Q3 2020 EXFO Inc Earnings Call
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Third quarter conference call for fiscal 2020.
At this time, all participants trying to listen only mode.
The conference will be.
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He said I worry about to begin.
Good day, and welcome to actually third quarter conference call for fiscal 2020.
Today's conference is being recorded.
I would like to turn the conference Overachieve Oliver Director of Investor Relations. Please go ahead Sir.
Good afternoon, and welcome to expose third quarter conference call for fiscal 2020.
Me on the line today are fit as well they pick source, Chief Executive officer, and shelf seminal CFO and Vice President Finance.
Minimal expose founder and executive Chairman will also be available to answer questions. During the Q1 day period.
A reminder, that this conference call include certain forward looking statements and our estimates concerning our intents beliefs or expectations regarding future events that may affect ex fuel.
Please note that such comments, maybe affected by risks and uncertainties, including the impact of the Corona buyers pandemic, our employees customers and global operations.
This may cause actual results of the company to be materially different from those expressed or implied today.
More information about X. So I encourage you to review our form 20-F.
Well I was a securities and Exchange Commission.
Our annual information form is available that's dangerous securities commissions as well.
No no yeah forest numbers, maybe used during this conference call. A reconciliation of these non I FRS results with forest numbers is available in the Q3 2020 news release on our website. All dollar amounts in this conference call are expressing U.S. dollar schools, otherwise indicated so without further delay I will turn the.
Well over two Phillips.
Thanks, Nancy and good afternoon, everyone.
Well, despite constraints and restrictive measures in many countries excellent navigate through the I call. It a virus epidemic with a solid financial performance in the third quarter of 2020.
The other sales at 66 million and an eye as far as net earnings of 3.2 million in the third quarter.
In terms of adjusted EBITDA and amounted to $10.7 million or 16 dot 1% of ourselves.
He is encouraging results were achieved by proactively implementing cost controls.
And also benefiting from a wage subsidy of 3.39.
In the Canadian government to help maintain employment drinking depends on it.
Now how to EXL not benefiting from the government away subsidy, our adjusted EBITDA margin would still have been in double digit in this quarter.
Our bookings were down 15% year over year for a softer book to Bill racial although one.
However, we are pleased that our test and measurement bookings dropped nearly 7% year over year Bar Sox related business has more severely affected by depends on it.
On the other had we ask that nicely significant size deal quoting the fourth quarter, which I will address that Larry.
Now, let's take a closer look a lot harder to major product families perform in the third quarter.
2020.
In terms of that test and measurement.
Sales were down moderately 7.5% year over year again, mainly due to the impact of the krona rise pandemic.
More specifically government imposed restrictions and seven several countries within maley Americas in Europe during a quarter.
And then it our ability to ship test instruments and deliver services.
We also saw pause.
Large scale fiber installations with communication service providers.
Fiber to the home in fiber to the antenna mainly a while our service providers will mainly focusing during that period on maintenance work.
However, as economies are gradually reopening around the world. We are witnessing an increasing our funnel in our opportunities for optical and high speed test solution.
In addition.
That's optical test solutions for our manufacturing and lab market continues to Delta deliver healthy girls, mainly in China, where we've seen an acceleration of fiveg investments.
Well, that's service assurance systems and service inside sales decreased 16% year over year and again largely due to the current a virus and Danny.
Market dynamics, however are different from this business.
And I was longer selling and revenue recognition cycles, and obviously our test business.
And with the pandemic affecting our ability to close deals and install new systems.
Spiked to go on a virus and.
Our current customer engagements on our automated end to end troubleshooting solution still cloud Native network continues to expand.
In fact, our proof of concept trials far and all this anti monitoring and troubleshooting solutions I've now increased from three to seven and this and the third quarter.
Well my sense, I use and machine learning to detect predict that work anomalies in real time.
And it can pinpoint which subscribers impacted where it hasn't happened and for how long as well as healthy diagnostics the root cause.
For rapid resolution.
Okay listen there is an integral part of Expos recently launched Nova adaptive service assurance platform.
