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

EXFO Electro-Optical Engineering Inc.

October 16, 2007 16:02 ET

EXFO Reports Record Sales and GAAP Net Earnings for Fiscal 2007

- Annual sales increase 19.2% to a record-high US$152.9 million, including year-over-year growth of 20.3% to US$43.0 million in the fourth quarter - GAAP net earnings reach US$42.3 million in fiscal 2007, including recognition of US$24.6 million in future income tax assets and US$3.2 million in R&D tax credits - Gross margin improves for a fifth consecutive year to 57.4% - Receives fourth consecutive Growth Strategy Leadership Award from Frost & Sullivan for highest market-share gains in fiber-optic test equipment market

QUEBEC CITY, QUEBEC--(Marketwire - Oct. 16, 2007) - EXFO Electro-Optical Engineering Inc. (TSX:EXF)(NASDAQ:EXFO), reported today record sales and GAAP net earnings for the fiscal year ended August 31, 2007.

Sales increased 19.2% to a record-high US$152.9 million in fiscal 2007 from US$128.3 million in 2006. In the fourth quarter of 2007, sales reached US$43.0 million compared to US$39.2 million in the previous quarter and US$35.7 million in the fourth quarter of 2006. Net bookings totaled US$39.5 million in the fourth quarter of fiscal 2007 compared to US$43.7 million in the third quarter of 2007 and US$32.6 million in the fourth quarter of 2006. Overall in fiscal 2007, net accepted orders increased 21.0% to US$156.7 million from US$129.4 million in 2006 for a book-to-bill ratio of 1.02.

Gross margin improved to 57.4% of sales in fiscal 2007 from 55.3% in 2006. In the fourth quarter of 2007, gross margin amounted to 57.9% compared to 57.1% in the previous quarter and 54.3% in the fourth quarter of 2006. Fiscal 2007 marked the fifth consecutive increase in the company's gross margin.

In fiscal 2007, GAAP net earnings reached a record-high US$42.3 million, or US$0.61 per diluted share, including US$24.6 million in recognition of previously unrecognized future income taxes, US$3.2 million in recognition of previously unrecognized R&D tax credits, US$2.9 million in amortization of intangible assets, US$1.1 million from a government grant recovery and US$1.0 million in stock-based compensation costs. In 2006, GAAP net earnings totaled US$8.1 million, or US$0.12 per diluted share, including US$4.4 million in amortization of intangible assets, US$1.3 million from a government grant recovery, US$1.0 million in stock-based compensation costs and US$0.6 million in impairment of long-lived assets.

In the fourth quarter of 2007, GAAP net earnings amounted to US$33.5 million, or US$0.48 per diluted share, including US$24.6 million in recognition of previously unrecognized future income taxes, US$3.2 million in recognition of previously unrecognized R&D tax credits, US$1.1 million from a government grant recovery, US$0.7 million in amortization of intangible assets and US$0.3 million in stock-based compensation costs. In the third quarter of 2007, GAAP net earnings reached US$2.6 million, or US$0.04 per diluted share, including US$0.7 million in amortization of intangible assets and US$0.2 million in stock-based compensation costs. In the fourth quarter of 2006, GAAP net earnings totaled US$2.9 million, or US$0.04 per diluted share, including US$1.0 million in amortization of intangible assets and US$0.2 million in stock-based compensation costs.

"Fiscal 2007 marked another good year with market-share gains for a 22(nd) consecutive reporting period, while being recognized with a fourth consecutive Growth Strategy Leadership Award from Frost& Sullivan for gains in optical testing," said Germain Lamonde, EXFO's Chairman, President and CEO. "We delivered sales growth of 19.2% for record sales of $152.9 million in 2007 largely due to strong performances from our optical and protocol businesses and significant inroads into the Americas and EMEA sales regions."

"I am also pleased with our long-term profitability, especially how we coped with a 32% increase in the Canadian dollar in the last five fiscal years," Mr. Lamonde added. "More specifically in 2007, we improved our net earnings 78.8% year over year if you exclude tax-related items. Our earnings growth exceeded sales growth for a fifth consecutive year and our gross margin progressed for a fifth consecutive year, too. I remain confident that we can continue growing sales and earnings based on our positioning among key growth trends, history of market-share gains, strong focus on execution, healthy balance sheet, as well as global expansion plans for our sales, R&D and manufacturing operations."



