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

EXFO Electro-Optical Engineering Inc.

October 25, 2006 16:02 ET

EXFO Reports Strong Sales and Earnings Growth for Fiscal 2006

- Sales increase 31.9% year-over-year to US$128.3 million - GAAP net earnings reach US$8.1 million compared to a net loss of US$1.6 million in 2005 - Gross margin improves to 55.3% - Cash flows from operating activities amount to US$12.3 million

QUEBEC CITY, CANADA--(CCNMatthews - Oct. 25, 2006) - EXFO Electro-Optical Engineering Inc. (TSX:EXF)(NASDAQ:EXFO) reported today strong sales and earnings growth for the fiscal year ended August 31, 2006.

Sales increased 31.9% to US$128.3 million in fiscal 2006 from US$97.2 million in 2005. In the fourth quarter of 2006, sales reached US$35.7 million compared to US$35.4 million in the previous quarter and US$26.3 million in the fourth quarter of 2005. Net bookings totaled US$32.6 million in the fourth quarter of fiscal 2006 compared to US$37.9 million (-14.0%) in the third quarter of 2006 and US$24.6 million (+32.6%) in the fourth quarter of 2005. Gross margin improved to 55.3% of sales in fiscal 2006 from 54.7% in 2005. In the fourth quarter of 2006, gross margin amounted to 54.3% compared to 56.4% in the previous quarter and 54.7% in the fourth quarter of 2005.

GAAP net earnings totaled US$8.1 million, or US$0.12 per diluted share, in fiscal 2006 compared to a net loss of US$1.6 million, or US$0.02 per diluted share, in 2005. GAAP net earnings in 2006 included US$4.4 million in amortization of intangible assets, US$1.0 million in stock-based compensation costs, US$0.6 million in impairment of long-lived assets, and a non-recurring government revenue grant of US$1.3 million.

In the fourth quarter of 2006, GAAP net earnings amounted to US$2.9 million, or US$0.04 per diluted share, compared to US$3.5 million, or US$0.05 per diluted share, in the third quarter of 2006 and US$0.5 million, or US$0.01 per diluted share, in the fourth quarter of 2005. GAAP net earnings included US$1.0 million in amortization of intangible assets and US$0.2 million in stock-based compensation costs in the fourth quarter of 2006.

"Clearly, EXFO stands out in the telecom industry with 12 consecutive quarters of sales growth, a 31.9% year-over-year sales increase in fiscal 2006, as well as compound annual growth rates (CAGRs) of 27.5% and 20.9% over the last 3 and 10 years, respectively, despite the 2001 telecom crisis," said Germain Lamonde, EXFO's Chairman of the Board, President and CEO. "Like every year since our inception in 1985, I believe that we have increased sales faster than our end-markets. Our bottom-line improved even faster than our top-line in recent years with GAAP net earnings of US$8.1 million in 2006, thus extending our sequence to seven consecutive quarters of GAAP profitability. These performance highlights, which must be weighed against the strengthening Canadian dollar, larger customers consolidating and competitors intensifying pricing pressure, reflect ongoing market-share gains in each division as well as operating efficiencies throughout the company."

"Based on long-term planning and judicious R&D investments in optical, protocol and copper access testing, I believe that EXFO is well-positioned to benefit from the migration of carriers to converged, IP-based networking as they increase bandwidth and accelerate triple-play service deployments," Mr. Lamonde added. "We intend to continue strengthening our sales, marketing and R&D teams in order to build on our competitive advantage in the marketplace. As well, I am pleased to report that we surpassed two key corporate performance goals for fiscal 2006 and have announced ambitious performance metrics for 2007, as we maintain our focus on growing faster than our end-markets, increasing net earnings faster than revenues, and achieving these results through excellence in product innovation. I would like to thank all our employees for their outstanding commitment and real passion to serve our customers, since we could not aspire to reach such lofty heights without their wholehearted contribution."



