EXFO's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Jun.27.13 | About: EXFO, Inc. (EXFO)

EXFO, Inc. (NASDAQ:EXFO)

Q3 2013 Earnings Conference Call

June 26, 2013 05:00 PM ET

Executives

Germain Lamonde - Chairman, President and CEO

Pierre Plamondon - VP, Finance and CFO

Vance Oliver - Manager, IR

Analysts

Patrick Newton - Stifel, Nicolaus & Co.

Kris Thompson - National Bank Financial

Scott Penner - TD Securities

Thanos Moschopoulos - BMO Capital Markets

Deepak Kaushal - GMP Securities

Robert Young - Canaccord Genuity

Hendi Susanto - Gabelli & Company

Robin Manson-Hing - CIBC World Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to EXFO’s Third Quarter Conference Call for Fiscal 2013. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, June 26, 2013.

I’d now like to turn the conference over to Vance Oliver, Manager of Investor Relations. Please go ahead sir.

Vance Oliver

Good afternoon, and welcome to EXFO’s third quarter conference call for fiscal 2013. With me on the line today are Germain Lamonde, EXFO’s Chairman, President and CEO; and Pierre Plamondon, Vice President of Finance and CFO.

A reminder that this conference call 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 risks and our uncertainties, which may cause the actual 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, which is on file with the Securities and Exchange Commission. Our Annual Information Form is available with Canadian Securities Commission, as well.

Please note that non-IFRS numbers may be used during this conference call. A detailed reconciliation of these non-IFRS results with our IFRS results is available in the Q3, 2013 press release on our website. All dollar amounts in this conference call are expressed in U.S. dollars unless otherwise indicated.

So, without further delay, I’ll turn the call over to Germain.

Germain Lamonde

Thank you very much, Vance, and good afternoon everyone. So our financial performance came in below expectations in the third quarter 2013 with a net IFRS net loss of $0.9 million on sales of $58.9 million and that is despite booking progress and book-to-bill ratio of 1.05.

So clearly the market conditions have remained challenging during the third quarter, especially in EMEA, and somewhat in Asia Pacific where our bookings came in lower than expected as economic conditions continue to force some network operators to delaying some of their capital spending plans.

I’m encouraged, however, by our improved bookings of 7% year-on-year and 16% sequentially to $61.8 million in the third quarter. We witnessed renewed investment in U.S., especially related to 4G/LTE deployments as well as very high speed 100 gig capacity upgrades. Overall, bookings came in rather strong in March and May, but for some reasons were weaker in April.

This week we have heard the claim that network operator spending has returned to normal levels, but at least we’re seeing pockets of growth in key geography – geographic regions and technology sectors. More specifically we've made comfortable progress with Tier-1 operators and the Tier-1 with mobile operators, EXFO is increasingly becoming relevant to some of these players especially in product areas related to wireless broadband deployment since we have unique solutions to help them accelerate network capacity and assure end-to-end quality of experience for their consumers.

We will have a lot of runway ahead of us during that segment and that’s the sector that we expect to continue to develop in the years to come. We’ve also made significant inroads with our wireless and 100 gig test portfolios, both in terms of new solutions, we have brought to the market and also market acceptance by customers.

Even though we did not capitalize on these new solution as much as we had expected in the third quarter, I’m pleased to report that their market acceptance has been strong with Tier-1 operators and this bodes well for the quarters to come as I’m convinced we will be reaping some of the benefits in the near future.

We are keeping a tight control to our expenses. So as indicated in prior calls, we tightened our cost controls at the beginning of the fiscal year, due to difficult market conditions we’ve reduced our net R&D and SG&A expenses by $7.5 million after nine months into fiscal year ’13 and that is despite annual salary increases and inflation.

It could also be noted that our core technologies related to the acquisition of Brix Networks became fully amortized in April 2013 so consequently amortization expenses have decreased from $1.7 million in the prior quarter to $1.6 million in Q3. And it will further drop to about $1.2 million in upcoming reporting periods based on full quarter without the Brix amortization expenses. So this will certainly improve profitability by nearly 700,000 per quarter or $2.8 million per year moving forward.

While we’re tracking very well against our announced cost reduction plans, we’ve maintained a sound investment model in our product innovation, which I’m convinced, will benefit us in the quarters to come. We’ve also focused efforts on go to market activities and market development initiatives in order to accelerate real growth in the upcoming quarters and drive further towards increased profitability. While adjusted EBITDA stands at about $10.3 million or 5.7% of sales after three quarters, clearly not exactly where we like it to be, I expect to raise the EBITDA in Q4, 2013 sequentially accelerate profitability in fiscal 2014.

