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

EXFO Electro-Optical Engineering Inc.

January 10, 2006 15:58 ET

EXFO Increases Sales for a Ninth Consecutive Quarter

QUEBEC CITY, QUEBEC--(CCNMatthews - Jan. 10, 2006) - EXFO Electro-Optical Engineering Inc. (TSX:EXF.SV)(NASDAQ:EXFO)



- Grows sales 25.2% and bookings 30.9% compared to same period in
2005
- Posts fourth consecutive quarter of GAAP net earnings
- Agrees to acquire assets of privately held Consultronics Limited to
address broadband access test market
- Launches six new optical, protocol and access test solutions during
and after quarter-end


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

Sales increased 25.2% to US$27.0 million in the first quarter ended November 30, 2005, from US$21.6 million in the first quarter of 2005 and 2.8% from US$26.3 million in the fourth quarter of 2005. Net bookings improved 30.9% to US$30.6 million for a book-to-bill ratio of 1.13 in the first quarter of fiscal 2006 from US$23.3 million in the same period last year and 24.1% from US$24.6 million in the fourth quarter of 2005.

Gross margin progressed to 55.4% of sales in the first quarter of fiscal 2006 from 52.7% in the first quarter of 2005 and 54.7% in the fourth quarter of 2005.

GAAP net earnings in the first quarter of fiscal 2006 totaled US$355,000, or US$0.01 per diluted share, compared to a net loss of US$2.4 million, or US$ 0.03 per diluted share, in the same period last year and net earnings of US$454,000, or US$0.01 per diluted share, in the fourth quarter of 2005.

GAAP net earnings in the first quarter of fiscal 2006 included US$1.2 million in amortization of intangible assets and US$274,000 in stock-based compensation costs.

Subsequent to the quarter-end, EXFO announced that it is acquiring substantially all the assets of Consultronics Limited in an all-cash transaction valued at C$22.8 million (US$19.8 million), including debt assumption and other acquisition-related costs. Consultronics, a privately held company based in Toronto with operations in the United Kingdom and Hungary, is a leading vendor of xDSL, IPTV and VoIP test solutions for the broadband access market. The transaction, which is slated to close before mid-March, is expected to be neutral for the remainder of fiscal 2006 and accretive in fiscal 2007, taking into account approximately US$2.0 million per year in additional amortization of intangible assets.

"With nine consecutive quarters of sales growth and four consecutive quarters of GAAP profitability, I am excited about EXFO's growth prospects in key market segments as reflected by our strong sales, bookings and earnings numbers," said Germain Lamonde, EXFO's Chairman, President and CEO. "The announced acquisition of Consultronics, as well as the launch of our modular FTB-200 Compact Platform and AXS-100 OTDR for access networks, should enable us to build on this momentum by significantly strengthening our product and technology offering in the fast-growing broadband access and triple-play test markets. Combined with our leading position in optical access testing, long-standing relationships with several network operators worldwide, and very strong innovation pipeline, I am optimistic that EXFO will continue gaining market approval from customers and ultimately create value for shareholders."



Selected Financial Information
(In thousands of US dollars)

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Segmented results: Q1 2006 Q4 2005 Q1 2005
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(unaudited) (unaudited) (unaudited)

Sales:
Telecom Division $22,076 $21,174 $17,431
Life Sciences and
Industrial Division 4,968 5,130 4,166
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Total $27,044 $26,304 $21,597
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Earnings (loss) from
operations:
Telecom Division $488 $523 $(980)
Life Sciences and
Industrial Division 195 288 (357)
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Total $683 $811 $(1,337)
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Other selected
information:
GAAP net earnings
(loss) $355 $454 $(2,373)
Amortization of
intangible assets $1,221 $1,198 $1,222
Stock-based
compensation costs $274 $288 $137
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---------------------------------------------------------------------


Operating Expenses

Selling and administrative expenses amounted to US$9.1 million, or 33.5% of sales, in the first quarter of fiscal 2006 compared to US$7.4 million, or 34.3% of sales, in the same period last year and US$8.1 million, or 30.7% of sales, in the fourth quarter of 2005.