Selected Financial Information
(In thousands of US dollars)
---------------------------------------------------------------------
Segmented
results: Q4 2006 Q3 2006 Q4 2005 FY 2006 FY 2005
---------------------------------------------------------------------
(unaudited)(unaudited)(unaudited)(unaudited)
Sales:
Telecom Division $30,111 $29,935 $21,174 $107,376 $80,120
Life Sciences &
Industrial
Division 5,622 5,475 5,130 20,877 17,096
---------------------------------------------------------------------
Total $35,733 $35,410 $26,304 $128,253 $97,216
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Earnings (loss)
From
operations:
Telecom
Division $1,275 $3,696 $523 $6,679 $763
Life Sciences &
Industrial
Division 1,088 (88) 288 1,383 (962)
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Total $2,363 $3,608 $811 $8,062 $(199)
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Other selected information:

GAAP net earnings
(loss) $2,910 $3,504 $454 $8,135 $(1,634)
Amortization of
intangible
assets $1,043 $994 $1,198 $4,394 $4,836
Stock-based
compensation
costs $213 $264 $288 $1,032 $963
Impairment of
long-lived assets $- $604 $- $604 $-
Government grants
revenue $- $(1,307) $- $(1,307) $-
Restructuring
charges $- $- $- $- $292
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Operating Expenses

Selling and administrative expenses amounted to US$40.3 million, or 31.4% of sales, in fiscal 2006 compared to US$31.8 million, or 32.7% of sales, in 2005. In the fourth quarter of 2006, selling and administrative expenses totaled US$10.9 million, or 30.4% of sales, compared to US$11.1 million, or 31.3% of sales, in the third quarter of 2006 and US$8.1 million, or 30.7% of sales, in the fourth quarter of 2005.

Gross research and development (R&D) expenses reached US$19.5 million, or 15.2% of sales, in fiscal 2006 compared to US$15.9 million, or 16.3% of sales, in 2005. In the fourth quarter of 2006, gross R&D expenses attained US$5.2 million, or 14.6% of sales, compared to US$5.3 million, or 15.1% of sales, in the previous quarter and US$4.1 million, or 15.8% of sales, in the fourth quarter of 2005.

Net R&D expenses totaled US$15.4 million, or 12.0% of sales in fiscal 2006, compared to US$12.2 million, or 12.5% of sales, in 2005. In the fourth quarter of 2006, net R&D expenses amounted to US$4.3 million, or 12.0% of sales, compared to US$4.1 million, or 11.6% of sales, in the third quarter of 2006 and US$3.3 million, or 12.5% of sales, in the fourth quarter of 2005.

Fiscal 2006 and Fourth-Quarter Business Highlights

- Market expansion -- EXFO increased its sales 31.9% year-over-year to US$128.3 million in fiscal 2006 largely due to market-share gains in the telecom test equipment market. At the beginning of the fiscal year, the company had established its corporate sales growth metric at 15%, but the strong performance in the first half of the year coupled with the Consultronics acquisition prompted it to raise the bar to 25%. The Telecom Division and Life Sciences & Industrial Division delivered year-over-year sales growth of 34.0% and 22.1%, respectively. Confirming market-share gains in the optical test equipment market, Frost & Sullivan named EXFO recipient of the Growth Strategy Leadership Award for the third consecutive year. Continuing efforts to diversify its end-markets, EXFO expanded into broadband copper access testing for IPTV and VoIP applications through the Consultronics acquisition. In terms of customer diversity and market expansion, EXFO's top customer represented 13.8% of sales in fiscal 2006 compared to 23.3% in 2005, while sales to Europe, Middle East and Africa (EMEA) and Asia-Pacific improved from 31.9% of sales in 2005 to 40.3% in 2006.

- Profitability -- EXFO completed fiscal 2006 with GAAP net earnings of $8.1 million or $0.12 per diluted share. In the fourth quarter, GAAP net earnings totaled US$2.9 million or US$0.04 per diluted share. Looking at operating margin, it reached 6.3% of sales in 2006, while the company's published goal was 5%. For every additional sales dollar in fiscal 2006 over 2005, US$0.31 flowed to earnings before income taxes. The company also generated US$12.3 million in cash flows from operating activities in 2006, raising its cash and short-term investments to $111.3 million.