To summarize, we’re staying on course. We’ve – since we’re convinced the fundamental drivers of the telecom industry remain sound and our market position is better than ever. We are maintaining a close eye on global economic conditions and in our end markets. But we believe it’s critical in newly launched solutions and our [enhanced] go to market focus will enable us to improve revenues thus profitability in the short-term and subsequently help us resume with our trajectory towards our 15% EBITDA – with our 15% adjusted EBITDA margin target.

I firmly believe we have the right people, the right products and the right market positioning in place to take advantage of any network operator spending that will relatively be happening over time. So Q4 from a guidance point of view, we’ve been said here is our financial outlook for the fourth quarter of 2013. We’re forecasting sales within $58 million and $60 million for the reporting period extending from June 1 to August 31, 2013 for that typically soft fourth quarter that coincides with summer vacations for several of our key end markets.

On the profitability side, IFRS net earnings are expected to range between $0.00 to $0.04 per diluted share for the fourth quarter of 2013 and net earning includes $0.03 per share in after tax amortization of intangible assets and stock-based compensation costs.

So, at this point, I will turn the call over to Pierre, to discuss our financials.

Pierre Plamondon

Thank you, Germain. Sales decreased 1.1% to $58.9 million in the third quarter of 2013 from $59.5 million in third quarter of 2012 and $5.9 million from $62.6 million in the second quarter of 2013. Bookings increased 7.4% to $61.8 million in the third quarter of 2013 from $57.5 million in the same period last year and 15.8% increase from $52.4 million in the second quarter of 2013. As a result, our book-to-bill was 1.05 in the third quarter of 2013.

Gross margin reached 61.7% of sales in the third quarter of 2013 compared to 60.4% in the third quarter of 2012 and 62.2% in the second quarter of 2013. Gross margin increased year-over-year mainly due to a more favorable product mix and a larger proportion of our sales coming from products, manufactured at our plant in China.

On the sequential basis, our gross margin decreased largely because of our lower sales volume which goes a lower absorption of fixed manufacturing costs, which in turn resulted in the reduced gross margin. Pricing pressure was still a drag on our gross margin in the third quarter. We now expect to deliver gross margin between 61% and 62% for all fiscal 2013.

In terms of operating expenses, selling and administrative expenses totaled $22 million or 37.4% of sales in the third quarter of 2013 compared to $23.6 million or 39.7% of sales in the same period last year and $23.1 million or 36.9% of sales in the second quarter of 2013.

SG&A dollars decreased $4.5 million year-over-year mainly due to our Q4 2012 restructuring plan, lower commissions paid on lower sales volume and tight control on expenses. On a sequential basis, the decrease in SG&A expenses can also be attributed to lower commissions paid out on lower sale volumes and a tight control on expenses.

Net R&D expenses reached $11.6 million, or 19.7% of sales, in the third quarter of 2013 compared to $13.2 million, or 22.1% of sales, in the same period last year and $12 million, or 19.4% of sales, in the second quarter of 2013. Net R&D dollar decreased year-over-year due to our previously mentioned restructuring plan and mix of project. On a sequential basis, net R&D dollar decreased mainly because of our tight cost control.

IFRS net loss in the second quarter of 2013 totaled $0.9 million or $0.01 per share, compared to a net loss of $3.7 million or $0.06 per share in the same period last year and net earnings of $39,000 or $0.00 per diluted share in the second quarter of 2013. IFRS net loss in the third quarter of 2013 included $1.5 million in after tax amortization of intangible assets, $0.4 million in stock-based compensation costs and foreign exchange gain of $0.3 million.

Adjusted EBITDA amounted to $3.1 million or 5.2% of sales in the third quarter of 2013 compared to minus $0.5 million in the third quarter of 2012 and $4.4 million or 7.1% of sales, in the second quarter of 2013.

Geographically the Americas accounted for 55% of total sales in Q3, 2013. Europe, Middle East, Africa represented 28%, while Asia Pacific totaled 17%. In comparison, the sales split was 51%, 29% and 20% among the three geographic regions in the third quarter of 2012. In terms of customer mix, our top customer accounted for 6.6% of total sales in Q3, 2013 while our top three represented 16.5%.

Our cash position decreased to $54.8 million at the end of Q3, 2013 from $56.4 million in the previous quarter. This $1.6 million decrease is mainly due to $1.5 million for depreciation of capital assets and $1.2 million for the redemption of 250,000 shares under our share repurchase program. These items were partially offset by $1.3 million in cash flow from operating activities.

Finally, DSO increased to 73 days in the third quarter of 2013 from 62 days in Q2, 2013, mainly because of sales were back-end loaded in the quarter. Inventory returns meanwhile, slightly dropped to 2.4 times in Q3, 2013 from 2.5 times in the previous quarter.

At this time, I will now turn the call over to the operator for the start of the Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Patrick Newton with Stifel. Please proceed with your question.

