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

EXFO Electro-Optical Engineering Inc.

June 28, 2005 16:01 ET

EXFO Increases Sales and Bookings for a Seventh Consecutive Quarter

QUEBEC CITY, QUEBEC--(CCNMatthews - June 28, 2005) - EXFO Electro-Optical Engineering Inc. (TSX:EXF.SV)(NASDAQ:EXFO)



- Grows sales to US$26.2 million (+28.0%) and bookings to US$28.9
million (+44.9%) from same period last year
- Increases GAAP and pro forma net earnings(i)
- Generates 45.6% of sales from products on the market two years or
less


EXFO Electro-Optical Engineering Inc. (TSX:EXF.SV)(NASDAQ:EXFO) reported today sales and bookings growth for a seventh consecutive quarter.

Sales increased 28.0% to US$26.2 million in the third quarter ended May 31, 2005, from US$20.5 million in the third quarter of 2004 and 13.2% from US$23.1 million in the second quarter of 2005. Net bookings improved 44.9% to US$28.9 million for a book-to-bill ratio of 1.11 in the third quarter of fiscal 2005 from US$20.0 million in the same period last year and 16.4% from US$24.9 million in the second quarter of 2005.

Gross margin progressed to 56.2% of sales in the third quarter of fiscal 2005 from 52.9% in the third quarter of 2004 and 54.9% in the second quarter of 2005.

GAAP net earnings in the third quarter of fiscal 2005 totaled US$276,000, or US$0.00 per share, compared to a net loss of US$1.2 million, or US$ 0.02 per share, in the same period last year and net earnings of US$9,000, or US$0.00 per share, in the second quarter of 2005.

On a pro forma basis(i), net earnings in the third quarter of fiscal 2005 amounted to US$1.8 million, or US$0.03 per share, compared to US$273,000, or US$0.00 per share, in the third quarter of 2004 and US$1.5 million, or US$0.02 per share, in the second quarter of 2005.

"Overall, our third quarter marked a solid financial performance on all fronts through increased sales and bookings for a seventh consecutive quarter, reaching respective growth rates of 33.0% and 41.2% for the first nine months of fiscal 2005, and by means of an improved gross margin and profitability," said Germain Lamonde, EXFO's Chairman, President and CEO. "These results reflect our strength in the fiber access network test market and good execution of our long-term strategic plan as we remain focused on strengthening our competitive position in FTTx and IP network convergence by enabling rapid and efficient deployments of broadband networks."



Segmented Results
(In millions of US dollars)

Sales Earnings (loss)
from operations
---------------------------------------------------------------------
Q3 2005 Q2 2005 Q3 2004 Q3 2005 Q2 2005 Q3 2004
Business
Segment
Telecom
Division $ 22.1 $ 19.4 $ 16.7 $ 0.6 $ 0.6 $ (0.8)
Photonics
and Life
Sciences
Division 4.1 3.7 3.8 (0.1) (0.8) (1.1)
---------------------------------------------------------------------

Total $ 26.2 $ 23.1 $ 20.5 $ 0.5 $ (0.2) $ (1.9)
---------------------------------------------------------------------
---------------------------------------------------------------------


Operating Expenses

Selling and administrative expenses amounted to US$8.6 million, or 32.7% of sales, in the third quarter of fiscal 2005 compared to US$6.9 million, or 33.9% of sales, in the same period last year and US$7.7 million, or 33.4% of sales, in the second quarter of 2005.

Gross research and development expenses totaled US$4.1 million, or 15.7% of sales, in the third quarter of fiscal 2005 compared to US$4.2 million, or 20.4% of sales, in the third quarter of 2004 and US$3.8 million, or 16.5% of sales, in the second quarter of 2005.

