Q2 2021 EXFO Inc Earnings Call
June
good day everyone and welcome to expose second-quarter conference call for fiscal 2021 today's call is being recorded at this time. I would like to turn the conference over to Vance Oliver director of investor relations, please go ahead sir.
Good afternoon, and welcome to expose second-quarter conference call for fiscal 2021 with me on the line today are Philip maughan expose chief executive officer and Kia. CFO and Vice President of Finance expose founder and executive chairman will also be available to answer questions during the Q&A. A reminder that this month will include certain forward-looking statements and our estimates concerning our intents beliefs or expectations regarding future events that may affect exfo please note that such comments will be affected by Chef Anton uncertainties including the impact of a coronavirus endemic on our employees customers and Global operations.
This may cause you.
Two results of the company to be materially different from those expressed or implied today for more information about exfo. I encourage you to review our form 20-f file the Securities and Exchange Commission off or annual information form is available with Canadian Securities commissions as well. Please note that non-ifrs numbers may be used during this conference call today at reconciliation. These non-ifrs results with IFRS numbers is available in the queue to 20 21 news release on our website all dollar amounts in this conference call are expressed in US Dollars unless otherwise indicated. So without further delay, I will turn the call over to fill it.
Thanks Vance and good afternoon. Next one delivered another solid financial performance in our second quarter of 2021 highlighted by a ghost of 8.9% for both DeVille ratio at 1.15 and strong cash flows from operations of 14.7.
I'm particularly pleased with our strong bookings in the second quarter and reflect increase market demand driven by catch up spending an early deployments of 5G cloud-based Network page a customer the communication service providers get a better handle on transforming the Network's during the coronavirus synthetic.
Recent success in securing a multi-year contracts bodes well for the expanding footprint of an oval adaptive service Assurance platform is a growing number of our fees for 5G Standalone network monitoring systems are expected in 2021 and Beyond.
Silver our sales increased 25.2% year-over-year 269 million in our second quarter of 2021, but it should be recalled that the initial outbreak of the page at Forrester one month shut down or manufacturing facility in China a year ago in February 2020.
Trying to the bottom line. I have I have net loss total 2.4 million while adjusted it amounted to three point four million or 4.9% of sales off the halfway mark electrical year 2021 exfo generated earnings of one point 1 million or two cents per share. And is it just did it did a Thursday at 4 million or 9.5% of our sales?
I was returning to are looking at our product line in terms of our test and measurement borderline first revenues grew by 36% year-over-year again, reflecting the 1-month shutdown of our manufacturing facility in China in Q2 2020 that does distort year-over-year comparisons. The tnm bookings grew by 3.2% year-over-year may need you to increase fiber deployments by Temptation service providers to support Broadband Network expansion.
Exfo was also.
Benefit from earlier budget releases by some service providers and calendar 2021 which has positively affected our team and booking.
Deciding the man mainly driven by catch up spending from delayed projects was partially offset by reduced Investments by the network equipment manufacturers for a lab Solutions in Asian region.
It should be noted the initial coronavirus a break in February 2020 had little impact on our test and measurement bookings in our queue 220.
TDM orders began to significantly drop in our third quarter of 2020 as preventive lockdown measures were imposed in several countries. So it sucks we can state that are often bookings are gradually returning to a pre pandemic level with good growth opportunities in the second half of our fiscal 2021 given anticipate investments in fiber deployments home 5G infrastructure and data center connectivity.
I'm trying to service Assurance systems and services business on a satisfying our Revenue decreased 2.1% year-over-year while bookings improved 28.6% 2:25. Three million in the second quarter of 2021.
The strong bookings growth can be attributed to recent wins for arnaudville fiber monitoring solution to increase traction of our normal sensory, I troubleshooting solution and package and the solid support contract renewals.
19 recall, you know the major fiber line can deal with openreach if it's a jury of British. And early January the good news is that open reached recently confirmed that it will move ahead with its own not the past twenty million homes twenty million premises with fiber by mid 2025 as a result exfo will benefit from this multi-million dual sword fiber monitoring deal with openreach.