Selected Financial Information
(In thousands of US dollars)
--------------------------------------------------------------------------
Segmented results: Q4 2007 Q3 2007 Q4 2006 FY 2007 FY 2006
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(unaudited) (unaudited) (unaudited) (unaudited)

Sales:
Telecom Division $37,199 $33,821 $30,111 $129,839 $107,376
Life Sciences &
Industrial Division 5,776 5,384 5,622 23,095 20,877
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Total $42,975 $39,205 $35,733 $152,934 $128,253
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Earnings from
operations:
Telecom Division $8,108 $2,143 $1,275 $13,132 $6,679
Life Sciences &
Industrial Division 994 697 1,088 3,650 1,383
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Total $9,102 $2,840 $2,363 $16,782 $8,062
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Other selected
information:
GAAP net earnings $33,646 $2,574 $2,910 $42,275 $8,135
Amortization of
intangible assets $699 $653 $1,043 $2,864 $4,394
Stock-based
compensation costs $277 $178 $213 $981 $1,032
Impairment of
long-lived assets $- $- $- $- $604
Government
grants $(1,079) $- $- $(1,079) $(1,307)
Recognition of
previously
unrecognized
future income
taxes $ (24,566) $- $- $(24,566) $-
Recognition of
previously
unrecognized R&D
tax credits $(3,162) $- $- $(3,162) $-
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Operating Expenses

Selling and administrative expenses amounted to US$49.6 million, or 32.4% of sales, in fiscal 2007 compared to US$40.3 million, or 31.4% of sales, in 2006. In the fourth quarter of 2007, selling and administrative expenses totaled US$13.0 million, or 30.3% of sales, compared to US$12.8 million, or 32.7% of sales, in the third quarter of 2007 and US$10.9 million, or 30.4% of sales, in the fourth quarter of 2006.

Gross research and development (R&D) expenses reached US$25.2 million, or 16.5% of sales, in fiscal 2007 compared to US$19.5 million, or 15.2% of sales, in 2006. In the fourth quarter of 2007, gross R&D expenses attained US$7.1 million, or 16.6% of sales, compared to US$6.6 million, or 16.9% of sales, in the previous quarter and US$5.2 million, or 14.6% of sales, in the fourth quarter of 2006.

Net R&D expenses totaled US$16.7 million (including US$3.2 million for the recognition of previously unrecognized R&D tax credits), or 10.9% of sales in fiscal 2007, compared to US$15.4 million, or 12.0% of sales, in 2006. In the fourth quarter of 2007, net R&D expenses amounted to US$2.3 million (including US$3.2 million for the recognition of previously unrecognized R&D tax credits), or 5.4% of sales, compared to US$5.3 million, or 13.6% of sales, in the third quarter of 2007 and US$4.3 million, or 12.0% of sales, in the fourth quarter of 2006.

Fiscal 2007 and Fourth-Quarter Business Highlights

- Market expansion - EXFO increased its sales to an all-time high of US$152.9 million in fiscal 2007 for an annual growth rate of 19.2%, while the company's published goal was 20%. Telecom Division sales improved 20.9% year over year, including 19.9% in the optical test segment, 48.2% in the protocol test segment and 15.5% in the copper access test segment (although Consultronics contributed only seven month's revenue in fiscal 2006). Confirming the highest market-share gains in the fiber-optic test equipment market, Frost & Sullivan named EXFO recipient of the Growth Strategy Leadership Award for the fourth consecutive year. In terms of market expansion, EXFO's sales to Europe, Middle East and Africa (EMEA) and the Americas increased 27.5% and 18.7%, respectively, in fiscal 2007. The Life Sciences and Industrial Division and Asia-Pacific region generated lower year-over-year sales growth of 10.6% and 7.8%, respectively, in 2007.

- Profitability -- EXFO completed fiscal 2007 with record-high GAAP net earnings of US$42.3 million or US$0.61 per diluted share, including US$33.5 million or US$0.48 per diluted share in the fourth quarter. GAAP net earnings in fiscal 2007 included US$24.6 million in recognition of previously unrecognized future income taxes, US$3.2 million in recognition of previously unrecognized R&D tax credits, US$2.9 million in amortization of intangible assets, US$1.1 million from a government grant recovery and US$1.0 million in stock-based compensation costs. In comparison, the company generated US$8.1 million in GAAP net earnings in 2006. The significant improvement is mainly due to increased revenue contribution from the Telecom Division and a strong focus on operations, despite a headwind from a strengthening Canadian dollar. Looking at GAAP operating margin, it reached 11.0% of sales in fiscal 2007, while the company's stated goal was 7%. Excluding the recognition of previously unrecognized R&D tax credits of US$3.2 million and a government grant recovery of US$1.1 million, operating margin would have attained 8.2% in 2007. EXFO also generated an all-time high of US$14.4 million in cash flows from operating activities in 2007, raising its cash and short-term investments to US$129.8 million.