Third-Quarter Business Highlights



- Market-share gains-EXFO increased sales 33.0% nine months into
fiscal 2005 compared to the same period last year amidst a
telecom marketplace growing in single digits. EXFO had targeted
20% sales growth at the beginning of the fiscal year.
- Leadership in the fiber-to-the-x (fiber-to-the-premises, fiber-
to-the-node, fiber-to-the curb) test market-EXFO shipped several
FTTx-related orders to a US-based, Tier-1 telecom carrier, who
accounted for 30.8% of sales in the third quarter of 2005. The
company also began recognizing revenue for its FTTx solutions
from another Tier-1 carrier in the United States. The top three
customers for EXFO in the quarter represented 38.1% of sales.
- Profitability-EXFO reached GAAP break-even for a second
consecutive quarter and was profitable on a pro forma basis(i)
for the fourth time in the last five quarters. After nine months
into fiscal 2005, the company has delivered pro forma net
earnings of US$2.5 million, or US$0.04 per share, while its
stated goal for the fiscal year is break-even on a pro forma
basis.
- Market-driven innovation-EXFO released a new software suite for
its highly acclaimed Packet Blazer™ Gigabit Ethernet tester,
which is designed for remote Ethernet testing and commissioning
applications. Subsequent to the quarter-end, the company launched
a 10 Gigabit Ethernet test solution for network commissioning and
quality assurance requirements. Sales of new products that have
been on the market two years or less accounted for 45.6% of sales
in the third quarter of 2005 and 44.7% for the first nine months
of fiscal 2005, while the company's stated goal is 45.0% for the
fiscal year.


Business Outlook

EXFO forecasts sales between US$23.0 million and US$26.0 million and GAAP net earnings (loss) between a net loss of US$0.02 per share and net earnings of US$0.01 per share for the fourth quarter of fiscal 2005. Excluding stock-based compensation costs, amortization of intangible assets, restructuring charges and other unusual items, the company expects to report pro forma net earnings between US$0.00 per share and US$0.03 per share.

Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to review its financial results for the third quarter of fiscal 2005. To listen to the conference call and participate in the question period via telephone, dial 1-416-695-9726. 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 until July 5, 2005. The replay number is 1-416-695-5275. The audio Webcast of the conference call will also be available on EXFO's Website at www.exfo.com, under the Investors section.



Reconciliation of pro forma net earnings (loss) with GAAP net
earnings (loss)

- Pro forma net earnings (loss) represent net earnings (loss)
excluding stock-based compensation costs, amortization of
intangible assets, restructuring charges and an unusual tax
recovery. All figures are in thousands of US dollars except per
share data.


Actual Results

Three Nine Three Nine
months months months months
ended ended ended ended
May 31, May 31, May 31, May 31,
2005 2005 2004 2004
--------------------------------------------------------------------
(unaudited)
Net earnings (loss) in
accordance with GAAP $276 $(2,088) $(1,188) $(6,081)

Pro forma adjustments:
Stock-based compensation
costs 294 675 200 289
Amortization of intangible
assets 1,191 3,638 1,261 3,837
Restructuring charges 38 292 - -
Unusual tax recovery - - - (1,406)
--------------------------------------------------------------------
Pro forma net earnings
(loss) $1,799 $2,517 $273 $(3,361)
--------------------------------------------------------------------
--------------------------------------------------------------------
Basic and diluted net
earnings (loss) per share
in accordance with GAAP $- $(0.03) $(0.02) $(0.09)
--------------------------------------------------------------------
--------------------------------------------------------------------
Basic and diluted pro
forma net earnings (loss)
per share $0.03 $0.04 $- $(0.05)
--------------------------------------------------------------------
--------------------------------------------------------------------


Three months ending
August 31, 2005
--------------------------------------------------------------------

(unaudited)

Basic and diluted net earnings
(loss) per share in accordance with GAAP

From $ (0.02) To $ 0.01

Pro forma adjustments:
Stock-based compensations costs 0.00 0.00
Amortization of intangible assets 0.02 0.02
Restructuring charges 0.00 0.00
--------------------------------------------------------------------