- Innovation -- EXFO launched two new products in the fourth quarter, including optical transport network (OTN-1/2) testing functionalities for its Transport Blazer field and manufacturing/R&D test modules and the enhanced CoVALT, a handheld tester for digital subscriber line (DSL) circuits and voice-over Internet Protocol (VoIP) services. Altogether, the company released 18 new products in fiscal 2006, compared to 15 in 2005, to strengthen its market position in protocol and IP testing as well as FTTx and broadband deployment testing. Innovation delivered a strong return on investment with products on the market two years or less accounting for 37.1% of sales in 2006, while the stated goal was 40%.

Business Outlook

EXFO forecasts sales between US$34.0 million and US$37.0 million and GAAP net earnings between US$0.02 and US$0.05 per diluted share for the first quarter of fiscal 2007. GAAP net earnings include US$0.02 per diluted share in amortization of intangible assets and stock-based compensation costs

Corporate Performance Objectives for Fiscal 2007/Results for Fiscal 2006

EXFO disclosed the following three corporate objectives and related metrics for fiscal 2007 as well as results for fiscal 2006. It should be noted that fiscal 2007 metrics are not guidance, but goals that management has set out to achieve.



-------------------------------------------------------------------
Objectives 2007 2006 2006
Metrics Metrics Results
-------------------------------------------------------------------
Increase sales (% of year-over-year
growth) 20% 25%(i) 31.9%
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Maximize profitability (operating margin in %) 7% 5% 6.3%
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Focus on innovation (sales % from
products less than 2 years on market) 35% 40% 37.1%
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(i) Sales growth metric was updated at the end of the second quarter in 2006 to reflect mid-year results and Consultronics acquisition.

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 2006. To listen to the conference call and participate in the question period via telephone, dial 1-416-620-5683. 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 November 1, 2006. The replay number is 1-402-977-9141 and the reservation number is 21304423. 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 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 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,
2006 2005
--------------------------------------------------------------
(unaudited)
Assets
Current assets
Cash $6,853 $7,119
Short-term investments 104,437 104,883
Accounts receivable
Trade, less allowance for doubtful
accounts of $451 ($352 as at
August 31, 2005) 20,891 13,945
Other 2,792 2,007
Income taxes and tax credits
recoverable 2,201 2,392
Inventories 24,623 17,749
Prepaid expenses 1,404 1,112
--------------------------------------------------------------
163,201 149,207

Income taxes recoverable 476 459

Property, plant and equipment 17,392 13,719

Long-lived asset held for sale - 1,600

Intangible assets 10,948 5,602

Goodwill 27,142 20,370
--------------------------------------------------------------
$219,159 $190,957
--------------------------------------------------------------
--------------------------------------------------------------
Liabilities

Current liabilities
Accounts payable and accrued
liabilities $17,337 $12,201
Deferred revenue 1,772 1,584
Current portion of long-term debt 107 134
--------------------------------------------------------------
19,216 13,919

Deferred revenue 2,632 1,568

Government grants 723 1,872

Long-term debt 354 198
--------------------------------------------------------------
22,925 17,557
--------------------------------------------------------------

Shareholders' Equity

Share capital 148,921 521,875
Contributed surplus 3,776 2,949
Deficit - (381,846)
Cumulative translation adjustment 43,537 30,422
--------------------------------------------------------------
196,234 173,400
--------------------------------------------------------------
$219,159 $190,957
--------------------------------------------------------------
--------------------------------------------------------------






EXFO Electro-Optical Engineering Inc.
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,
2006 2006 2005 2005
---------------------------------------------------------------------
Sales $35,733 $128,253 $26,304 $97,216
Cost of sales (1,2) 16,318 57,275 11,925 44,059
---------------------------------------------------------------------
Gross margin 19,415 70,978 14,379 53,157
---------------------------------------------------------------------
Operating expenses
Selling and
administrative (1) 10,857 40,298 8,072 31,782
Net research and
development (1) 4,281 15,404 3,287 12,190
Amortization of property,
plant and equipment 871 3,523 1,011 4,256
Amortization of
intangible assets 1,043 4,394 1,198 4,836
Impairment of long-lived
assets - 604 - -
Government grants - (1,307) - -
Restructuring and other
charges - - - 292
---------------------------------------------------------------------

Total operating expenses 17,052 62,916 13,568 53,356
---------------------------------------------------------------------