The first intelligent automation solution, enabling mobile network operators to deliver alter our libel and high quality service experience in Fourg and Fiveg environment.
Looking ahead remains difficult to forecast and Bennick impact on the global economy.
But given that the long term drivers like fiber and Fiveg deployments remain intact, we're optimistic that expos revenue levels will improve in upcoming quarters and the operating leverage of our business model will be fully demonstrate.
We continue to witness increased RFP activity and trials far sent us Assurant solutions for Fiveg core applications.
We expect positive decisions on a number of these RFP to be made in this fourth quarter of our fiscal 20 Twond.
So at this point I'd like to turn the call over the pie. So you can cover our financials.
Thank you said it saved decreased 10.1%.
To 66.1, new you'll need the <unk> 2000, 2020 from 73.6 million in that took what it doesn't 19.
When you do the ongoing bank of the occur on the virus, sending me and negative currency fluctuation year over year.
Looking at its been in mentioned decreased 15% to 59.1 million in that took what else does on 2020 from 69.6 million in the same fail last year for book to Bill Reid show a point 89.
Likewise, the prepping booking can be attributed to the could be nice in many me and you get these currency impact.
Gross margin before depreciation and amortization amounted to 57.7% of seed in the third party. It doesn't 2020 compared to 58.6% industrial quartets doesn't 19.
Our gross margin was negatively affected by lower sale Liberty over years, as a result, because nobody spending meat, which prevented us from better absorbing all fixed costs.
This was supported by city upset by the wage subsidy I'll begin genuine him in Q3 2020.
In terms of operating expenses, selling and administrative expenses totaled 18.9 million all 28.6% upstate into third quarter of 2020, compared to 23.8 million or 32.3% of seed in the same thing or last year.
These 4.9 million decrease in it Ginnie expenses year over year, mainly reflects a 1.1, new young the wage subsidy beta kids and given that men to meet you de facto defending me.
The adoption of our efforts 16, I suppose it's supposed to be back up quite familiar young on Oracle Ginny expense year over year invention Warner minds restriction, although I guess form of transportation you did depended me result, so it resulted in lower travel expenses year over year.
Net R&D expenses reached 9.2, many or do anything 0.9 years I've seen in that took one it doesn't 20 compared to 20 million or 16.2% of seed in the same field last year.
Likewise, the 2.8 million decrease in the net R&D expenses can be attributed to the candidates in the wage subsidy program and difference you didn't thanks, Yeah. That's on the surface you've seen in the net R&D expenses year over year.
Hi, sorry, Anthony totaled 3.2 medium or six cents per share indistinct what it doesn't 2020.
Now turning into three or four to 2020 included one point Fourm young <unk> after tax amongst each other intangible assets.
Well find muni and stock based compensation costs and point 1 million young employing foreign exchange loss.
Now turning into circle under 2020 odd to include two points problem in young fall. After thanks wage subsidy bend. It gives you can give them in two as maintaining and play means are independent.
In companies, then I have furnace knits, earning amounted to 21000 or several cents fair share in the <unk> of 2019.
Geographically the Americas accounted for 45% of still sell seeking to treat 20.
I mean that East Africa represented 32% White is Jeff This is Pete totaled 20%.
Companies on the seats this was 51%, 30% and 90% among the three geographic region in the third quarter 2019.
Sam a customer mix on a.
Accounted for 9.19, 0.6% of football season, due to be 21 analyst up three represented 18.2%.
Turning to a few key points independently or cash position decreased to 20.5 million at the end of Q3 20 from 20.9 million in the previous water.
This point Fourmillion decrease in means you used to 16.9 million Casco use vital for edition, which is really largely related to the increase of our receivables due a more normal liver compared to previous quarters.
The 1.9 million supported her sister kept and that's it and 1.1 million unfold the repayment of lease obligation and all of them lives.
These cash outflow were mostly offset by beginning treat you know bank loan by 19.9 million.
At the end of Q O Q3, 20, EXL at a net debt position of 17.5, many young and I believe the revolving credit supposed to eat up to 39.7 million.
