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

EXFO Electro-Optical Engineering Inc.

April 04, 2006 16:09 ET

EXFO Reports Strong Profitable Growth in Second Quarter

QUEBEC CITY, QUEBEC--(CCNMatthews - April 4, 2006) -



- Posts tenth consecutive quarter of sales growth at 30.0% year-over-
year and 11.2% sequentially to reach US$30.1 million

- Generates fifth consecutive quarter of GAAP net earnings at
US$1.4 million compared to break-even in the same period last year

- Announces and completes acquisition of Consultronics to strengthen
triple-play, VoIP and IPTV test offerings in access networks

- Launches seven new products including critical next-generation
SONET/SDH protocol test solutions up to 10 Gb/s and multi-medium,
multi-moduleFTB-200 Compact Platform


EXFO Electro-Optical Engineering Inc. (TSX:EXF.SV) (NASDAQ:EXFO) reported today strong profitable growth for its second quarter of fiscal 2006.

Sales increased 30.0% to US$30.1 million in the second quarter ended February 28, 2006, from US$23.1 million in the second quarter of 2005 and 11.2% from US$27.0 million in the first quarter of 2006. Net bookings reached US$28.3 million for a book-to-bill ratio of 0.94 in the second quarter of fiscal 2006 compared to US$24.9 million in the same period last year and US$30.6 million in the first quarter of 2006.

Gross margin amounted to 55.3% of sales in the second quarter of fiscal 2006 compared to 54.9% in the second quarter of 2005 and 55.4% in the first quarter of 2006.

GAAP net earnings in the second quarter of fiscal 2006 totaled US$1.4 million, or US$0.02 per diluted share, compared to net earnings of US$9,000, or US$0.00 per diluted share, in the same period last year and net earnings of US$0.4 million, or US$0.01 per diluted share, in the first quarter of 2006.

GAAP net earnings in the second quarter of fiscal 2006 included US$1.1 million in amortization of intangible assets and US$0.3 million in stock-based compensation costs.

During the second quarter, EXFO announced and subsequently completed its acquisition of the assets of Consultronics Limited, a leading supplier of test equipment for copper-based broadband access networks. Consultronics, which has been integrated into EXFO's Telecom Division, contributed about one month to the company's consolidated financial results in the second quarter.

"I am really pleased with our strong execution in the first half of fiscal 2006 as we reached several key strategic milestones," said Germain Lamonde, EXFO's Chairman, President and CEO. "First of all, we strengthened our position and product offering in the growing triple-play access test market through the acquisition of Consultronics. Secondly, we substantially grew our international business and customer base to enhance revenue diversification. Thirdly, we launched several new products including the all-important multi-medium, multi-module FTB-200 Compact Platform for the telecom SuperTech as well as next-generation SONET/SDH test modules up to 10 Gb/s for our FTB-200, FTB-400 and IQS-500 platforms. While achieving these goals, we extended our strong sequence of consecutive quarters of sales growth, cash flows from operations and GAAP net earnings to ten, nine and five, respectively."



Selected Financial Information
(In thousands of US dollars)

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Segmented results: Q2 2006 Q1 2006 Q2 2005
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(unaudited) (unaudited) (unaudited)
Sales:
Telecom Division $25,254 $22,076 $19,469
Life Sciences and Industrial
Division 4,812 4,968 3,666
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Total $30,066 $27,044 $23,135
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Earnings (loss) from operations:
Telecom Division $1,220 $488 $575
Life Sciences and Industrial
Division 188 195 (757)
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Total $1,408 $683 $(182)
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Other selected information:
GAAP net earnings $1,366 $355 $9
Amortization of intangible assets $1,136 $1,221 $1,225
Stock-based compensation costs $281 $274 $244
---------------------------------------------------------------------
---------------------------------------------------------------------


Operating Expenses

Selling and administrative expenses amounted to US$9.3 million, or 30.9% of sales, in the second quarter of fiscal 2006 compared to US$7.7 million, or 33.4% of sales, in the same period last year and US$9.1 million, or 33.5% of sales, in the first quarter of 2006.

Gross research and development expenses reached US$4.9 million, or 16.4% of sales, in the second quarter of fiscal 2006 compared to US$3.8 million, or 16.5% of sales, in the second quarter of 2005 and US$4.0 million, or 14.8% of sales, in the first quarter of 2006.