Gross research and development expenses totaled US$4.0 million, or 14.8% of sales, in the first quarter of fiscal 2006 compared to US$3.8 million, or 17.6% of sales, in the first quarter of 2005 and US$4.1 million, or 15.8% of sales, in the fourth quarter of 2005.

Net R&D expenses totaled US$3.1 million, or 11.6% of sales, in the first quarter of fiscal 2006 compared to US$2.8 million, or 12.9% of sales, in the same period last year and US$3.3 million, or 12.5% of sales, in the fourth quarter of 2005.



First-Quarter Business Highlights

- Market expansion-EXFO increased sales 25.2% and bookings 30.9%
year-over year, even though its top customer accounted for 13.2%
of sales in the first quarter of fiscal 2006 compared to 25.0% in
the same period last year. Combined with EXFO's selection as sole-
source supplier for all of Deutsche Telekom's optical time-domain
reflectometry (OTDR) applications, these results demonstrate the
company's ongoing progress in diversifying its revenue base.
- Profitability-EXFO was profitable on a GAAP basis for a fourth
consecutive quarter, reporting net earnings of US$355,000 in the
first quarter of fiscal 2006. GAAP net earnings include US$1.5
million in amortization of intangible assets and stock-based
compensation costs. The company also generated earnings from
operations for a third consecutive quarter with a total of
US$683,000.
- New products-EXFO strengthened its protocol product offering with
the launch of four new products in the first quarter, including 10
Gigabit Ethernet and Fibre Channel test solutions for the
manufacturing and lab environments; a Transmission Control
Protocol/Internet Protocol (TCP/IP) tester for the simpler
deployment of xDSL-based residential broadband Internet services;
as well as the EXpertNPA protocol analysis software for field-test
applications on Ethernet networks.
- Subsequent to the quarter-end, EXFO released the new FTB-200
Compact Platform, a lightweight two-slot unit compatible with test
modules from the widely deployed FTB-400 Universal Test System.
The company also introduced its AXS-100 handheld OTDR for the
broadband access test market. Sales of new products on the market
two years or less accounted for 35.6% of sales in the first
quarter.


"I am confident that our global sales channels will leverage Consultronics' rich product portfolio once the acquisition is closed, as well as our significant new product introductions, to increase our revenue streams," Mr. Lamonde said. "As part of our growth strategy, this acquisition will be a key step in strongly positioning EXFO for the access and triple-play test markets. I look forward to welcoming Consultronics employees and continue delivering on our growth plan."

Business Outlook

Although EXFO's second quarter is usually affected by seasonality, the company forecasts sales between US$26.0 million and US$29.0 million and GAAP net earnings (loss) between a net loss of US$0.01 per diluted share and net earnings of US$0.02 per diluted share for the second quarter ending Feb. 28, 2006. GAAP net earnings (loss) include US$0.02 per diluted share in amortization of intangible assets and stock-based compensation costs.

The business outlook provided for the second quarter of fiscal 2006 excludes the Consultronics acquisition, since the transaction is expected to close by mid-March. Key performance metrics set forth for fiscal 2006 will be updated at the end of the second quarter to reflect mid-year results and the impact of the Consultronics acquisition.

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 2006. To listen to the conference call and participate in the question period via telephone, dial 1-416-620-2406. 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 7 p.m. on January 17, 2006. The replay number is 1-402-977-9141 and the reservation number is 21276335. The audio Webcast of the conference call will also be available on EXFO's Website at www.exfo.com, under the Investors section.

