EXFO Electro-Optical Engineering Inc.
NASDAQ : EXFO
TSX : EXF

EXFO Electro-Optical Engineering Inc.

January 08, 2008 16:10 ET

EXFO Reports First-Quarter Results for Fiscal 2008

- Sales increase 15.3% year-over-year to US$41.0 million, top of guidance range - Net bookings improve 18.2% year-over-year for a book-to-bill ratio of 1.07 - GAAP net results amount to US$0.00 per share, given high Canadian/US exchange rate - Several major products launched, including AXS-200 test platform, 40G/43G SONET/SDH test module for FTB-400 platform and a combined single-end CD and PMD test module

QUEBEC CITY, CANADA--(Marketwire - Jan. 8, 2008) - EXFO Electro-Optical Engineering Inc. (TSX:EXF)(NASDAQ:EXFO) reported today financial results for the first quarter ended November 30, 2007.

Sales increased 15.3. % to US$41.0 million in the first quarter of fiscal 2008 from US$35.5 million in the first quarter of 2007, but decreased 4.6% from US$43.0 million in the fourth quarter of 2007. Net bookings improved by 18.2% year-over-year to US$43.7 million for a book-to-bill ratio of 1.07 in the first quarter of fiscal 2007 from US$37.0 million in the same period last year and 10.5% from US$39.5 million in the fourth quarter of 2007.

Gross margin amounted to 55.7% of sales in the first quarter of fiscal 2008 compared to 57.2% in the first quarter of 2007 and 57.9% in the fourth quarter of 2007. The drop in gross margin is mainly due to the significant and rapid increase in the Canadian/US exchange rate, product and geographical mix, as well as ramp-up costs related to a manufacturing plant in China.

GAAP net loss in the first quarter of fiscal 2008 totaled US$0.1 million, or US$0.00 per share, compared to GAAP net earnings of US$3.5 million, or US$ 0.05 per diluted share, in the same period last year and GAAP net earnings of US$33.5 million, or US$0.48 per diluted share in the fourth quarter of 2007 (including US$24.6 million in recognition of previously unrecognized future income taxes, US$3.2 million for the recognition of previously unrecognized R&D tax credits and US$1.1 million from a government grant recovery). GAAP net loss in the first quarter of fiscal 2008 included US$0.3 million in stock-based compensation costs and US$0.5 million in after-tax amortization of intangible assets.

"I'm satisfied sales reached the high end of our guidance range and that bookings were solid in the first quarter, especially with 19.8% and 18.2% year-over-year growth in sales and bookings for our Telecom Division," said Germain Lamonde, EXFO's Chairman, President and CEO. "We are following an aggressive profitable growth strategy that allowed us to increase our gross margin and profitability in each of the last five fiscal years, despite an average annual increase of 6.4% in the Canadian/US exchange rate. In addition, we implemented corrective actions to absorb the 6.9% surge of the exchange rate in the first quarter. We now expect that earnings in the second half of fiscal 2008 will be comparable (excluding one-time items) to the second half of 2007, assuming the Canadian dollar remains at par or below."

"We remain committed to achieving our 20% sales growth target for the fiscal year based on our key market-driven product launches, increased intensity in our sales and marketing activities worldwide, and strong execution that strengthen competitive advantages in our optical, protocol and access businesses, where we anticipate making market-share gains," Mr. Lamonde added.



Selected Financial Information
(In thousands of US dollars)

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Segmented results: Q1 2008 Q4 2007 Q1 2007
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(unaudited) (unaudited) (unaudited)

Sales:
Telecom Division $ 35,365 $ 37,199 $ 29,522
Life Sciences and Industrial
Division 5,620 5,776 6,025
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Total $ 40,985 $ 42,975 $ 35,547
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Earnings from operations:
Telecom Division $21 $8,108 $1,803
Life Sciences and Industrial
Division 281 994 956
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Total $302 $9,102 $2,759
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Other selected information:
GAAP net earnings (loss) $(93) $33,484 $3,533
After-tax amortization of intangible
Assets $499 $699 $882
Stock-based compensation costs $301 $277 $285
Government grants $- $(1,079) $-
Recognition of previously
unrecognized future income taxes $- $(24,566) $-
Recognition of previously
unrecognized R&D tax credits $- $(3,162) $-
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Operating Expenses

Selling and administrative expenses amounted to US$14.8 million, or 36.2% of sales, in the first quarter of fiscal 2008 compared to US$11.5 million, or 32.5% of sales, in the same period last year and US$13.0 million, or 30.3% of sales, in the fourth quarter of 2007.