During the third quarter, we extended our revolving facility by 20 million change then daughters on field may 31st 2021.
I just want that we're starting to turn over to deal reserved for the stuff that you and thank you.
Thank you very much if he would like to ask a question on today's call. Please press star one on your telephone keypad.
<unk> Speakerphone, please pick up your handset before passing the corresponding digits. Once again. Please press star one at this time to ask a question.
Well take our first question from Daniel Chan.
TD Securities. Please go ahead.
Hi, guys. Thanks for taking my question.
These numbers, where it doesn't matter that I expect this congratulations on that.
Was there any kind of expansion capex from your customers in the quarter and would you say that was a large driver for I'm somewhat better than expected results and PNM space.
<unk>.
As I mentioned I think we've seen some again continuing positive trends on our successful market penetration around a the manufacturing and lab environment.
As you know we made an acquisition so almost two years ago and starting to really it is paying off allowing us to gain market share.
And I work continue as well to see I'm more and more investments going into the latter part of that quarter of people going in with you know fiber to the home and and fiber to the antenna nice you look at our customer base, we've seen customers announcing and increasing our capex rising mainly in the being one where they've.
And now it's a 500 million.
Capex increase for their network build outs, so and I know there we've seen other service why isn't the same I'm sure really responding to the bandwidth growth that they've seen since the beginning of the depend dentek, but overall on our T.N. I do see it's the same kind of.
Business growth that we've seen in our high speed solutions, our manufacturing solutions and we're getting the benefit of their decisions. We made up a few years back and leveraging.
That position the market.
Okay. That's helpful.
Mentioned that side you investment in China seems to be ramping up aggressively any changes to timelines on fiveg in it and Rollouts and your other markets in Europe and North America.
Yeah, I think is you're going to he has a different.
Responses the based on a per countries on per customers I think we've seen.
Customers that I'd actually has decided to accelerate fiveg because they think is so critical and again I'll I'll restate, the rising and 18 teams in certain countries in Europe, and you've seen a bit of delays, mainly as well as an option being delayed and song So a lot in China, we all know we've seen as well some acceleration.
Oh, that's but ultimately I still go back with the but the two growth sectors. We are focusing on from our service provider customers and our web scale customer providers around fiber infrastructure investments and fiveg.
To me they remain strong and and that's why we're optimistic about.
Getting our business or do you know, they're getting some growth in our revenue going forward.
Yeah, that's going to that's my next question, you sound pretty confident and winning some five GR fees in Q4.
I'm just wondering how those discussions are going and what's driving some of that confidence.
Yeah as I mentioned in his you know we're seeing a lot of activities Orestes. They do take you know, especially with the spend dynamic at crisis. They take a bit more time to calls, but we feel pretty confident that we are getting some of our.
That's fair share of these wins and ER and the fact that you know where we do expect that our backlog will be able to also.
We're going to be able to grow our backlog both par hsas and can business that will really help in the predictability of our.
Revenue.
Revenue profile I would do keep but keep in mind that usually are caught us for the fourth quarter, four which is really summer months.
Our a bit slower on PNM as as we know is because of just some other constructions activities and so on being into Florida. So that's a bit of that seasonality that we attitude to deal with.
Okay. Thanks, So pestilent.
Okay.
Thank you.
Thank you we'll take our next question for Dennis Choppiness.
Capital markets. Please go ahead.
Hi, good afternoon.
Got it can you comment and how the supply chain and logistics issues are looking galloping I presume to try and get that better.
But to what extent might that they'll be a constraints I do think in the current quarter.
Well I thought so first of all let's talk about our supply chain, our factories are up up and running and then like I mentioned on previous quarter. So we're fully operational on all our factories and that's a that's.
That's obviously benefiting us in terms of being able to respond quickly to to our customers and made in terms of our overall, our all in supply chain and when you look some well some orders all the way it took to shipments I do think that we've seen the recovery and the the last.
Phase I guess with what's really I think that we gotta continue to Nick.
Really navigate through is around the whole logistics side of things out being able to deliver equipment to our customers we have to schedule and make sure. They have people over there there's still some challenges in terms of flights and.