About EXFO

EXFO is a recognized test and measurement expert in the global telecommunications industry. The Telecom Division, which represents the company's main business activity, 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 and a leading supplier of protocol and access test solutions to enable triple-play deployments and converged IP networking. Its PC/Windows-based modular 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, which leverages several core telecom technologies, offers value-added solutions in the life sciences and high-precision assembly sectors based on advanced spot-curing, fluorescence microscopy and nanopositioning solutions. 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. 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 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. 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
November 30, August 31,
2005 2005
-------------- --------------
(unaudited)


Assets

Current assets
Cash $8,487 $7,119
Short-term investments 105,655 104,883
Accounts receivable
Trade, less allowance
for doubtful accounts
of $352
($352 as at August 31, 2005) 17,345 13,945
Other 2,126 2,007
Income taxes and tax
credits recoverable 2,761 2,392
Inventories 19,217 17,749
Prepaid expenses 1,249 1,112
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156,840 149,207

Income taxes recoverable 434 459

Property, plant and equipment 13,755 13,719

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

Intangible assets 4,489 5,602

Goodwill 20,745 20,370
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$197,863 $190,957
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Liabilities

Current liabilities
Accounts payable and accrued
liabilities $14,903 $12,201
Deferred revenue 1,693 1,584
Current portion of long-term debt 134 134
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16,730 13,919

Deferred revenue 1,813 1,568

Government grants 1,906 1,872

Long-term debt 166 198
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20,615 17,557
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Contingency

Shareholders' Equity

Share capital 521,894 521,875
Contributed surplus 3,223 2,949
Deficit (381,491) (381,846)
Cumulative translation adjustment 33,622 30,422
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177,248 173,400
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$197,863 $190,957
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EXFO Electro-Optical Engineering Inc.
Interim Unaudited Consolidated Statements of Earnings

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


Three months ended
November 30,
---------------------

2005 2004
----------- ----------

Sales $27,044 $21,597

Cost of sales (1,2) 12,064 10,225
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Gross margin 14,980 11,372
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Operating expenses
Selling and administrative(1) 9,058 7,413
Net research and development(1) 3,122 2,780
Amortization of property,
plant and equipment 896 1,094
Amortization of intangible assets 1,221 1,222
Restructuring charges - 200
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Total operating expenses 14,297 12,709
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Earnings (loss) from operations 683 (1,337)

Interest and other income 555 724
Foreign exchange loss (318) (1,035)
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Earnings (loss) before income taxes 920 (1,648)

Income taxes 565 725
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Net earnings (loss) for the period $355 $(2,373)
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Basic and diluted net earnings
(loss) per share $0.01 $(0.03)

Basic weighted average number of
shares outstanding (000's) 68,571 68,463

Diluted weighted average number
of shares outstanding (000's) 69,058 68,990

(1) Stock-based compensation
costs included in:
Cost of sales $42 $25
Selling and administrative 181 87
Net research and development 51 25
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$274 $137
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(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 months ended
November 30,
-----------------------

2005 2004
---------- -----------
Cash flows from operating activities
Net earnings (loss) for the period $355 $(2,373)
Add (deduct) items not affecting cash
Discount on short-term investments 171 (150)
Stock-based compensation costs 274 137
Amortization 2,117 2,316
Deferred revenue 293 385
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3,210 315
Change in non-cash operating items
Accounts receivable (3,193) 290
Income taxes and tax credits (288) 346
Inventories (1,133) (947)
Prepaid expenses (116) 16
Accounts payable and accrued liabilities 2,418 459
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898 479
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Cash flows from investing activities
Additions to short-term investments (131,375) (65,086)
Proceeds from disposal and maturity
of short-term investments 132,399 64,330
Additions to property, plant and
equipment and intangible assets (635) (577)
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389 (1,333)
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Cash flows from financing activities
Repayment of long-term debt (32) (28)
Exercise of stock options 19 86
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(13) 58

Effect of foreign exchange rate
changes on cash 94 485
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Change in cash 1,368 (311)

Cash - Beginning of period 7,119 5,159
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Cash - End of period $8,487 $4,848
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Contact Information

  • EXFO Electro-Optical Engineering Inc.
    Vance Oliver
    Manager, Investor Relations
    (418) 683-0913, Ext. 3733
    vance.oliver@exfo.com