Gross research and development expenses totaled US$7.5 million, or 18.3% of sales, in the first quarter of fiscal 2008 compared to US$5.5 million, or 15.5% of sales, in the first quarter of 2007 and US$7.1 million, or 16.6% of sales, in the fourth quarter of 2007.

Net R&D expenses totaled US$6.0 million, or 14.7% of sales, in the first quarter of fiscal 2008 compared to US$4.4 million, or 12.2% of sales, in the same period last year and US$2.3 million (including US$3.2 million for the recognition of previously unrecognized R&D tax credits), or 5.4% of sales, in the fourth quarter of 2007.

First-Quarter Business Highlights

Market expansion - EXFO delivered sales growth of 15.3% and bookings growth of 18.2% year-over-year mainly due to market-share gains in optical and protocol testing and a positive spending environment. The Telecom Division increased its sales 19.8% year-over-year, while the Life Sciences and Industrial Division experienced a 6.7% drop during the same period due to less sales of fluorescence microscopy and light-based spot curing products. The corporate performance metric for sales growth in fiscal 2008 has been established at 20% year-over-year. Sales and marketing teams were expanded in recent quarters in order to exploit the launch of several new products.

Profitability - EXFO reported a GAAP net loss of US$0.1 million, or US$0.00 per share, mainly due to fluctuations in the Canadian/US exchange rate, which impacted the company's operating expenses and foreign exchange loss. Gross margin pressure  created by more sales to the Asia-Pacific region and less shipments of protocol products  higher operating costs, one-time cost-reduction measures and non-deductible tax items also negatively affected earnings in the first quarter. In terms of GAAP earnings from operations, it reached 0.7% in the first quarter versus the company's stated goal of 8% for the fiscal year.

Innovation -EXFO launched six new products in the first quarter including a multi-service, multi-medium modular handheld platform for characterizing and troubleshooting access networks (AXS-200 SharpTESTER) with cost-effective modules for the rapid installation and maintenance of ADSL/ADSL2/ADSL2+ (AXS-200/620) and Ethernet/IP services (AXS-200/850), as well as a compact multi-service transport test set that combines next-generation SONET/SDH and Ethernet testing inside a single module for its FTB-200, FTB-400 and IQS-500 test platforms (8120NGE at 2.5 Gbit/s and 8130NGE at 10 Gbit/s). Following the quarter-end, the company released two additional key products, namely a 40/43 Gbit/s SONET/SDH and OTN field-test module (hosted in the FTB-400 test platform) for high-speed optical networks and an all-in-one, single-end CD and PMD Analyzer (for the FTB-200 and FTB-400 test platforms) that requires only one technician to characterize a link from a single end. Sales from products that have been on the market two years or less represented 33.8% of total sales in the first quarter of fiscal 2008, while the company's published goal is 30% for the fiscal year.

Business Outlook

Although EXFO's second quarter, which includes the months of December, January and February, is usually seasonally weak, the company forecasted sales between US$40.0 million and US$43.0 million and GAAP net results between a loss of US$0.02 per share and earnings of US$0.01 per share. GAAP net results include US$0.01 per share in stock-based compensation costs and after-tax amortization of intangible assets as well as US$0.02 per share to account for the reduced tax rate on future income tax assets that was recently enacted in Canada.

Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to review its financial results for the first quarter of fiscal 2008. To listen to the conference call and participate in the question period via telephone, dial 1-416-620-5690. Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available one hour after the event until midnight on January 15, 2008. The replay number is 1-402-977-9141 and the reservation number is 21361059. The audio Webcast and replay of the conference call will also be available on EXFO's Website at www.EXFO.com, under the Investors section.