What about the end of the second quarter of 2021 also intensified or automated troubleshooting solution that detects Network anomalies in real-time retracting customers interest because the solution shines Big Data swamped in favor of Highly specific information and prioritize them to reveal the network outages and service degradation.
Ultimately know that it's built in machine learning capabilities combined with other Solutions like Nova Active Health Service Providers improved subscriber experience and faster troubleshooting time. I highlighted by the 2.5 million bookings this quarter with a European service provider.
Finally expose Nova adaptive service Assurance platform has been selected after Darcy process to enter the lab evaluation space for potential large-scale home 5G monitoring deal at this point. We have secured a $2,000 order to undergo the elaborate valuation and we're doing this is a partnership with a tier one network system vendor off for a prospective 5G dine alone cloud-based Network deployment in the United States. So now I will turn the call over to the cover our financials.
Good afternoon, everybody sending three 25.2% to 69.3 million in the second quarter of 2021 from 55.3 million in the same quarter of 2020 as previously mentioned sending treat you every year mainly due to the initial impact of the COVID-19 hombre the first one month on the stroke manufacturing facility in Shenzhen China in summary 2020s smokings meanwhile improved 8.9% year-over-year to 79.3 million in discount quite a 20 21 for a book to be refilled 1.15.
Crows Marvin before depreciation and amortization reach 56.1% of same in the second quarter of 2021 compared to 56% in the second quarter of 2020.
Grouse Mountain in the second quarter of 2021 was affected by your last February Bolton mix compared to the same period last year as we recognized in to remember last software solution into two twenty-one.
In terms of operating expenses setting and administrative expenses decreased to 22.9 million or 33.1% of said in the second quarter of 2021 from 24.3 million of 44% of sale in the second quarter of 2020.
The one point four million decrease in expenses, the reflects lower travel and trade show expenses due to the Stanley Meg and the full impact of our 2020 restructuring package.
Nancy all the expenses increased to thirteen point five million or 19.6% off sale in the second quarter of 2021 from 12.6 million or 22.7% the same in the same period last year
do you want me to an increase in net are the expenses in mainly related to some errands and annual salary raises and the mix of R&D projects?
How far is net loss total 2.4 million or -4 cents per share in the second quarter of 2021 compared to a lot of nine million or minus fifteen cents per share in the Covenant action second quarter of 2020 FRS. I have purchased net loss in the second quarter twenty Twenty-One included in our tradition of intangible assets 1 million in stock based compensation costs Point 1 million is point range loss and in income taxes second has item or three million.
Atlas also included point three million for an after-tax wage subsidy granted by the government to add company mitigate the effect of dependent. It took two point seven million for the negative Goodwill recorded following the acquisition of inopticals.
I just said it'd be the amount to three point four million or 4.9% of sales in the second quarter of 2021 compared to minus 4.9 million or minus 8.59% of stays in the Cove is in fact and second quarter 2020.
Geographically the Americas accounted for 48% of total think Twenty-One Arab Middle East Africa represented 38% 1 total 15%
In terms of customer mix or customer accounted for 6.8% of total sending to 22113 represented 14.3% Do you need to a few key points on the balance sheet or cash position increase by 7.8 million to 24.3 million volts of the second quarter twenty Twenty-One this increase in mainly due to fourteen point seven million in cash flow from oppression and point eight million in cash acquired from the inopticals transaction design and we're possibly upset by 5.5 million or for the reduction in our bank loans one point five million repayment of these celebrities and long-term debts and 1.2 million for the crochets of kept at acid.
At the end of two Twenty-One at the net cash position of 10.2 million + available revolving credit facilities up to 68.3 million month May twenty one and two fifty two point five million thereafter at this point. I will turn the call over to the operator from the start the Q&A.
Thank you. If you'd like to ask a question, please. Press star followed by the number one on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment again star one to ask a question. And first we'll go to your line is open.
Hi, good afternoon. I guess start with on the tier one 5G trial. I guess first of all, congratulations on making it to the lab evaluation phase and secondly em any sense. You can provide us in terms of the timing for that customer to make a decision. Yeah. So the lab is shown is a pretty complex and lengthy process through we we do expect that the the next phase should happen in our fiscal before the end of our fiscal year. So but again, you know, it's we'll see how lengthy gets but we're open that, you know, by the time we we get into this summer, we'll we'll get to the next page.