Patrick Newton - Stifel, Nicolaus & Co.

Yeah. Good afternoon, Germain and Pierre. I guess, my first question is you discuss the month of May demonstrating accelerating orders, especially in North America, and I’d love to get your thoughts on how order flow and geographic trends have fared thus far in June?

Germain Lamonde

Also June has started on a regular basis. The Americas still in – is clearly the better region right now. So thanks Patrick first for your question. So, a good question, of course this is three weeks into the month, so there is still a bit of time to go to call for the full month, but so far so good, I would say, and the trend is really satisfactory.

Patrick Newton - Stifel, Nicolaus & Co.

Okay. And then I guess, during your prepared remarks, Germain, you talked about new products. I think you said 13 new products or enhancements since the beginning of the year. And I'm wondering if you can discuss a percentage contribution of revenue from these new products or the new products as a percentage of bookings or somehow quantify the positive view on the traction you're gaining with these products?

Germain Lamonde

It’s a very good question. In fact it is a difficult question, in fact we use to report numbers on that, but it becomes a little bit subjective and that’s the reason we dropped to usage as such a metric as a reporting metric. The reason being that when you have a, lets say, a very software intensive solution and you are really coming out with a major software upgrade, do we call that a new product, we call that just say like an enhancement, does it fall into accounted and accounted for your new product revenue. So it was too subjective, other companies sometimes like to report it, but we [thought] it was too subjective in fact to make out a strong metric.

But with that being said, I will say that innovation revenues, if you will, are flowing increasingly well. We didn’t get as much of it as we thought in the third quarter, but what’s very interesting is some of our new products were very much launched towards the end of Q3, sometime into late April, mid April or basically mid May. But what’s very interesting is we’re seeing increasingly traction with some of these recently introduced solutions, directly with Tier-1 operators, especially wireless Tier-1 operators. So, I’m quite excited about this and I believe that we’re going to start to see a bit more result of these new products both into Q4 and clearly into the next fiscal year as well. So that’s clearly very exciting. I would say that we’ve invested in the last 12 months towards building EXFO’s advantages in the marketplace and many of our new solutions now are just on the market and really getting traction.

Patrick Newton - Stifel, Nicolaus & Co.

Great. Thank you for the details. I guess, the last one is if you could talk a little bit about the pricing environment. I know it’s always challenging, but it seems it’s been even more competitive over the last few quarters. And are you seeing any material change from your traditional competitors and are you walking away from any business due to pricing competition? And I guess, Pierre, if I heard you right, you said 61% to 62% for fiscal ’13 for gross margin, that implies about 62.5% or even a little bit lower in the month of August – I’m sorry, in the August quarter. So is pricing playing a role in the gross margin outlook?

Germain Lamonde

Yes, as Pierre has mentioned, there is clearly an absorption of our fixed cost data number of volumes that is one factor. The second factor is, there’s no questions about it, pricing pressure plays a role to it. In fact it takes multiple people to – or players to drive the business in fact in such a fashion and looking for the right expression, it takes two to tango, it takes multiple -- when multiple players are tangoing together like eventually there’s a little bit of a pricing pressure specifically some key product or innovation areas and so forth what people are positioning a little bit for longer term. There are times where we walk away because we think that when you have a superior product there’s so much you want to do in terms of discounting to it. So, we are trying to be disciplined and our intent is to increase discipline internally to avoid this type of pricing pressure. I don’t think this is actually any good for any players in the industry on a longer term.

Patrick Newton - Stifel, Nicolaus & Co.

I know the new product is helping avoid some of that erosion?

Germain Lamonde

Well, absolutely. With the new product we’re launching there’s more and more the differentiation in benefits and value and we’re positioning our solutions to avoid as much as we possibly can. Now with that being said it is you’re said and done well we cannot say that we can avoid all aspects of it, but I think we can mitigate a lot of it.

Patrick Newton - Stifel, Nicolaus & Co.

Perfect. Thank you for taking my questions. Good luck.

Germain Lamonde

My pleasure, Patrick.

Operator

Our next question comes from the line of Kris Thompson with National Bank. Please proceed with your question.

Kris Thompson - National Bank Financial

Great, thanks. Germain, I’ve covered EXFO now for a number of years and your report for forward guidance for one quarter – two months into the quarter and I think three out of the last five you’ve had to unfortunately preannounce and I’m just wondering historically you guys have vague with guidance, you seemed to have decent visibility with your backlog. What's changing with visibility and that’s it's harder for you to hit your guidance that you’ve been providing over the last five or six quarters?

