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Letter to shareholders

Testing, monitoring and analytics with a unique lens

Letter to shareholders
Letter to shareholders

Dear shareholders,

We’re pleased with EXFO’s fiscal 2019 results, given solid growth in revenue, bookings, earnings and cash flows from operations, while surpassing our annual profitability target. We also made significant progress against key strategic imperatives to position the company for the promising fiber, 5G/IoT and virtualization growth opportunities.

EXFO surpassed revenue and bookings historical highs in 2019 with increases of 6.4% to $286.9 million and 11.2% to $297.8 million, respectively. Our double-digit bookings growth reflects four SASS monitoring contract wins related in part to 5G deployments and a full-year contribution from the Astellia acquisition. This strong performance was also marked by a heightened degree of predictability as revenue results were above the midpoint of our guidance for four consecutive quarters.

Turning to the bottom line, IFRS net loss was reduced by 79.8% to $2.5 million in 2019. Adjusted EBITDA1 surged 48.8% to $25.6 million, eclipsing our annual profitability target of $24 million. Cash flows from operations improved 20.0% year-over-year to $17.2 million, providing us with a stronger balance sheet. We also completed a reorganization plan initiated in August 2018 to increase efficiency and profitability, while maintaining sound operational discipline.

Fiscal 2019 highlights

Total sales increased 6.4% and bookings 11.2%

  • T&M sales grew 3.7% and bookings 8.4%
  • SASS sales increased 16.2% and bookings 21.0%

Sales to the EMEA, Americas, and Asia-Pacific regions improved 9.5%, 6.3% and 1.6%, respectively

Top customer accounted for 6.9% of sales and the top three represented 18.1%

Gross margin before depreciation and amortization2 reached 58.6%

IFRS net loss totaled $2.5 million

Adjusted EBITDA1 attained $25.6 million, up 48.8% year-over-year

Cash flows from operations amounted to $17.2 million, up 20.0% year-over-year

Recurring revenue (including professional services) represented 15% of total revenue, up from low double-digits in prior years

SASS transformation

From an execution standpoint, we completed the integration of our transformative acquisition of Astellia with Ontology and EXFO’s assets to create our SASS product group (Service Assurance, Systems and Services). EXFO now stands among the top-5 players within this large, fragmented market with highly differentiated capabilities and the scale to successfully compete.

Among our unique solutions, we offer network topology software that automatically maps the relationships between network resources and related services across multiple domains. By combining AI-based (artificial intelligence) analytics and automation solutions with the massive data collection capabilities of our physical and virtual probes, we’re providing unmatched visibility into network performance to help drive service reliability and subscriber experience.

For example, we deployed our network topology solution at a Tier-1 US service provider in 2019, allowing it to merge newly acquired network assets and combine legacy and next-generation technologies — all under a single, comprehensive network management framework. The end result was a holistic network view to detect and fix issues faster, while enabling a strategic transition towards fiber densification and 5G deployments. This $4.9 million contract win was accompanied by an even larger service deal extending over three years.

Also, in 2019, Analysys Mason, a well-respected research firm in the telecom industry, credited EXFO with 9% share of the probe-based monitoring systems market for calendar 2018. Its research report on the broader automated assurance systems market highlighted EXFO’s “comprehensive portfolio” and stated that EXFO is “well-positioned to support the communications service provider evolution to 5G.”

Fiber everywhere

Communications service providers and cable companies are increasing fiber buildouts and high-speed deployments in metro, regional and access networks to meet growing bandwidth demand. Webscale operators, meanwhile, are building data centers closer to the network edge to ensure a superior quality of experience for end-users.

All these customer groups are accelerating their fiber deployments to deliver a high-performance network to retain subscribers and enable new revenue-generating opportunities. It should come as no surprise this secular growth trend is bolstering EXFO’s T&M business, since we’re the market leader in optical testing with our intelligent, automated test solutions and strong brand reputation. This growth vector is also benefiting fiber monitoring solutions within our SASS product group, as we’re leveraging OTDR technology of which we own about 50% global market share.

5G and IoT

5G and IoT (Internet of Things) are outright technology revolutions that are creating disruptive opportunities and new business models in most industry verticals, thus offering significant revenue potential for EXFO.

Implementation of 5G mobile networking began a few years ago with the deepening of fiber infrastructure to increase the number of points of presence and to provide higher speeds in core networks. More recently, fixed wireless broadband got underway to bring high-speed bandwidth to residential areas where, otherwise, it would be difficult to reach. As such, mobile 5G deployments started in limited geographies in 2019 (US, South Korea and China) and will fast-track during the 2020-22 time frame.

EXFO’s T&M business has benefited from early 5G/IoT deployments due to our market leadership in optical and high-speed transport testing. Record revenue and orders for our T&M business in 2019 are proof points of our strong market presence and we expect to continue along this path in upcoming years.

As communications service providers accelerate deployments of new 5G radio equipment and increase the scale of their networks, AI-based troubleshooting, RAN optimization and end-to-end monitoring solutions will become mission-critical. Already, EXFO secured four 5G contract wins valued in excess of $8 million in fiscal 2019. More orders are on the horizon as commercial 5G deployments become mainstream in 2020 and beyond.

Acquisition update

Following the integration of Astellia, our key priorities revolve around maximizing go-to-market and R&D efficiencies while bringing new, disruptive solutions to the marketplace. Stay tuned for upcoming announcements on that front. We intend to remain on the sidelines regarding SASS-related acquisitions in the short to medium-term, without excluding potential T&M opportunities that would generate incremental value like the recent Yenista deal.

Our focus on cash generation allowed us to rebuild our balance sheet with a positive net cash position at the end of 2019.

Value creation

Given the above, we’re confident about delivering organic revenue growth for the years ahead. Looking at industry peers and elevating our efforts on unlocking shareholder value, we will focus on:

Wrap-up

In closing, EXFO delivered on all key financial metrics in fiscal 2019 with an increased focus on operational discipline and predictability. For 2020, we’re targeting adjusted EBITDA1 of $33 million, based on the newly adopted IFRS 16 accounting standard, with a heightened emphasis on creating shareholder value.

As we embark on our 35th year of operation and 20th year as a publicly listed company, we’d like to offer a special thank-you to our customers for the challenges they’ve brought to us and confidence that we always deliver; to our shareholders for their trust in our profitable growth strategy; to our employees for their unwavering commitment and contribution; and to our Board of Directors for its ongoing support and counsel.

Sincerely,

Germain Lamonde,
Founder and Executive Chairman

Philippe Morin,
Chief Executive Officer

November 26, 2019

1Adjusted EBITDA is a non-IFRS measure and represents net loss before interest and other expense, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment and foreign exchange loss.

The adjusted EBITDA target for fiscal 2020 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 2020 adjusted EBITDA target was established based on results achieved in fiscal 2019, expected sales growth, margin improvement, and expected savings from our recent restructuring plan.

 2Gross margin before depreciation and amortization is a non-IFRS measure, and represents sales, less cost of sales, excluding depreciation and amortization.