And you know trucks and song, but overall manageable and we've been able to really work around those are in or excuse me.
Okay.
Do you have any guesstimate as to what the impact that had been in Q3, if you didn't have anything to steal others artists ask.
No I think I've been very marginalize, the only comment I will make tightness is obviously, what the uncertainty associated with.
You know that.
The first way as you know expanse of the pandemic or even a second wave heading that's the part of that you know that a bit of the unknown from the point of view of predictability as our business, but in terms of Q3 wasn't marginal impact.
Okay [noise].
From an Opex perspective, I guess, there's some moving parts. Your I guess one question is how long does the stimulus like last but I mean, putting that aside if we if we look at the numbers underlying without the stimulus normally you have a downtick in Q4, you do application seasonality or should we expect the same this quarter.
And then looking past that I mean, how should we think about maybe permanent cost reductions versus temporary cost reductions.
So I'll, let that to answer that the first question on vacation smelting child I'll, Let you go first and I'll I'll answer the other piece.
Yeah, Yeah, you're right they send us using Q4, we see the benefits of the vacation where do you expect tend to be lower.
Q3 has been quite low with the recent she subsidy that we just for the tend to government, we won't have those eat into full.
As we we wouldn't want them good what do you feel good <unk> could you find fall for the program.
So that doesn't mean point and the main say means that we got in the acuity.
On sort of was the Richardson and try them and we do expect <unk> you know speeds for Q4 has the most of the control. So like done right now so we could assume some some reduction if you compare to that run rate does Q on Q1, two two and and that's really Q2 Street.
Okay, No point I'll add that time losses were going to continue to be very disciplined and now with regards to our opex costs I'm. So we've achieved that's just highlighted obviously travel reduction, but we had a hiring freeze we are very careful with their contractors, who are using we've gone into a much more virtual engagement of our customers that is actually.
But interestingly favorable in terms of being able to outreach and bring more experts in front of our customers all of that and you environment, where we're going to continue to to adapt and and see how we can.
Continued to grow our business, while really being as I mentioned diligent on our cost and our opex.
Okay.
He led the <unk> sorry.
Maybe 10, that's one thing like ours as well. So there you have done it was weak in two or three d. averaged more than 139 is getting it. It is stronger in Q4. So does that we'd have some some but it gets you can pick on opex because they increased you know they said it had been because of that that's where.
Okay [noise].
And then what's epidemic had any impact as far as maybe market share shifts and I'm just curious as to you know as you've been any difference in terms of your ability to maybe response to customer orders and ship you know test <unk> measurement equipment to them versus some of your competition or.
One thing kind of an equal footing in that regard.
Well, if any impact on us over the full year, but I really do we do think that because I factory, where we're up in up and running.
Two out of this this this quarter I'm, especially around the manufacturing and lot of market that we were able to gain market share.
Again, it will be more interesting to really compare those numbers then when we get a full year, but we do believe that on the Tam side, we have increased our markets market share, we do believe as well in high speed.
400 gig a high speed solutions, we do believe that we've actually gained market share as well because were able to respond as you know we do all manufacturing.
With our three festive factories, and I and I do believe it brought us a competitive advantage to respond faster.
Customers and then therefore, leading into market share improvement.
Great. Thanks, I thought I fly.
Thank you.
Next question from.
Canaccord. Please go ahead.
I was hoping you could maybe give a bit of insight sorry, I missed something earlier in the called but is there any cadence. So bookings that you can help us with his last quarter, yet shrink book to Bill in a tough revenue quarter now you got lower Buck book to Bill in.
And slightly stronger revenue quarter in or is there any cadence of bookings.
You can help us understand.
Yes, Robert on on the booking site I would tell you that we're pleased with although it's it's a decrease but being 7% down year on year for PNM.
Considering that covenant back in Q3, and as you know a that caught in particular was substantially impacted by <unk> and a lot of countries to be 70% down on PNM. We felt that there was a really good performance, especially in the month of maintenance or.
With what Ted the bookings were able to close.