Germain Lamonde

Okay, well I would say that when you say we missed two to three out of five I will say this is two out of seven somewhat like that, so I think it's two over the timeframe. So, but yes you’re right in the sense it's been a bit more changing, and to be frank maybe we have to be careful not to over extend our self basically because in some cases these have to do some time with the fact that customers are getting orders. So significant amount of orders were actually delayed and that’s just the environment right now that makes some of these deals be somewhat unpredictable.

Sometime it might just be that the deal if you’re expecting, you’ve got confirmation verbally that the order is in and it’s yours and all that. You might actually then get a call the next day and say you know what, well we would have actually placed the order with you guys but it will not be now but it's going to be let’s say three months from now, so we get some of that. We are also increasingly into a systems business which includes increasing amount of revenue recognition so sometimes there is some of that to do as well with the revenue aspect of it. But the environment makes it a bit more complex than ever.

We have seen situations where in the very last minute there is new prices being thrown in and so that is a part of that situation which is typically and the bulk and the main reason of it is that customers are sometime getting orders and especially when you get into economies that are a bit more soft. Like if you go to EMEA or especially Western Europe any specific countries, you go into specific countries around Asia you see more orders being delayed, it doesn’t mean that you only lost them you’re just going still to win them but there is a bit of delay. Customers are holding tighter to their budgets when their economies are a bit more challenging.

Kris Thompson - National Bank Financial

Okay, that’s fair. And just on the segmented revenue, you used to provide a little bit more segmentation around your optical test or your protocol test business of copper. Can you give us a sense where the short fall is coming from lately? I mean it sounds like NetHawk is doing decently well with LTE test but what about the optical outside of 100G area, are you loosing some momentum in the legacy products and we need to wait for a crossover for the optical test to start to accelerate?

Germain Lamonde

I’ll give you probably a 30,000 feet answer and in fact we will be providing more detailed answer at the end of the fourth quarter. We provide a once a year update more at that level. I will say that in the last quarter some of our optical business has done fairly well especially within the America zone. So basically this is a business that’s pretty much in good shape. We were still delivered its not stellar, but we still delivered 7% year-on-year growth, so Q3 ’12 versus Q2, Q3 this year. And our growth has come largely from the Americas and we – and secondly as well it came in from the wireless segment and the -- I mean the protocol business as that has done fairly well. So I’d say it's a bit of both.

In the mean time, we’re working at both the physical error test and the protocol error test. One segment were extra continuous to make gains and quite pleased with it and there again I'll report basically more specifically at the end of the fiscal year, but it's really with our progress with the wireless industry. I can really sense right now with not having specific numbers to provide today that our wireless business is still progressing fairly well. We’re getting more and more acceptance, various solutions whether this is at the optical front end or the transport datacom solutions that are needed to deploy internet to the tower, what is it with our wireless protocol analyzers or simulators.

In many of these fronts we’re making very interesting progress and then quite pleased with the fact it's increasingly exposed it’s normally like a fixed operator supplier that we used to be say back in 2007 to be today far more entrenched and far more relevant with wireless operators and that’s the direction we want to keep pushing forward, that is a very strong focus for us as a company.

Kris Thompson - National Bank Financial

Okay, thanks for taking my questions, and I do want to acknowledge the good work on the operating expense control and I’ll leave it there. Thanks guys.

Germain Lamonde

Thank you very much Kris. Good evening.

Operator

Our next question comes from the line of Scott Penner with TD Securities. Please proceed with your question.

Scott Penner - TD Securities

Thanks. Just wanted to ask first of all maybe some of the new products that have been launched, specifically something like the TravelHawk Pro that seem to have pretty impressive interest in some of the tradeshows whether this is – these are products that are essentially delayed because they are tied to larger rollouts that are themselves delayed or is there specific issues around those parts of a larger deal?

Germain Lamonde

Thank you very much Scott, a very good question in fact and thanks for noticing this. This is a very interesting product in deed because we can do some study, it's very unique in the industry where we can capture full traffic within an LTE network and 10 Gig in multiple locations. We can actually record and analyze the traffic and really find basically the very, very complex issues within LTE networks. So it's a very good solution, it's now available in the market, in fact it's being released we’re in a shipping mode we sold some in fact all the way back for the last four, five, six months and it's basically a product we’ve actually announced from a legacy TravelHawk product. We made it now to be what we call the TravelHawk Pro and we really transforms this product inside out to make it what it is today where it's very, very unique. So, we’ve already sold this solution to the three largest wireless LTE operators around the globe and what we can say now is that we’re expecting great news from this product line to accelerate in the quarters to come on the fact of both product acceptance, very positive product evaluation. I think we’ve got a very unique solution in the market place right now. We’re clearly ahead of competition in that space.