Basic and diluted pro forma net
earning per share From $ 0.00 To $ 0.03


EXFO discloses pro forma financial data in order to provide supplemental information regarding its results of operations and to enhance investors' overall understanding of its core financial performance and its prospects for the future. EXFO believes that investors benefit from seeing its results through the eyes of management in addition to seeing the GAAP information. This non-GAAP information facilitates management's comparison of current results with the company's historical results of operations and strategic plan and with those of its peers. This information is not in accordance with, or an alternative to, GAAP and and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as net earnings (loss). As a result, EXFO's pro forma net earnings (loss) may not be comparable to similarly titled measures reported by other companies.

About EXFO

EXFO is a recognized test and measurement expert in the global telecommunications industry through the design and manufacture of advanced and innovative solutions as well as best-in-class customer support. The Telecom Division, which represents the company's main business activity, offers fully integrated and complete test solutions to network service providers, system vendors and component manufacturers in approximately 70 countries. One of EXFO's strongest competitive advantages is its PC/Windows-based modular platforms that host a wide range of tests across optical, physical, data and network layers, while maximizing technology reuse across several market segments. The Photonics and Life Sciences Division mainly leverages core telecom technologies to offer value-added solutions in the life sciences and high-precision assembly sectors. For more information about EXFO, visit www.exfo.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 that refer to expectations, projections or other characterizations of future events and circumstances. 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 economic uncertainty; capital spending levels in the telecommunications, life sciences and high-precision assembly sectors; concentration of sales with a single customer; 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 workforce reductions, 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 and shall not be revised or updated to reflect events after the date of this document.

EXFO Electro-Optical Engineering Inc.
Interim Consolidated Balance Sheet

(in thousands of US dollars)



As at As at
May 31, August 31,
2005 2004
---------------------------------------------------------------------
(unaudited)

Assets

Current assets
Cash $ 3,957 $ 5,159
Short-term investments 96,739 83,969
Accounts receivable
Trade, less allowance for doubtful
accounts of $361 ($510 as at
August 31, 2004) 13,926 12,080
Other 1,593 1,532
Income taxes and tax
credits recoverable 3,275 7,836
Inventories 19,428 15,371
Prepaid expenses 1,308 1,513
---------------------------------------------------------------------
140,226 127,460

Income taxes and tax
credits recoverable 460 449

Property, plant and
equipment 13,768 15,442

Long-lived asset held for
sale 1,600 1,600

Intangible assets 6,454 9,447

Goodwill 19,359 18,393
---------------------------------------------------------------------
$181,867 $172,791
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities

Current liabilities
Accounts payable and accrued
liabilities $12,819 $11,393
Deferred revenue 1,409 805
Current portion of
long-term debt 122 121
---------------------------------------------------------------------
14,350 12,319

Deferred revenue 1,456 1,123

Deferred grants 1,779 1,690

Long-term debt 242 332
---------------------------------------------------------------------
17,827 15,464
---------------------------------------------------------------------

Shareholders' Equity

Share capital 521,857 521,733
Contributed surplus 2,661 1,986
Cumulative translation
adjustment 21,822 13,820
Deficit (382,300) (380,212)
---------------------------------------------------------------------
164,040 157,327
---------------------------------------------------------------------
$181,867 $172,791
---------------------------------------------------------------------
---------------------------------------------------------------------


EXFO Electro-Optical Engineering Inc.
Interim Unaudited Consolidated Statements of Earnings

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


Three Nine Three Nine
months months months months
ended ended ended ended
May 31, May 31, May 31, May 31,
2005 2005 2004 2004
---------------------------------------------------------------------

Sales $26,180 $70,912 $20,456 $53,298
---------------------------------------------------------------------

Cost of sales (1,2) 11,478 32,134 9,637 24,980
---------------------------------------------------------------------