I'm, sorry, I do think that you didn't call that really impacted us in terms of when you're looking at doing new RF peas, new business trying to displaced an incumbent.
Corporate environment.
Take a bit more time.
Two to to call. It deal. So it's really come down to timing of closing the deal. So whether it was not there were not lost deals. It just takes more time to in this environment to close and as I mentioned in my opening statement.
Our funnel is going up there's more RFP is going to being happening.
We do believe we'll be able to cause some of these deals.
A potential deals that we haven't Q4, and I'm coming up and mainly on the side, but again, both CNN and size, we see the final and the opportunities are increasing as we speak in our Q4.
Okay. Okay.
The accounts receivable jumped up quite a bit is there anything in there or you've seen any linkedin payments.
Here.
No no that's really a rather a instead of mainly Q2 was really the thing that's the way has been the hammered into it February two on shipment. This is why we have a a very low.
So every month or so we don't want more more in line with previous quarter. Indeed, 50, 50, it's I mean, you only in the receivables. So when it was we haven't experienced a neat and that's that's a major bad debts all modes that school d., So we need to keep tight control on the.
<unk>, but Ah for me a being a 50 over 50 million 55. This is back to normal which we have seen in the previous waters.
Okay and then maybe this is there any other color I can get from.
On the these deals that might close in Q4 is there any context around size or confidence on closing or I imagine.
The backlog I think last quarter, you said there was around 60 million in SAS did it is are these deals it would've been in the backlog last quarter or any other information to give us there.
I I, what I could bring back a bit more color. Robert is you know the backlog is again is putting sound with regards to our SaaS business, but these wouldn't be additional.
I would actually tell you new logos. So so it definitely winning new customers and a that we are not don't have any on existing position and as you know they they take longer [noise]. These SaaS deals to get revenue recognition because there's always.
Some professional services.
Work that we have to do and get customer acceptance of song, which is quite different revenue cycle than then we see on PNM.
That's good to hear I'll pass now thank you.
Thank you.
Thank you. We'll go ahead and peak our next question, Tim Savageaux with Northland Capital. Please go ahead.
Hi, good afternoon, and congrats from me a better than expected results.
The question and or.
Thank you referred to this.
Briefly you see what appears to be a lot of strength globally in fiber access market.
10 gig pulling upgrade what have you.
Pretty broad base.
And obviously somewhat of an uptick driven by work from home Tropic amongst or a cable operators as well.
So I guess my question is if you looked at <unk>.
Access portion.
Of your T. Nm business.
I Wonder if you could talk about.
You know what you're seeing in terms of either.
Funnel activity orders.
Connected who are the increase in.
Fiber to the home deployment.
Ah globally.
Follow up from there.
Yeah.
Yeah. So tend the when we look at our T.N. business the that growth vectors that helped us get the bookings and the revenues were predominant as I mentioned around our manufacturing and lab.
Market, which continues to do really well our high speed solutions like 400 gig, which does really really well and then as well we're continuing to see solid performance on some of the optical and RF solutions that we have high that and deployed and.
Over the past the past quarter, what you're highlighting is you know the like that because of that pandemic, though a lot of that's what I would call fiber build out whether its fiber to the home fiber to the antenna the densification of fiber to antenna that we've seen in and I'm in Americas North America.
They've been obviously impacted by cold it where the final as increasing.
Well, it's exactly what you just highlighted fiber to the home a especially with Covance people are realizing that need to be will they will get better broadband connectivity with fiber deployment with what fiber access whether its pong technology, whether its fiber deep and we are seeing the impact of the that the fund.
All of dollars that particular market as you highlighted and it's not just in North America that we're seeing that's what we're seeing this across Europe, as well and we're seeing data and certain countries and ER and Asia Pac.
Okay, and I imagine you know critical little Wilder develop as you mentioned sort of activity funnel, but is that.
Kind of part of what's behind.
Sure.
Got it optimism for your increasing revenue levels.
I don't know exactly how you meant that [laughter] looks like there maybe some seasonality or play as we look at.
Fiscal Q4, but due to the extent that you're optimistic about growth.