Scott Penner - TD Securities

So just stepping back and that, recalling at the end of last quarter when the year as a whole was targeted doing mid single digits growth, you’re just using the mid point for Q4. The delta now between three months ago and now as far as this year looks to be pretty substantial. So I just wanted to get some a little bit more color from you Germain whether you consider that this is all just business that has been delayed for industry reasons or are there situations there as you kind of eluded or perhaps you haven't won a deal because we’ve walked away of pricing or other competitive situations that we should know about?

Germain Lamonde

I would say that it's mostly a combination of the EMEA market that is really more challenging and becoming more challenging than we thought it would be. So, there was a deception in the last quarter and clearly we want to be careful with guidance in this particular quarter especially this is a summer month so that for the bulk of it. There’s little bit about the decision of walking away when we think that it makes no sense to provide superior product for same or lower price so there’s times where we’ve also walked away there. And I’d say mostly it's about being a bit surprised with some additional softness and expect it over EMEA and to some degree APAC, but it's mostly EMEA.

Scott Penner - TD Securities

Okay. On the expense side, guys is this expenses that you had in Q3 and I know this pretty much reflects the full amount of the cost cuts from earlier this year, is this a pretty good number to use for the next few quarters?

Pierre Plamondon

Yeah, you have to remember that Q4 usually is lower because this is summer time and we have the vacation period so certain expense tends to be lower in those period, so we’re expecting global engineering a little lower in Q4 due to a full vacation, but this is a one-time and we’ll be back to normal trending. You’re right most of the saving has been shown now in Q3 numbers.

Scott Penner - TD Securities

Okay, last question for me Pierre again if you could just remind me or remind us what the, how many shares were left on your share buyback and when that -- when the current plan expires?

Pierre Plamondon

We had about 1.7 million still available to – to be repurchased until 7th or 8th -- November 7th or 8th something like that.

Scott Penner - TD Securities

Okay. Thank you.

Germain Lamonde

Thank you very much, Scott.

Operator

Our next question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please proceed with your question.

Thanos Moschopoulos - BMO Capital Markets

Hi, good afternoon. Germain, as a general comment how would you say you feel about visibility now versus what it was 90 days ago, and so how do you speak to customers, do you have any incremental clarity with respect to the specific timing of some of the large projects or would you say there’s been really no change from a visibility perspective in the last few weeks?

Germain Lamonde

Thank you very much Thanos, this is a very good question. Of course the visibility is typically quite strong because we typically we do have a very deep final review process. We have basically very strong ownership in there. So to be frank, I would say, where we stand right now with the guidance we’re providing in fact I think we stand very safe given the fact that we have of course order at hands when it comes to the time we’re reporting. We have only three weeks into the new quarter that’s done, so we are fitted with visibility. We wanted to be -- we want to be count out a bit prudent. We were a bit taken by surprise in the last quarters with orders delayed, so we want to be a bit careful. So we think that and we want to be careful mostly because the summer vacation it tends to be that multiple countries in Europe for instance go out all together for about a month, three weeks what have you, so we want to be a little bit careful but we see no risk with it, but we think we’re quite safe.

Thanos Moschopoulos - BMO Capital Markets

Okay, and so I guess this question has been asked different ways but just to clarify would you say that, should I think we beat up the challenges you’ve experienced having primarily give the geographic and regional issues or are there any specific product areas that you’ve highlighted being more challenging than others?

Germain Lamonde

Well, I'll say that it's mostly been first geographic and second I'll say that some products that were launched into the quarter but we’re hoping to be able to generate revenues during the last quarter on these new products but they were launched like maybe too much in middle of the quarter or if it's too late into the quarter to be highly fully impacted if we weren’t expecting. So we think this will actually start to be positively impacting our results in this quarter and the quarters to come.

Thanos Moschopoulos - BMO Capital Markets

And would you count the 100G as among those or in general how would you characterize the 100G business?

Germain Lamonde

Well a part of that is in fact we do have completely new solutions from the 100GigS solutions market our end market which is very differentiated, very unique value for us. So we think this is a product that’s going to do very well in the market place and same as the question that was asked earlier with Scott was the TravelHawk Pro which also we’re expecting to do well in the quarters to come. We have a number of additional solutions as well in which we’re expecting to do very well. We just launched recently a new OTDR model called the Max 700 series which we’re expecting to do very well with as well, so it a number that they use where we can be very, very confident in terms of being able to accelerate revenues in the very near future.

Thanos Moschopoulos - BMO Capital Markets

Okay, and then finally my understanding is that China Mobile finally released their tender for their 200,000 base stations in the past two days, and so I believe China is the second largest region for you. Can you talk about what type of uplift you might see in the region from that deployment and from a timing perspective when we might start to see impact from that?