Net R&D expenses totaled US$3.9 million, or 13.0% of sales, in the second quarter of fiscal 2006 compared to US$2.8 million, or 12.0% of sales, in the same period last year and US$3.1 million, or 11.6% of sales, in the first quarter of 2006.



Second-Quarter Business Highlights

- Market expansion-EXFO increased its sales 30.0% year-over-year to
$30.1 million in the second quarter of fiscal 2006. Geographically,
sales outside of the Americas improved to 43.0% of total sales in
the second quarter of 2006 from 35.4% in the second quarter of
2005. In terms of customer spending, EXFO's largest customer
represented 8.5% of sales in the second quarter of 2006 compared to
21.4% in the same period last year. Excluding this customer, sales
would have increased 51.1% year-over-year in the second quarter of
2006. These latest results demonstrate EXFO's on-going efforts to
diversify its revenue base both on a geographic and customer basis.

- Profitability-EXFO was GAAP profitable for a fifth consecutive
quarter, reporting net earnings of US$1.4 million in the second
quarter of fiscal 2006. GAAP net earnings include US$1.4 million in
amortization of intangible assets and stock-based compensation
costs. The company also generated cash flows from operating
activities for a ninth consecutive reporting period with
US$5.4 million in the second quarter of 2006.

- Innovation-EXFO launched seven new products in the second quarter
including the two-slot FTB-200 Compact Platform for multi-layer and
multi-medium testing, the handheld AXS-100 OTDR for fiber-to-the-x
(FTTx) test applications, SONET/SDH test modules reaching
transmission rates up to 10 Gb/s for the FTB-200 Compact Platform,
and next-generation SONET/SDH test modules reaching 10 Gb/s for the
FTB-400 field-test and IQS-500 R&D/manufacturing platforms.
Altogether, EXFO launched 11 new test solutions in the first half
of fiscal 2006, while 34.7% of sales were derived from products
that have been on the market two years or less.

Updated Corporate Metrics

To reflect the Consultronics acquisition and mid-year results, EXFO
updated one out of three corporate metrics for fiscal 2006:

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Strategic Objective New Metric Former Metric After Q2 2006
---------------------------------------------------------------------
Increase sales through 25% sales 15% sales 27.7%
market-share gains growth growth
year-over- year-over-
year year
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Maximize profitability 5% operating 5% operating 3.7%
margin margin
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Focus on innovation 40% of sales 40% of sales 34.7%
from new from new
products (on products (on
the market the market
two years or two years or
less) less)
---------------------------------------------------------------------


"Given the impact of the Consultronics acquisition and solid execution leading to market-share gains in the first half of fiscal 2006, we're raising our sales growth metric to 25% year-over-year, while our key performance indicator for profitability is expected to reach an operating margin of 5% for the fiscal year despite additional amortization of intangible asset expenses related to the acquisition," Mr. Lamonde added. "With regard to innovation, we're continuing to target 40% of sales from new products, which is a lofty goal for any company in the high-tech industry."

Business Outlook

Based on a full contribution from Consultronics, newly launched products, a favorable market environment and internal momentum, EXFO forecasts sales between US$33.0 million and US$36.0 million and GAAP net earnings between US$0.01 and US$0.04 per diluted share for the third quarter ending May 31, 2006. GAAP net earnings include US$0.02 per diluted share in amortization of intangible assets and stock-based compensation costs.

Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to review its financial results for the second 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 April 11, 2006. The replay number is 1-402-977-9140 and the reservation number is 21284959. 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 majority 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 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 thousand of US dollars)

As at As at
February 28, August 31,
2006 2005
---------------------------------------------------------------------
(unaudited)

Assets

Current assets
Cash $4,777 $7,119
Short-term investments 99,064 104,883
Accounts receivable
Trade, less allowance for doubtful
accounts of $350
($352 as at August 31, 2005) 16,176 13,945
Other 2,003 2,007
Income taxes and tax credits recoverable 3,306 2,392
Inventories 24,237 17,749
Prepaid expenses 1,447 1,112
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151,010 149,207

Income taxes recoverable 439 459

Property, plant and equipment 17,162 13,719

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

Intangible assets 12,340 5,602

Goodwill 26,199 20,370
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$208,750 $190,957
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---------------------------------------------------------------------
Liabilities

Current liabilities
Accounts payable and accrued liabilities $18,666 $12,201
Deferred revenue 1,787 1,584
Current portion of long-term debt 237 134
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20,690 13,919