Heading into fiscal two.
21.
Would it be kind of a continuation of some of these current turns you're sitting around you know lab in production and high speed [laughter], where you're maybe some of the access and beating your PNM here.
Coming up to could be a more significant driver as you kind of look forward.
Yeah. So Tim that my comment was really more than than just what I would call next quarter optimism that this is exactly what you said when we look at our you know fiscal year 2020 of the fundamentals behind why we're investing where we've made acquisitions.
We are you know we are feeling optimistic about the opportunity to.
To respond to their customers needs around you know fiber deployment high speed solutions lab manufacturing and on the SaaS side, we're starting to see as I mentioned, a lot more activities around fiveg deployments I'd cards applying it.
Caveat is obviously the global economy, and then and what will happen and you know that with a.
Potential recession or slow down and then went back and cheap GDP and this is that the challenge that we have spent a lot of time talking to our customers where were trying to get a better feel of their capex spend and what are they on it you know go ahead with there I wet weather investments in terms of Buildouts on.
Our business around with the web scale by the way is also increasing you know whether it's between the datacenters or within the data centers and we see that continuing and as you know there's a whole discussion around edge datacenter build out that we do believe will be based on on interconnected inside and outside with with optical technology.
Okay, and again, giving us the the optimism that you know focusing on fiber and focusing on Fiveg is is the right strategy for us.
Okay. Thanks very much.
And get them.
And once again that start one if you'd like to ask a question on today's call well take our next question from Richard Tse with National Bank Financial. Please go ahead.
Yes. Thank you.
So you referred to a strength here in China, I'm kind of curious on a relative basis. Prior to this and that make you know, we just say that kind of scale I remind them this back to where it was.
I do think that it's a tip it difficult it to answer but I do think theres a two to.
To answer your questions. The first one is we are seeing the China I got the Chinese government, making a priority in infrastructure build out for Fiveg and that we do see the impact of that.
We do a lot of again that manufacturing business. We do you know we helped Transceivers manufacturers, we help people building optical component and I do feel that that is not just in the savvy to the Chinese market, but overall the global global need for those type of products, but I would say there's been a combination of both so it's all a.
We all infrastructure investment build out in China, and then ultimately as wallet high demand for optical component.
Okay.
Okay dovetails into my other question like on a global basis, how would you. Sir are ranked <unk> said relative strength of the other regions, having sort of come back here.
It's a I wish I was really I can it's interesting to see within the quarter. How the reasons were gradually reopening up you know, obviously, China being the first one being hit.
But the first love to be reopening.
Well, we saw the some of the activities going there anyway. It was more impacted for our business. I mean, we saw obviously I countries being close down economy has been closed down for a big part of that particular quarter and and we saw that as of being a bigger impact.
America. It was interesting the U.S. performing better, especially the month of May for Us, Canada, as well, but Latin America, obviously as I'm sure you're just seeing the news was a softer quarter.
Okay, great. Thank you.
And once again that start when if you like ask a question on today's call a pause for just one other piece.
Yes, we have no further questions at this time, we'd like to turn the call back over to CEO Philippe Morin for any closing remarks.
Thank you so I'm just a few key takeaways before we conclude the call today, So again first.
I've airplanes that are solid financial performance in the third quarter of 20 to 20 delivered double digit adjusted EBITDA margin during a pretty implying a pandemic crisis here.
Second our proof of concepts are far and all of US I'd say I monitoring solutions.
He used to gain traction with customers a thriving freestyles front street.
Two seven and the third quarter and.
And then finally, despite the fact that connect a fiber.
And Fiveg gross drivers remain intact.
With some countries as I mentioned, even accelerating their investments.
So given our market driven focus on it too long term drivers expose revenue rose I've, all should improve in the upcoming quarters and the operating leverage of our business model will also be fully demonstrated there.
But at this point. This concludes our Q3 2020 conference call and on behalf of the entire ex 14.
Thank you very much for joining us today.
Once again that does conclude today's conference. Thank you very much for your participation you may now disconnect your phone lines.
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