Germain Lamonde

Absolutely while the RFQ has been sent on acquiring the base to base stations the path of deployment is not basically for up until later this fall and that’s the project we will following very closely because of course like any other slow projects there could be delays. There are a lot of delays that are occurring in many of the technologies right now into the telecom space to be frank there was a lot of massive announcements made in the past for large scale deployment of cells, eco cells, nano cells. The industry is a little behind schedule when it comes to these deployments. So the RFQ is a great positive sign and we’re going to follow that situation very closely. But we’ll also be following it very closely when the problem will actually take place and at that time that EXFO would actually potentially be benefiting from this deployment.

Thanos Moschopoulos - BMO Capital Markets

Great. Thanks Germain, I’ll pass the line.

Germain Lamonde

Thank you very much, Thanos.

Operator

Our next question comes from the line of Deepak Kaushal with GMP Securities. Please proceed with your question.

Deepak Kaushal - GMP Securities

Hi, good evening. Thanks for taking my question gentlemen. I guess falling on the Asia Pacific team perhaps you could comment on the trend in the non-Chinese Asian markets. You mentioned Asia Pacific is uneven, so where are the pockets of growth and where are the pockets of challenges outside of China?

Germain Lamonde

Very good question, Deepak. I'll give you a bit more of the 30,000 feet view just because of competitive reasons we’re not typically disclosing more specifically on the country for country basis. I will say that, I will cover probably the two regions more like; the China region is actually starting to do a little better, sub regions within the rest of the APAC if you would have been a bit more challenging. We were expecting slightly better than the last two months in the region. We were firm believers that our structure is very, very effective. We have got very good positioning with many of the very core, very key network operators with both within China and outside of China. So although this has not been as strong as we were expecting during Q3 we remain quite optimistic about a near term potential for us in APAC impact.

Deepak Kaushal - GMP Securities

Okay, great. And then just comparing APAC with perhaps the U.S. on the wireless LTE front you’ve seen some good uptick in the U.S. on LTE. Can you contract or compare what stages or rollouts are in the U.S. versus some of the players in Asia and do you expect Asia to kind of follow suit with what's going on in the U.S. and your success there in wireless?

Germain Lamonde

Yeah, I would like to say that within APAC there are two countries that we could probably set aside like Japan, it's clearly not a follower – technology leader right now into to the LTE deployment, and Korea is pretty much the same way as well slightly behind Japan, but Japan is still today a very leading edge country when it comes to LTE deployment. The rest of it back China we talk about China, China is actually following [suit], but is clearly lagging really what's been done so far in America. I mean there is other operators that have got the initiatives like (indiscernible) South Korea, there’s a few players but finally Japan is ahead of the pack with AT&T and Verizon very close, with a number of new technologies that are very critical for the telecom industry, whether its in force over LTE or some of the feature that comes with 3GPP release stand for example where we’re going to see tremendous amount of evolution as network operators are skidding up, when wherever you're today where you’re looking at the Verizon or AT&T or Docomo deployment, I mean these networks will still continue to get substantial amount of investments moving forward as capacities just continue to expend in the quarters to come – in the years to come.

Deepak Kaushal - GMP Securities

Okay, and then on the LTE deployments in Asia versus the U.S. are your products playing the same role in both of those markets, are you seeing similar levels of traction success in Asia in net versus the U.S?

Germain Lamonde

For the most part I would say the answer is yes, there is some system -- some product specific nuances that we have seen in some of these countries where we’ve had more success in some of our solutions. Our range of solutions for the wireless industry has substantially increased over the last three years, four, five years. So our traction in Japan for instance would be slightly different than what it is in China and while Japan and America will look the same, China will look slightly different let’s say then what we’ve been doing in Japan and U.S. and so forth.

Deepak Kaushal - GMP Securities

Okay, great. Thank you, that’s helpful. And then perhaps one more question for Pierre. We say the amortization of intangibles come down, you guys have about $8.7 million left, is that all related to the NetHawk acquisition, does that go to zero and then I guess the corollary to that question is, what are your thoughts on CapEx? How should we look at sustaining CapEx for the business, does it all go to fixed assets or is there any that goes regularly into intangible assets?

Pierre Plamondon

Okay, most of the intangible is related to NetHawk and we still have 18 months to amortize this amount, into intangible assets we do have some small intangible assets such as software okay, so we continue to appoint some software for our businesses and this would be accounted as intangible as well okay. So going forward CapEx is about $5 million to $6 million per year so this is the trend that we have right now.

Deepak Kaushal - GMP Securities

Okay, thank you, that’s helpful. And thanks, I’ll pass the line.

Germain Lamonde

Thank you very much, Deepak.

Operator

Our next question comes from the line of Robert Young with Canaccord Genuity. Please proceed with your question.