Earnings (loss) from
operations 2,363 8,062 811 (199)
Interest and other income 1,074 3,253 558 2,524
Foreign exchange gain (loss) 17 (595) (507) (1,336)
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Earnings before income taxes 3,454 10,720 862 989

Income taxes 544 2,585 408 2,623
---------------------------------------------------------------------
Net earnings (loss) for
the period $2,910 $8,135 $454 $(1,634)
---------------------------------------------------------------------
Basic and diluted net
earnings (loss) per
share $0.04 $0.12 $0.01 $(0.02)

Basic weighted average
number of shares
outstanding (000's) 68,735 68,643 68,562 68,526

Diluted weighted average
number of shares
outstanding (000's) 69,346 69,275 68,996 68,981

(1) Stock-based
compensation
costs included in:
Cost of sales $16 $127 $42 $143
Selling and
administrative 142 701 184 626
Net research and
development 55 204 62 194
---------------------------------------------------------------------
$213 $1,032 $288 $963
---------------------------------------------------------------------
---------------------------------------------------------------------

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




EXFO Electro-Optical Engineering Inc.
Interim Consolidated Statements of Deficit and Contributed Surplus
(in thousands of US dollars)


Deficit
Twelve months ended August 31,
---------------------------------------------------------------
2006 2005
---------------------------------------------------------------
(unaudited)

Balance -- Beginning of period $(381,846) $(380,212)

Deduct (add)
Net earnings (loss) for the period 8,135 (1,634)
Elimination of deficit by
reduction of share capital 373,711 --
---------------------------------------------------------------

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




Contributed surplus

Twelve months ended August 31,
---------------------------------------------------------------
2006 2005
---------------------------------------------------------------
(unaudited)

Balance -- Beginning of period $2,949 $1,986

Add (deduct)
Stock-based compensation costs 1,027 963
Reclassification of stock-based
compensation costs to share
capital upon exercise of stock awards (200) --
Premium on resale of share capital -- --
---------------------------------------------------------------

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





EXFO Electro-Optical Engineering Inc.
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,
2006 2006 2005 2005
---------------------------------------------------------------------
Cash flows from operating
activities
Net earnings (loss)
for the period $2,910 $8,135 $454 $(1,634)
Add (deduct) items not
affecting cash
Discount on short-term
investments (872) (229) (565) (302)
Stock-based
compensation costs 213 1,032 288 963
Amortization 1,914 7,917 2,209 9,092
Impairment of long-lived
assets - 604 - -
Government grants - (1,307) - -
Deferred revenue 538 786 133 977
---------------------------------------------------------------------
4,703 16,938 2,519 9,096

Change in non-cash
operating items
Accounts receivable 1,521 (2,637) 382 (838)
Income taxes and tax
credits 1,690 329 1,023 6,096
Inventories 803 (2,287) 2,616 (699)
Prepaid expenses 260 79 258 544
Accounts payable and
accrued liabilities (759) (144) (1,227) (164)
---------------------------------------------------------------------
8,218 12,278 5,571 14,035
---------------------------------------------------------------------
Cash flows from investing
activities
Additions to short-term
investments (34,655) (673,289) (96,710) (585,665)
Proceeds from disposal
and maturity of
short-term investments 29,845 681,500 94,345 574,207
Additions to property,
plant and equipment
and intangible assets (847) (3,378) (275) (1,501)
Business combination, net
of cash acquired (338) (18,054) - -
---------------------------------------------------------------------

(5,995) (13,221) (2,640) (12,959)
---------------------------------------------------------------------

Cash flows from financing
activities
Repayment of long-term
debt (257) (415) (32) (121)
Exercise of stock
options 54 557 18 148
Share issue expenses - - - (6)
---------------------------------------------------------------------
(203) 142 (14) 21

Effect of foreign exchange
rate changes on cash (148) 535 245 863
---------------------------------------------------------------------

Change in cash 1,872 (266) 3,162 1,960

Cash -- Beginning of period 4,981 7,119 3,957 5,159
---------------------------------------------------------------------

Cash -- End of period $6,853 $6,853 $7,119 $7,119
---------------------------------------------------------------------
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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