Gross margin 14,702 38,778 10,819 28,318
---------------------------------------------------------------------

Operating expenses
Selling and administrative (1) 8,569 23,710 6,927 19,543
Net research and development(1) 3,342 8,903 3,321 9,642
Amortization of property,
plant and equipment 1,053 3,245 1,198 3,814
Amortization of intangible
assets 1,191 3,638 1,261 3,837
Restructuring charges 38 292 - -
---------------------------------------------------------------------
Total operating expenses 14,193 39,788 12,707 36,836
---------------------------------------------------------------------
Earnings (loss) from
operations 509 (1,010) (1,888) (8,518)

Interest and other income 617 1,966 398 1,068
Foreign exchange gain (loss) (57) (829) 167 124

Earnings (loss) before income
taxes 1,069 127 (1,323) (7,326)

Income taxes 793 2,215 (135) (1,245)
---------------------------------------------------------------------
Net earnings (loss) for the
period $276 $ (2,088) $(1,188) $(6,081)
---------------------------------------------------------------------
Basic and diluted net earnings
(loss) per share $- $(0.03) $(0.02) $(0.09)

Basic weighted average number
of shares outstanding (000's) 68,552 68,514 68,409 65,211

Diluted weighted average
number of shares outstanding
(000's) 68,969 68,977 68,991 65,820

(1) Stock-based compensation costs
included in:
Cost of sales $44 $101 $29 $37
Selling and administrative 190 442 115 174
Net research and development 60 132 56 78
---------------------------------------------------------------------

$294 $675 $200 $289
---------------------------------------------------------------------

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


EXFO Electro-Optical Engineering Inc.
Interim Unaudited Consolidated Statements of Cash Flows

(in thousands of US dollars)


Three Nine Three Nine
months months months months
ended ended ended ended
May 31, May 31, May 31, May 31,
2005 2005 2004 2004
---------------------------------------------------------------------

Cash flows from operating
activities
Net earnings (loss) for the
period $276 $(2,088) $(1,188) (6,081)
Add (deduct) items not
affecting cash
Discount on short-term
investments (57) 263 29 361
Stock-based compensation costs 294 675 200 289
Amortization 2,244 6,883 2,459 7,651
Deferred revenue 184 844 503 1,286
Deferred grants - - (3) (215)
---------------------------------------------------------------------
2,941 6,577 2,000 3,291

Change in non-cash operating
items
Accounts receivable (1,129) (1,220) (2,398) (2,171)
Income taxes and tax credits 2,813 5,073 295 (1,621)
Inventories (1,367) (3,315) 687 (281)
Prepaid expenses (110) 286 (194) (256)
Accounts payable and accrued
liabilities 686 1,063 215 276
---------------------------------------------------------------------
3,834 8,464 605 (762)
---------------------------------------------------------------------

Cash flows from investing
activities
Additions to short-term
investments (200,308) (488,955)(259,832) (506,744)
Proceeds from disposal of
short-term investments 196,589 479,862 260,230 478,739
Additions to property, plant
and equipment and intangible
assets (403) (1,226) (238) (814)
---------------------------------------------------------------------

(4,122) (10,319) 160 (28,819)
---------------------------------------------------------------------

Cash flows from financing
activities
Repayment of long-term debt (31) (89) (28) (80)
Net proceeds of offering - - - 29,164
Share issue expenses (6) (6) (5) (171)
Exercise of stock options 31 130 28 246
Redemption of share capital - - - (3)
Resale of share capital - - - 13
---------------------------------------------------------------------

(6) 35 (5) 29,169

Effect of foreign exchange
rate changes on cash (7) 618 (20) (648)
---------------------------------------------------------------------

Change in cash (301) (1,202) 740 (1,060)

Cash - Beginning of period 4,258 5,159 3,566 5,366
---------------------------------------------------------------------

Cash - End of period $3,957 $3,957 $4,306 $4,306
---------------------------------------------------------------------
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