Robert Young - Canaccord Genuity

Hi, good evening. Just a couple of quick ones for me, the booking in the quarter are higher than the guidance you’ve given and that’s not something that hasn’t happened in the past but in the past I think you had some big orders perhaps in the service assurance business or a big DSL copper order, I mean there wasn’t any press release, I was wondering what might be different this time am I thinking about that in the right way?

Germain Lamonde

It's a very good question Robert, many thanks for asking. In fact we have had a number of important deals to be frank we have not been as outgoing with potentially they’re doing press releases on that. But we’re pleased with the book-to-bill ratio of 1.05, I think especially bodes well for the future and pleases with the sequential increase, which is quite significant. So to which degree have we wanted to be very aggressive in doing press releases or into quarter, while the answer I think you would understand why we thought to be a bit more in the safe side and we didn’t want to create press releases basically specifically on that, and practically we tend to be able to be conservative when it comes to making press releases around specific customers or product or account wins because typically customers they’re not allowed to be mentioned in our press releases and that’s why in fact we’ve been a bit a soft on that side.

Robert Young - Canaccord Genuity

Okay, fair enough. And then, would you say that you’re a little more conservative than you’ve been in the past with the guidance, the reason I am asking that is just because of the, you said at the end of the quarter, the last month has been quite busy. It seems as though this is the first quarter where you’ll see growth and year-over-year growth quite a number of quarters and I just want to get a sense of just your conservatives in going into this guidance this quarter.

Germain Lamonde

Very good question Robert, and I don’t know what you would do in my position if you would be conservative or not. But what I'll say simply is that we’re putting in the groups the factors into consideration, while I don’t see a reason to take on due reason in terms of stretching basically where we should be landing for this particular quarter. We also want to take into consideration the fact that this is a summer month and so this might have an impact although we think it's going to be too bad but we want to put that into the context. So all these factors considered, I think it's, this is enough guidance to be provided for this particular period of time which tends to be typically a little softer on the August quarter.

Robert Young - Canaccord Genuity

Okay, that’s all my questions, thanks a lot and good luck.

Germain Lamonde

Thank you very much Robert, have a good evening.

Operator

Our next question comes from the line of Hendi Susanto with Gabelli & Company. Please proceed with your question.

Hendi Susanto - Gabelli & Company

Good evening, Germain and Pierre.

Germain Lamonde

Good evening.

Hendi Susanto - Gabelli & Company

Like earlier in the year management is aiming for gross margin improvement towards 62% to 65% driven by product mix shift over entire margin protocol business and a new product introduction. May I know where EXFO is in terms of product mix now versus last year, and then secondly have you seen meaningful benefit of product mix shift and new product introductions embedded in the gross margin of the third quarter.

Germain Lamonde

With regard to the third quarter we mentioned, it's difficult when you make a statement regarding the product mix, the shift if you will and sense that we have some products moving up and south but the one point that for sure we have to – we have confirmed and we have to take into consideration is the fact that the volume of sales was below what were anticipated and therefore our absorption of fixed costs is not being to the height of what we were – normally being targeted so that’s for one. And the second aspect of it is that we're seeing certain amount of pricing pressures specifically on entry levels of products for example. So that’s the main reason of the, a bit below where we would like to be from the gross margins point of view.

Hendi Susanto - Gabelli & Company

Okay. And then Germain could you talk more about the encouraging dynamics in 4G/LTE and 100 gigabytes deployment in the U.S. The press release said that you’re seeing like rather strong trend in North America. I’m wondering whether it's still more like pockets of strength, whether you’re seeing those on an encouraging trend across the majority of your customer in U.S.? On the other hand, I think we all know that uncertainties remain. I’m wondering like how much lets say like order push out were you seeing and then what can be the trigger for like more spending down the line especially probably in the December quarter of the year?

Germain Lamonde

Very good question. So I'll take them in sequence, but the first aspect is what are the positive signs we’re seeing about 4G/LTE and 100 gig type of deployment. We can – I can answer that question in multiple facets, one of which is of course we're seeing our engagement with number of operators mostly and very encouraging is that with Tier-1 operators we got more and more engagement around this 4G/LTE deployments, whether this has to do with our protocol analyzers, our protocol simulators or wireless broadband deployment for wireless backhaul or DAS or (indiscernible) systems, or remote radio head types or RRH or basically there is a lot of ways where operators are investing in their networks and therefore that’s creating basically traction for our products. We are seeing a bit more of that clearly in America as I’ve stated through the call so far and even in our press release. But that’s a very positive trend that we see out there.

The second very positive trend that we see especially in the America, but also in other regions around the world, is the traction and the growth in the 100 gig market. No questions about the fact that 100 gig will be a very massive wave of deployment. Now cleaning up, we’ve got many of our – Tier-1 operators that have approved our 100 gig solution, we got new solutions now available that’s even more strategically very interesting for network operators. So this is an area where traction is actually quite good. The growth in terms of number of units is actually quite good.