And you mentioned openreach.
Taurus and and they realize that's not a 5G deployment. But as far as the 5G operators you're talking to or some of those looking to do a source or those primarily single Square situations.
It really depends on our top of our business here. You know, when you look at that fiber monitoring, it does involve because it's got a portion of hardware and off solution. You can ultimately especially the size of millions of homes and openreach is looking at it does allow them to go and do a dual Source a supply of strategy. But as you're moving toward the 5G stand-alone clown needed kind of solutions where you cover the whole Court Network enter and services off and and you look at the the upgrade from going to forward you to finding a lot of these cases. It tends to be more single Source because it's easier to imagine providing that an 10 a.m. And how many troubleshoot when you have that single Source model.
And I don't know if you can find any color on size, but just hypothetically might this 5 g t o b kind of similar in size to say the openreach deal is that we can think about it or you can provide any comment on that.
Yeah, I think when you look at what I just kind of presented in my my remarks got it, you know, we got the openreach win, which is with fiber monitoring. We've got off the same thing with the European customer. And now this one they tend to really be a multi-year multi-million dollars off on this one in particular is still too early to tell there's still a lot of variables and a lot of work to be done. But they tend to be following the same kind of pattern that that we presented in the past that they need to be contract between three to five years and they said to have multi-million aspect of it and obviously depending on the size of the customer the number of Subs subscribers, especially now if you start thinking about five 5G naivety the type of coverage you need and that will kind of dictate the opportunity and it's going to be you know, and on top of that as you age
Thomas we always get maintenance contract renewal. So, you know, we'll be able to get a better view as we continue to involve and and work this um this lab evaluation that we're leaving by faith in this quarter.
Okay, great. And I guess would be focusing on on maybe just the shorter-term Dynamics of the business has visibility improved relative to the last six months what you say or think starting to look a bit more predictable in terms of customer behavior, um shorter-term or how would you characterize that?
Yeah, I think you know for me that when we stop we're going to start getting better visibility. And as I mentioned in my remarks were now starting to see TM back to the levels before prepaid demek. Now we seeing the Third Way is coming in and you know really, um are getting us the point where we need to really be careful about what will be the impact of that. There's also the aspect of Supply. I think you everybody is reading about the whole supply chain. Um, you know, that that's something that we're very very closely watching. We've got long-term relationship with our suppliers, but let me see the demand that's taking place and then some of the constraints that we're seeing on this page in other sectors. That's another aspect that we want to be really closely watching as we go through that so, you know, it's it's I'll give you an example even wage
we ended up getting
Booking is the stronger than we we anticipate it on the inside. So, you know a part of that pent-up demand and the need for the recover on Thursday the last few months of last year had a positive impact in our booking until that all aspects is makes it a bit more predictable for us to look at our house our plan for for the next six months.
Okay, that's great. Thanks Lee pass away.
And next we'll go to Robert Young from canaccord genuity your line is open.
Hi, good evening. Maybe I'll just ask about the the supply chain. You just brought up there. I assume that's chip shortages that we're hearing about. How will that manifest in your results if if they get worse from here is this going to be a headwind to your gross margins but limit your ability to you know, generate Revenue. Where should we think about that as being an impact?
Yeah. No, it's it's a good question Robert the obviously on the Southside we're predominately a software business. There's no real impact. They're more on the side. And and I think it would be more around probably seeing more longer Lea times on components which could ultimately have an impact in terms of shipping equipment at this point. I don't see any any issue but we we wanted to make sure that we're obviously spending much more time with our suppliers to make sure that we're not being impacted as well and in other Industries, um, um, but so far we've been able to the manage around. Um, so what we're seeing right now,
And then the tnm strength, I mean last couple of quarters are left quarter. I believe you said that, you know some of the maintenance and operational sort of spend was pushing out some longer-term projects. Is that still what's driving them here? I think you talked about some Fiber deployment or are you seeing this more transform into longer-term projects? I understand some of the 5G upside is still farther out. But are you seeing that improve towards longer-term projects?