- Innovation - EXFO introduced 20 new products in fiscal 2007, including two in the fourth quarter, compared to 18 in 2006. Two product releases in the fourth quarter of 2007 included a high-performance OTDR for ultra-long-haul network applications and a quality assurance system for real-time monitoring of triple-play IP services. Following the year-end, the company released three additional test solutions: a multi-service, multi-medium handheld platform for characterizing and troubleshooting rapidly growing access networks (AXS-200 SharpTESTER); a compact multi-service transport test set that combines next-generation SONET/SDH and Ethernet testing inside a single module (FTB-8120NGE/FTB-8130NGE Power Blazer); and a cost-effective handheld tester for the rapid installation and maintenance of ADSL/ADSL2/ADSL2+ services (EXD-350 ADSL2+ Test Set). Products on the market two years or less accounted for 33.7% of sales in fiscal 2007, while the company's published goal was 35%.

Business Outlook

EXFO forecasts sales between US$38.0 million and US$41.0 million and GAAP net earnings between US$0.01 and US$0.04 per diluted share for the first quarter of fiscal 2008. The GAAP net earnings outlook includes US$0.01 per diluted share in after-tax amortization of intangible assets and stock-based compensation costs .

Corporate Performance Objectives for Fiscal 2008/Results for Fiscal 2007
EXFO disclosed the following three corporate objectives and related metrics for fiscal 2008 as well as results for fiscal 2007. It should be noted that these metrics are not guidance, but goals that management has set out to achieve.



2008 2007
-----------------------------
Objectives Metrics Metrics Results
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Increase sales (% of year-over-year growth) 20% 20% 19.2%
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Maximize profitability (operating margin in %) 8% 7% 11.0%
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Focus on innovation
(sales % from products
less than 2 years on market) 30% 35% 33.7%
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Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to review its fourth-quarter and year-end financial results for fiscal 2007. 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 will be available one hour after the end of the conference call until 7 p.m. on October 23, 2007. The replay number is 1-402-977-9141 and the reservation number is 21349311. The live audio Webcast and replay of the conference call will also be available on EXFO's Website at www.EXFO.com/investors.

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 more than 80% 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.

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. We undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.



EXFO Electro-Optical Engineering Inc.

Interim Consolidated Balance Sheet

(in thousands of US dollars)

As at As at
August 31, August 31,
2007 2006
-----------------------
(unaudited)

Assets

Current assets
Cash $ 5,541 $ 6,853
Short-term investments 124,217 104,437
Accounts receivable
Trade, less allowance for doubtful accounts
of $206 ($451 as at August 31, 2006) 26,699 20,891
Other 2,479 2,792
Income taxes and tax credits recoverable 6,310 2,201
Inventories 31,513 24,623
Prepaid expenses 1,391 1,404
Future income taxes 7,609 -
-----------------------
205,759 163,201
Income taxes recoverable - 476

Property, plant and equipment 18,117 17,392

Intangible assets 9,628 10,948

Goodwill 28,437 27,142

Future income taxes 17,197 -
-----------------------
$ 279,138 $ 219,159
-----------------------
-----------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities $ 22,721 $ 17,337
Deferred revenue 2,598 1,772
Current portion of long-term debt - 107
-----------------------
25,319 19,216

Deferred revenue 3,414 2,632

Government grants - 723

Long-term debt - 354

Future income taxes 240 -
-----------------------
28,973 22,925
-----------------------

Shareholders' Equity

Share capital 150,019 148,921
Contributed surplus 4,453 3,776
Retained earnings 42,275 -
Cumulative translation adjustment 53,418 43,537
-----------------------
250,165 196,234
-----------------------
$ 279,138 $ 219,159
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-----------------------



Interim Unaudited Consolidated Statements of Earnings

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

Three Twelve Three Twelve
months months months months
ended ended ended ended
August 31, August 31, August 31, August 31,
2007 2007 2006 2006
--------- --------- ---------- ---------
Sales $ 42,975 $ 152,934 $ 35,733 $ 128,253

Cost of sales (1,2) 18,109 65,136 16,318 57,275
------------------------------------------------

Gross margin 24,866 87,798 19,415 70,978
------------------------------------------------

Operating expenses
Selling and
administrative (1) 13,035 49,580 10,857 40,298
Net research and
development (1, 3) 2,308 16,668 4,281 15,404
Amortization of property,
plant and equipment 801 2,983 871 3,523
Amortization of
intangible assets 699 2,864 1,043 4,394
Impairment of long-lived
assets - - - 604
Government grants (1,079) (1,079) - (1,307)
------------------------------------------------

Total operating expenses 15,764 71,016 17,052 62,916
------------------------------------------------

Earnings from operations 9,102 16,782 2,363 8,062

Interest and other income 1,204 4,717 1,074 3,253
Foreign exchange gain
(loss) (156) (49) 17 (595)
------------------------------------------------