Forward-Looking Statements

This news release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, will, expect, believe, anticipate, intend, could, estimate, continue, or the negative or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including consolidation in the global telecommunications test and measurement industry; capital spending levels in the telecommunications, life sciences and high-precision assembly sectors; concentration of sales; fluctuating exchange rates and our ability to execute in these uncertain conditions; the effects of the additional actions we have taken in response to such economic uncertainty (including our ability to quickly adapt cost structures with anticipated levels of business, ability to manage inventory levels with market demand); market acceptance of our new products and other upcoming products; limited visibility with regards to customer orders and the timing of such orders; our ability to successfully integrate our acquired and to-be-acquired businesses; the retention of key technical and management personnel; and future economic, competitive and market conditions. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct.
Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.

About EXFO

EXFO is a Tier-1 test and measurement expert in the global telecommunications industry, especially in the portable test market segment. The Telecom Division, which represents about 85% of the company's business, offers a full suite of test solutions and monitoring systems to network service providers, cable TV operators, telecom system vendors and component manufacturers in approximately 70 countries. EXFO is the global market leader for portable optical test solutions with an estimated 25.5% market share and a leading supplier of protocol and access test solutions to enable triple-play deployments and converged IP networking. Its Windows-based modular AXS-200, FTB-200, FTB-400 and IQS-500 test platforms host a wide range of modular test solutions across optical, physical, data and network layers, while maximizing technology reuse across several market segments. The Life Sciences and Industrial Division offers value-added light-based solutions in high-precision medical device and opto-electronics assembly sectors, and advanced fluorescence microscopy and electrophysiology solutions for the life sciences sector. For more information about EXFO's Telecom Division, visit www.EXFO.com, and for its Life Sciences and Industrial Division, visit www.EXFO-lifesciences.com.




Interim Consolidated Balance Sheet

(in thousands of US dollars)

As at As at
November 30, August 31,
2007 2007
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(unaudited)
Assets

Current assets
Cash $5,521 $5,541
Short-term investments 127,185 124,217
Accounts receivable
Trade, less allowance for doubtful accounts
of $211 ($206 as at August 31, 2007) 26,572 26,699
Other 7,057 2,479
Income taxes and tax credits recoverable 7,108 6,310
Inventories 33,369 31,513
Prepaid expenses 2,062 1,391
Future income taxes 6,725 7,609
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215,599 205,759

Property, plant and equipment 20,099 18,117

Intangible assets 9,527 9,628

Goodwill 29,905 28,437

Future income taxes 17,980 17,197
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$293,110 $279,138
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Liabilities

Current liabilities
Bank loan $676 $-
Accounts payable and accrued liabilities 18,578 22,721
Deferred revenue 2,948 2,598
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22,202 25,319

Deferred revenue 3,720 3,414

Future income taxes 272 240
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26,194 28,973
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Shareholders' Equity

Share capital 149,886 150,019
Contributed surplus 4,767 4,453
Retained earnings 42,198 42,275
Accumulated other comprehensive income 70,065 53,418
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266,916 250,165
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$293,110 $279,138
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Interim Unaudited Consolidated Statements of Earnings

(in thousands of US dollars, except share and per share data)

Three months ended
November 30,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Sales $40,985 $35,547

Cost of sales (1, 2) 18,144 15,229
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Gross margin 22,841 20,318
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Operating expenses
Selling and administrative(1) 14,817 11,542
Net research and development(1) 6,012 4,354
Amortization of property, plant and equipment 976 781
Amortization of intangible assets 734 882
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Total operating expenses 22,539 17,559
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Earnings from operations 302 2,759

Interest income 1,483 1,172
Foreign exchange gain (loss) (616) 383
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Earnings before income taxes 1,169 4,314

Income taxes
Current 1,181 781
Future 81 -
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1,262 781
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Net earnings (loss) for the period $(93) $3,533
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Basic and diluted net earnings (loss) per share $(0.00) $0.05

Basic weighted average number of shares
outstanding (000's) 69,000 68,775

Diluted weighted average number of shares
outstanding (000's) 69,000 69,385

(1) Stock-based compensation costs included in:
Cost of sales $37 $34
Selling and administrative 197 197
Net research and development 67 54
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$301 $285
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(2) The cost of sales is exclusive of amortization, shown separately.