And I think for this quarter particular on the strength, we did see some pent-up demand, you know, if you if you recall our previous result. We we've seen really sucks when the pandemic the pnm especially what we call the the physical business of the LTD is that type of instruments that field technicians used got infected by by the pandemic and the lock down and so on and what we have seen gradually is that business is coming on and it came out and really strong and in our queue to come and walk and and we do so the question is is that is that going to continue really a pent-up demand? So we're really seeing that catching up of of where I think people were fell behind because of the endemic and the service providers adapted to this new environment even a open now to to make decisions on procurement of our test.
Test and measurement Solutions. So that's what we seen the impact on our on our strength of their t m and that's why we've seen, you know, almost
54 million dollars of bookings and then fast had strong, um strong performance on this side. As I mentioned is we're seeing some really nice tracks on our fiber during some nice. Traction on Santee I & Q to buy these analyses Valley also represents a quarter where we do a lot of maintenance contract renewals wage, which we did a good job of securing that in our court.
Okay. Okay. That's great color, maybe two more questions if I could just the you talked about strong Trends you said or if you transfer strong last quarter life better, or worse? Is it are you more confident this quarter than last quarter? Maybe if you could give us a quarter-over-quarter view on the RV Transit be helpful.
Yeah, the activity in on 5G stand alone or are continuing to be to be strong. We're very busy and responding to our fees and you see the result in one of them that long, you know along with our partner where we're going into a into a deployment. It's a lot of potential deployment in America's so we're starting to see that it's still mailing out of where we see most of the activities are are in America's but I'm starting to see you're starting to come pretty active as well on on on Thursday. And and as well from 4 to 5 G on on on Craig's List in there. So I do think that you know, in terms of Revenue impact this is going to be again as I mentioned Thursday morning to the 2022 the activities as an example were very happy to see that for lab evaluation were giving you know, our customers to pay for those and ultimately wage.
One as well with the traction we're seeing with the window. We're seeing that I think we can really continue to expand our footprint. Um, as I mentioned in the last quarter for sass it's all about long suffering game. You got to win those those contract initially they tend to to bring Professional Services at the beginning so that you can do the integration. But once you're in the bath the multi-year contract and allows you to expand allows you to bring other tests and other monitoring capability with 5G signal as you know, we're going to go into Network slicing which will login allow us to go and and upgrade what we're doing. So really important for us to continue to to get the wins and secure these contracts that we should highlight it so far and continue to to get into these lab evaluations, um as as the rfps close to the next stage,
Right and you probably have a couple of times already but the Standalone 5G deployment when I think of that I think if that is something that's the next stage as opposed to something. That's really driving anything right now. Is there are there actually any down payments around Standalone that you're seeing now or is that something that's a 20 22 23 opportunity. Are there any closer term 5G opportunities that you see?
Yeah, no, I think.
See the volume already kicking into the 23 round as mentioned, but we are starting to see some some customers taking the lead on the point five Gees animal starting with our core Network and they've all made all their decisions between you know, Nokia X and Samsung Huawei now, they're going to the next phase in order to implement that 5G Standalone core n e r solution to do the monitoring took the shooting and service assurance. And and that's what we're we're seeing with the rfps that are happening now, but in terms of deployment some deployments and twenty Twenty-One, but really the the impact will be more than 20 22, but we're very happy right now with the progress we're making with um with the the footprint that that we're getting with our Solutions. So we just got you know continue to continue to do the work on the lab evaluations are are are long. They're they're complex, but I do think that the wars are there and once you you get selected dead.
Okay, great. Thanks for taking all my questions.
major
and next we'll go to Tim for Northland. Your line is open.
Hi, good afternoon. I wanted to file a couple of things first your commentary about seeing some I'm looking for a little more color there. I assume that's probably focused on the US your top customers. But if you have a great commentary geographically I'd be interested in hearing that and you know to what degree you've
Sort of seen that momentum continued into the current quarter School Q3 and then I have a follow-up. Okay. Thanks Dennis. Oh, yeah, it's interesting facts again and and the context of the tnm strengths on the the bookings. Um, is that um both in America and emea and I would probably say U.S. In the ending of what we've seen ten this year is as soon as the budget got approved which tends to be in beginning of calendar year. Usually what we've seen in the past. It takes a bit more time to get you know, the the purchase orders to go out and and and the procurement process to go through I think because of the pent-up demand of the previous year what we have actually seen this quarter is as soon as the budget got approved. We we saw Next Generation and converting those in to purchase orders. And as I said predominantly predominantly and being across across our customer base.