Earnings before income
taxes 10,150 21,450 3,454 10,720

Income taxes
Current 1,232 3,741 544 2,585
Recognition of previously
unrecognized future income
tax assets (24,566) (24,566) - -
------------------------------------------------
(23,334) (20,825) 544 2,585
------------------------------------------------
Net earnings for the
period $ 33,484 $ 42,275 $ 2,910 $ 8,135
------------------------------------------------
Basic net earnings per
share $ 0.49 $ 0.61 $ 0.04 $ 0.12
Diluted net earnings per
share $ 0.48 $ 0.61 $ 0.04 $ 0.12

Basic weighted average
number of shares
outstanding (000's) 68,969 68,875 68,735 68,643

Diluted weighted average
number of shares
outstanding (000's) 69,486 69,555 69,346 69,275

(1) Stock-based
compensation costs
included in:
Cost of sales $ 25 $ 118 $ 16 $ 127
Selling and
administrative 191 633 142 701
Net research and
development 61 230 55 204
------------------------------------------------
$ 277 $ 981 $ 213 $ 1,032
------------------------------------------------
------------------------------------------------

(2) The cost of sales is exclusive of amortization, shown separately.

(3) Net research and development expenses for the periods ended August 31,
2007 include recognition of unrecognized research and development tax
credits of $3,162.



Interim Unaudited Consolidated Statements of
Retained Earnings (Deficit) and Contributed Surplus

(in thousands of US dollars)

Retained earnings (Deficit)

Twelve months ended August 31,
--------------------------------
2007 2006
------------- ----------
(unaudited)

Balance - Beginning of period $ - $ (381,846)

Add
Net earnings for the period 42,275 8,135
Elimination of deficit by reduction of
share capital - 373,711
--------------------------------

Balance - End of period $42,275 $ -
--------------------------------


Contributed surplus

Twelve months ended August 31,
--------------------------------
2007 2006
--------------------------------
(unaudited)

Balance - Beginning of period $ 3,776 $ 2,949

Add (deduct)
Stock-based compensation costs 973 1,027
Reclassification of stock-based
compensation costs to share capital
upon exercise of stock awards (296) (200)
--------------------------------

Balance - End of period $ 4,453 $ 3,776
--------------------------------
--------------------------------



Interim Unaudited Consolidated Statements of Cash Flows

(in thousands of US dollars)

Three Twelve Three Twelve
months months months months
ended ended ended ended
August 31, August 31, August 31, August 31,
2007 2007 2006 2006
-------------------------------------------------

Cash flows from operating
activities
Net earnings for the
period $ 33,484 $ 42,275 $ 2,910 $ 8,135
Add (deduct) items not
affecting cash
Discount on short-term
investments (1,062) (404) (872) (229)
Stock-based compensation
costs 277 981 213 1,032
Amortization 1,500 5,847 1,914 7,917
Impairment of long-lived
assets - - - 604
Gain on disposal of
capital assets (17) (117) - -
Future income taxes (24,566) (24,566) - -
Deferred revenue 135 1,299 538 786
Government grants (730) (752) - (1,307)
-------------------------------------------------
9,021 24,563 4,703 16,938

Change in non-cash
operating items
Accounts receivable 792 (5,468) 1,521 (2,637)
Income taxes and tax
credits (2,006) (3,403) 1,690 329
Inventories (2,824) (5,456) 803 (2,287)
Prepaid expenses 174 85 260 79
Accounts payable and
accrued liabilities 1,564 4,105 (759) (144)
-------------------------------------------------

6,721 14,426 8,218 12,278
-------------------------------------------------

Cash flows from investing
activities
Additions to short-term
investments (80,267) (807,056) (34,655) (673,289)
Proceeds from disposal
and maturity of
short-term investments 75,073 793,435 29,845 681,500
Additions to capital
assets (2,011) (5,547) (847) (3,378)
Net proceeds from disposal
of capital assets 301 3,092 - -
Business combination, net
cash acquired - - (338) (18,054)
-------------------------------------------------

(6,904) (16,076) (5,995) (13,221)
-------------------------------------------------

Cash flows from financing
activities
Repayment of long-term debt (394) (472) (257) (415)
Exercise of stock options 229 802 54 557
-------------------------------------------------

(165) 330 (203) 142

Effect of foreign exchange
rate changes on cash (119) 8 (148) 535
-------------------------------------------------

Change in cash (467) (1,312) 1,872 (266)

Cash - Beginning of period 6,008 6,853 4,981 7,119
-------------------------------------------------

Cash - End of period $ 5,541 $ 5,541 $ 6,853 $ 6,853
-------------------------------------------------
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