to meet stringent 5G network requirements. These small cells, which entail fiber connections, require extensive optical testing, and no one does that better than EXFO.

Our second major initiative involved the acquisition of Astellia to increase our scale and relevancy as the 5G cycle gets underway. Astellia contributed $16.4 million in revenue during seven months under EXFO in fiscal 2018, which was reduced by $2.1 million to account for acquisition-related, fair value adjustment of deferred revenue. We should benefit from cross-selling opportunities in 2019 as the combined salesforce becomes more knowledgeable and trained on each other’s product portfolios.

Financial performance in fiscal 2018

Looking at our financial performance in 2018, EXFO delivered revenue growth of 10.8% to $269.5 million. This double-digit sales increase reflects contributions from the Astellia (seven months) and Yenista Optics (11 months) acquisitions, revenue growth in our Physical-layer business and a positive currency impact.

IFRS net loss attributable to the parent interest1 totaled $11.9 million in 2018. Adjusted EBITDA2 of $17.2 million, meanwhile, fell below our annual target due to a soft fourth quarter revenue-wise and because Astellia’s negative impact on profitability was more than anticipated.

Although our 2018 financial results weren’t at the level we were expecting, EXFO is in a much stronger position to address the next wave of investments in the communications industry. The monitoring, analytics and professional services team from Astellia will accelerate our path to becoming a trusted partner, especially with the knowledge that physical and virtualized networks will co-exist for several years to come.

Given that several MNOs have delayed investments in virtualized networks due to the inherent complexities in managing such infrastructures and in taking the next step with automation, this provides EXFO with additional time to fully integrate Astellia. Virtualization is directly linked with 5G deployments to increase network agility and lower operating costs, so it is not a surprise that mobile operators are taking time with these critical investments. We must be patient and execute our integration plan to be prepared for full-fledged 5G commercial deployments in the 2019-2020 time frame.

Fiscal 2018 highlights

Reorganization plan

As we reached the second half of fiscal 2018, we decided to implement an important reorganization plan to increase efficiency and strengthen profitability for the long term. Most of the heavy lifting will be completed by the end of the first quarter of 2019.

In terms of enhanced efficiency, we are fast-tracking the integration of newly acquired monitoring and analytics solutions from Astellia with EXFO’s offering to create a unique platform architecture. Our platform is built to address critical use cases and requirements: from the edge to the core of the network, from the field to network operations and service operations centers, as well as for customer care and marketing teams. It is a platform leveraging artificial intelligence and machine learning solutions to bring added value to customers.

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Turning to heightened profitability, we are consolidating our R&D activities in fewer sites to increase productivity and lower operating costs, while intensifying efforts in business segments where we have strong competitive advantages. Altogether, we are reducing our workforce by around 5%. Upon completion of our reorganization plan, we should benefit from annualized cost savings of $10.5 million, including approximately $8.0 million in fiscal 2019.

Wrap-up

To wrap up, EXFO underwent strategic transformations in 2018. We made investments—both internally and through acquisitions—to position the company as the supplier of choice delivering superior network performance, service reliability and deep subscriber insights for customers. These investments, combined with restructuring initiatives, should allow us to deliver adjusted EBITDA of at least $24 million3 in fiscal 2019. This represents a solid foundation for EXFO to generate profitable growth in future years.

Sincerely,

Philippe Morin,
Chief Executive Officer

November 27, 2018

 

1 Represents net loss excluding share of the net loss attributable to Astellia’s minority shareholders.
2 Represents net loss attributable to the parent interest before interest, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, change in the fair value of the cash contingent consideration, share in net loss of an associate, gain on the deemed disposal of the investment in an associate, and foreign exchange gain.
3 This adjusted EBITDA target is a forward-looking statement. In addition, as it excludes items that pertain to future events that are not currently estimable with a reasonable degree of accuracy, such as foreign exchange gain or loss and income taxes, no corresponding IFRS measure has been provided. Our fiscal 2019 adjusted EBITDA target was established based on results achieved in fiscal 2018, expected sales growth, margin improvement, expected savings from our recent restructuring plan, as well as the full contribution from Astellia in 2019.