I'm sorry, and then you know looking a bit farther out when you see news such as what she had a Verizon and AT&T and I'm accelerating 5G deployments and likely associated fiber deployment. And as well as a Teenage increasing its Target for for fiber Holmes pass this year. When would you expect to see the impact of any of the that type of activity it seems more laid-back kind of oriented toward the you know back half of calendar Twenty-One or twenty-two and would you view that as potential separate Catalyst from some of the more kind of catch up Oriental currently?
Nano
So the the only Announcement by Verizon AT&T and T-Mobile just on the yield of the spectrum options Tim. If you recall where frankly I was a bit nervous with them any building dollars going into Spectrum. Will they will the service providers have to step back on their investment and there was really happy to see that not only that but both Verizon AT&T if actually did say increased our Capital spending now a lot of it will probably go into the 5G deployment your 5G radio, but we do think that it will eventually continue to really help our our fiber business on the inside and then as well, obviously these gloriously aggressively on the 5 G core of employment. Um, you know, we are obviously looking at a being a plane in in those accounts with with our our our restaurant business are set with our captive platform.
What's the question is going to be the timing of the investment? And then how quickly will they start really wrapping up? I do think the overage when I have been pretty aggressive already on on fiber at homes pass and we've seen some of it. I'm pretty sure come in through our quarter in terms of their investment requirement. And um and part of my comment around investing very quickly as they got the budget approved and then we'll have to see what happens is while now in Europe trying to see um fiber to the home being prioritize. You see the the monitoring resolved fiber monitoring results that we're getting um wage is obviously on the heel of BT openreach, but we've also got nice traction with that solution that has they're looking at being a bit more aggressive now on deploying fiber-to-the-home fiber for the Dead.
In Europe, I think they were a bit behind in some countries are.
Great. Thanks. And last question for me in this reference is the APAC weakness that you saw above sequentially in year-on-year in the corner. I think you wanted to some home OEM weakness in in lab and production. You know, should we associate that with you know, China Williams or maybe big China or there's some other Dynamics there and I'm kind of situation you expect to continue.
Do you know what interesting with our Network our manufacturing product? What what we seen ten minutes actually good very strong faction North America and even in Europe, which we haven't seen that much in the past. So both of those regions did really well, but what happened, is it predominantly in China where we had a really really strong quarter off into two last year right during the the whole, you know, beginning of the pandemic that we really strong performance there in China that did not repeat the this court and so although I am recovered with Europe and America not as much we were not able able to recover as much of what the decline we've seen in in China.
Okay. Thanks very much. I'll pass.
All right. Thank you then.
And next we'll go to Richard see from National Bank Financial your line is open. Yes, thank you mister spec to the 5G, you know based on sort of your bookings today to age. You know, when would you guys expect to serve kind of Reach This sort of peak level of 5G that you know, the next two or three years like just want to get a sense of that.
Yeah, so the question is you got it all so you got two separate between the team members and the our service Assurance business. I think the on the team inside we're seeing the we do believe we're going to see the fiber bill down the fabric of the antenna the front hall the back home. It's going to be all fiber is that's going to be for many years because of the fact that you know, they just going to have to increase the overall fun hauling capacity that 5G brings. Um, and so that's going to be there for I think we got a good good cycle there and and really the expression that we're in the first few Innings of a gardenia on the inside for 5G, especially when you put that context into a global global global view and then the whole discussion around the service Assurance. I do think that what we're going to see is the next you know, 20 21 22 is when you're going to start seeing these contracts being awarded and you start getting it to the deployment. But again, we're we're
Stephen on the first inning the right so there's still a lot left to go in there and lots of pictures to to take play and and it's a ten year cycle at least you know, when you look at long it took off get the 4G deployed. Um, if I do you're going to be obviously, um more important. It's it's it's more of a major in my mind revolution in terms of the network appointment at allows to go over to iot combined with technology, like artificial intelligence start getting into private private 5G Network being built out Thursday. We're in for you know, many many years. I would say at least ten years of deployment for for that for that 5G and we're just at the beginning and and you know how long it will depend by geography. I know I keep repeating. We're seeing the Japan Korea China taking the lead, but then we're going to also see the pending on Thursday.