Deferred revenue 1,918 1,568

Government grants 1,978 1,872

Long-term debt 555 198
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25,141 17,557
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Contingency

Shareholders' Equity

Share capital 522,031 521,875
Contributed surplus 3,504 2,949
Deficit (380,125) (381,846)
Cumulative translation adjustment 38,199 30,422
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183,609 173,400
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$208,750 $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 Six months Three months Six months
ended ended ended ended
February 28, February 28, February 28, February 28,
2006 2006 2005 2005
----------------------------------------------------------------------
Sales $30,066 $57,110 $23,135 $44,732

Cost of sales (1,2) 13,440 25,504 10,431 20,656
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Gross margin 16,626 31,606 12,704 24,076
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Operating expenses
Selling and
administrative (1) 9,303 18,361 7,728 15,141
Net research and
development (1) 3,906 7,028 2,781 5,561
Amortization of
property, plant
and equipment 873 1,769 1,098 2,192
Amortization of
intangible assets 1,136 2,357 1,225 2,447
Restructuring charges - - 54 254
----------------------------------------------------------------------

Total operating
expenses 15,218 29,515 12,886 25,595
----------------------------------------------------------------------

Earnings (loss)
from operations 1,408 2,091 (182) (1,519)

Interest and other
income 828 1,383 625 1,349
Foreign exchange
gain (loss) (213) (531) 263 (772)
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Earnings (loss) before
income taxes 2,023 2,943 706 (942)

Income taxes 657 1,222 697 1,422
----------------------------------------------------------------------
Net earnings (loss)
for the period $1,366 $1,721 $9 $(2,364)
----------------------------------------------------------------------
----------------------------------------------------------------------
Basic net earnings
(loss) per share $0.02 $0.03 $- $(0.03)

Diluted net
earnings (loss)
per share $0.02 $0.02 $- $(0.03)

Basic weighted
average number of
shares outstanding
(000's) 68,591 68,581 68,528 68,495

Diluted weighted
average number of
shares outstanding
(000's) 69,152 69,105 68,968 68,978

(1) Stock-based
compensation costs
included in:
Cost of sales $30 $72 $32 $57
Selling and
administrative 198 379 165 252
Net research and
development 53 104 47 72
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$281 $555 $244 $381
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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 Six months Three months Six months
ended ended ended ended
February 28, February 28, February 28, February 28,
2006 2006 2005 2005
----------------------------------------------------------------------

Cash flows from
operating activities
Net earnings (loss)
for the period $1,366 $1,721 $9 $(2,364)
Add (deduct) items
not affecting cash
Discount on short-term
investments 447 618 470 320
Stock-based
compensation costs 281 555 244 381
Amortization 2,009 4,126 2,323 4,639
Deferred revenue (193) 100 275 660
----------------------------------------------------------------------
3,910 7,120 3,321 3,636

Change in non-cash
operating items
Accounts receivable 4,120 927 (381) (91)
Income taxes and
tax credits (461) (749) 1,914 2,260
Inventories (1,775) (2,908) (1,001) (1,948)
Prepaid expenses 88 (28) 380 396
Accounts payable and
accrued liabilities (446) 1,972 (82) 377
----------------------------------------------------------------------

5,436 6,334 4,151 4,630
----------------------------------------------------------------------
Cash flows from
investing activities
Additions to short-
term investments (279,670) (411,045) (223,561) (288,647)
Proceeds from
disposal and
maturity of short-
term investments 288,500 420,899 218,943 283,273
Additions to
property, plant
and equipment and
intangible assets (933) (1,568) (246) (823)
Business combination (17,497) (17,497) - -
----------------------------------------------------------------------

(9,600) (9,211) (4,864) (6,197)
----------------------------------------------------------------------
Cash flows from
financing activities
Repayment of long-
term debt (42) (74) (30) (58)
Exercise of stock
options 137 156 13 99
----------------------------------------------------------------------
95 82 (17) 41

Effect of foreign
exchange rate changes
on cash 359 453 140 625

----------------------------------------------------------------------

Change in cash (3,710) (2,342) (590) (901)

Cash - Beginning
of period 8,487 7,119 4,848 5,159
----------------------------------------------------------------------

Cash - End of period $4,777 $4,777 $4,258 $4,258
----------------------------------------------------------------------
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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