Interim Unaudited Statements of Comprehensive Income (Loss) and Accumulated
Other Comprehensive Income

(in thousands of US dollars)

Comprehensive income (loss)
Three months ended
November 30,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Net earnings (loss) for the period $(93) $3,533
Foreign currency translation adjustment 13,906 (6,026)
Changes in unrealized losses on short-term
investments 39 -
Unrealized gains on forward exchange
contracts, net of future income taxes of $624 1,325 -
Reclassification of realized gains on forward
exchange contracts in net loss, net of
future income taxes of $243 (516) -
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Other comprehensive income (loss) $14,661 $(2,493)
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Accumulated other comprehensive income
Three months ended
November 30,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Foreign currency translation adjustment
Cumulative effect of prior periods $53,418 $43,537
Current period 13,906 (6,026)
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67,324 37,511
Unrealized gains on forward exchange contracts
Adjustment related to the implementation of
new accounting standards 1,948 -
Current period, net of future income taxes
of $381 809 -
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2,757 -
Unrealized losses on short-term investments
Adjustment related to the implementation of
new accounting standards (55) -
Current period 39 -
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(16) -
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Accumulated other comprehensive income $70,065 $37,511
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Total retained earnings and accumulated other comprehensive income amounted
to $41,044 and $112,263 as of November 30, 2006 and 2007, respectively.



Interim Unaudited Consolidated Statements of Retained Earnings and
contributed Surplus

(in thousands of US dollars)

Retained earnings
Three months ended
November 30,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Balance - Beginning of the period $42,275 $-

Add (deduct)
Adjustment related to the implementation of
new accounting standards 55 -
Net earnings (loss) for the period (93) 3,533
Premium on redemption of share capital (39) -
--------------------------------------------------------------------------
Balance - End of the period $42,198 $3,533
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Contributed surplus
Three months ended
November 30,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Balance - Beginning of the period $4,453 $3,776

Add (deduct)
Stock-based compensation costs 316 282
Reclassification of stock-based compensation
costs to share capital upon exercise
of stock awards (2) (47)
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Balance - End of the period $4,767 $4,011
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Interim Unaudited Consolidated Statements of Cash Flows

(in thousands of US dollars)
Three months ended
November 30,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Cash flows from operating activities
Net earnings (loss) for the period $(93) $3,533
Add (deduct) items not affecting cash
Discount on short-term investments 902 414
Stock-based compensation costs 301 285
Amortization 1,710 1,663
Deferred revenue 351 494
Government grants - (22)
Future income taxes 81 -
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3,252 6,367
Change in non-cash operating items
Accounts receivable 1,166 (3,035)
Income taxes and tax credits (458) (418)
Inventories (87) 381
Prepaid expenses (612) 2
Accounts payable and accrued liabilities (5,694) 36
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(2,433) 3,333
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Cash flows from investing activities
Additions to short-term investments (211,453) (194,266)
Proceeds from disposal and maturity of
short-term investments 214,571 191,503
Additions to capital assets (1) (1,573) (811)
Net proceeds from disposal of capital assets - 1,228
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1,545 (2,346)
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Cash flows from financing activities
Changes in bank loan 699 -
Repayment of long-term debt - (27)
Redemption of share capital (174) -
Exercise of stock options - 121
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525 94

Effect of foreign exchange rate changes on cash 343 (193)
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Change in cash (20) 888

Cash - Beginning of the period 5,541 6,853
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Cash - End of the period $5,521 $7,741
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(1) As at November 30, 2006 and 2007, unpaid purchases of capital assets
amounted to $184 and $852, respectively.


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