Economies and countries, uh, the deployment that they replaced as well.
Okay, and then you know you guys have obviously been on the opposite side as we kind of looked at the other side, you know with hopes of everything finally opens up at one point. Would you say that that's the sort of on the expense side you can get back to your pre-code right rates or have you kind of you know, identified areas of savings that we're going to be more permanent here going forward or just trying to reflect that in a month. I'm going out here in the next year.
Well, I guess I don't need it. You know, we've been very very prudent and diligent on our spent obviously during this very both on our Indiana standing. Um is your name was was obviously reduced because I'm more travelling more conferences and so on. I do think that we will eventually go back to to traveling again leading customers face-to-face. And so what you would expect them to once we get behind, you know this, um, the third wave of the vaccinations taking place to start seeing like maybe an increase in this journey that has to do with the travel in Saint but I do think that there is a bit of a shift here in terms of how we're actually going to continue to to engage our customers. I do think that the the virtual model and Rachel demos these big conferences that used to take place will be really interesting to see not sure we're going to go back to these models birth.
We'll have to see this is a bit of noise on the on the bridge here. But you know for me that's where I would say we get a bit more on on the spend will only be back into the travel, but I don't believe it's going to be as much as where we used to be please pre vehicle.
Okay, I guess relative that you know with the sort of cash flow and a quarter and you've got a pretty decent credit facility. They're what do you think about sort of capital allocation you out Acquisitions it then you know, I would say contribute here in recent years. What's that environment look like today? And you know, what, do you sort of thinking on that front?
Can you want to take that one?
Yeah, yes. Yes means on the car as well. We did close enough to Thursday December. We still have enough cash. If you want to pursue any other kind of acquisition to complete our project line or even extend some some some some subjects reach. So for me the captured search is still acceptable to continue to to grow through acquisition.
Okay, did you guys ever consider like, you know starting in buy back stock, you know giving the stock price here today?
This is always an option. We still have our share buyback program in place that we can use if we believe this is the right thing to do to use cash.
Okay, great. Thank you.
And next we'll go to Daniel Chan from TD Securities. Your line is open.
Hi, thanks for taking my question. Just I just got one you mentioned with the the SAS are figure open on with your working with a large tier one network vendor to help you work on that. Just wondering about your go-to-market with received some of these larger 5G deployments whether you plan on partnering with more Network vendors, or whether you continue with your current mix of direct and and Partnerships. Thanks.
Yeah. No, I think the the strategy for us will be without divulging too much from a from a point of view book Market that will do both. I think there's opportunities for us to go direct and indirect accounts, but there are other other account that we really feel that going through a partner install partner will actually help us get some be a successful deployment. So I don't I think I think you're going to see us do both above the direct and to a partner depending on depending on the customer tech.
And at this time, I'll turn it back to you Philip Marie for closing remarks.
All right. Well, thank you very much. So just a few takeaways before we conclude this call today first solid performance in our second quarter and based on the best birthday bookings growth of 8.9% Um, a book-to-bill of 1.4 1.14 and $79 of of uh a book and as well are casting from operations at 14.7. It's not get my order momentum for our staff business is accelerating and continuous and it has accelerated a second job, you know with bookings increasing more than 20% year-over-year to twenty-five million. And then finally I sold the Nova had a bath Assurance platform continues to gain Market traction as we get highlighted with recent contract wins, and and this lab evaluation for this 5 G Stylo broad-based bonds and contract
In partnership with the network system vendor. Well this concludes on RQ221 conference call and on behalf of the entire Explorer team. I want to thank you very much for joining us today. Thank you.
And that does conclude our call for today. Thank you for your participation. You may now disconnect.