So, this is looking good for the quarters to come and that will be basically a very strong end market we believe in the next several years to come. Another aspect of your question is about order push out and whether we’re seeing that? Its being more intensely into either, I will say, first EMEA and secondly, we will see more into call that either expensive or complex system sales, where you tend to go to higher into the decision hierarchy for getting deals being moved through.

So, that’s where basically some of these larger deals got a bit more scrutiny and that created some delays in there. But fundamentally its not like deals are being cancelled or projects are being avoided. It’s more like, it’s taking a bit longer time to get this projects through the approval process.

Hendi Susanto - Gabelli & Company

Thank you.

Germain Lamonde

My pleasure.

Operator

Our next question comes from the line of Robin Manson-Hing. Please proceed with your question.

Robin Manson-Hing - CIBC World Markets

Good afternoon.

Germain Lamonde

Good afternoon, Robin.

Robin Manson-Hing - CIBC World Markets

First question, I got cut off for a little bit, so I missed the part, I thought I heard you mentioned EBITDA and then I got cut off, your EBITDA target of 15%, can you comment on that, just to reiterate what you said there?

Germain Lamonde

Yes, absolutely. What we said is that the EBITDA as of now is not exactly where we would like it to be, we said it were at about $10.2 million so far this year, which makes it to be at about 5.7% of EBITDA. So after three quarters it’s not exactly where we like to be. We expect Q4 to be at least to that – to the same level as Q3, probably better. So with that, we’re expecting to improve this 10.3 or especially to improve this 5.7% for this fiscal year. And what I was really mentioning about this is that I’m not satisfied with that level, our goal and our target to reach the 15% remains and we have got series of actions to take towards that and we’re doing what it takes to get there in fact and its going to take a bit of additional revenue influx and thanks to multiple new products we’ve launched. Thanks to specific initiative that we got in the sales front to drive more business.

I think we will actually be able to deliver the revenue growth and we need to have to get the EBITDA to improve substantially. Of course as we keep increasing revenues, I’m pleased with the booking increase in the last quarter of a sequential 15% or year-on-year 7%. What we have to do now is with the new solutions we’ve launched during Q3 is to continue to grow revenues and get basically to the right level of EBITDA profitability to drive earnings and the share price.

Robin Manson-Hing - CIBC World Markets

So, I believe it was $350 million to $400 million to get to 15%, is that changed at all and is that still three years – I mean the three-year goal I think was at 2012, what can you comment on that?

Germain Lamonde

Basically our commitment remains the same and we think we want to be reaching the 15%. We said that it will be within a three-year timeframe. So basically we’re pushing still hard on trying to reach that target.

Robin Manson-Hing - CIBC World Markets

Okay. And in the case, CapEx continues to be under pressure as it is now, will the goals – you have to choose one be it the $350 million, $400 million or 15% EBITDA, which do you see as a priority? I mean, I’m assuming $300 million; $350 million if you’re under pricing pressure you could choose to lower prices or pursue maybe lower ROI projects internally to get to the higher revenue level, but what is your primary goal at the end of the day, say two years from now?

Germain Lamonde

Of course our primary goal is try to reach both at the same time. So I’m a firm believer that we can actually grow and deliver the profits at the same vein. Of course if we were challenged to be making a choice of one or another, we’re very committed to deliver the earnings – the EBITDA growth or percentage that we’ve talked about. But its not just about an EBITDA percentage, its about an EBITDA dollar value that will drive to an earnings per share that we want to drive and that to us is a very fundamental push for the business is to drive stronger earnings per share. I hope that answers your question particularly.

Robin Manson-Hing - CIBC World Markets

It’s a very good answer actually. Okay and next question, you – last quarter you gave sales of products less than three years old. Do you have a number this quarter; I think it was 40% last quarter?

Germain Lamonde

No we didn’t give a percentage last quarter, in fact we used to report on revenue for product that are less than two years old and as I said early on the call is that we’ve abandoned this metrics about three years ago, I believe. It was mostly because it was too subjective and I don’t know how other organizations are reporting on this number, but we find our self with there is a number of questions when you throw an improvement in the product, when you make it to be a substantial enough improvement to a product that you consider it to be a new product or its not a new product, it is subjective. And that’s the reason why we wanted to walk away from this. Now the key point for us is that internally we are measuring return on our investments and all that, and we remain quite convinced that our new product introductions are really making a difference, both in terms of positioning us for the key growth vectors in the future, but as well that will actually tremendously help us improve profitability.

Robin Manson-Hing - CIBC World Markets

Okay. So in terms of key products kind of pushing you towards higher revenue, can we count those maybe as a top three or four product being – you talked about the TravelHawk Pro, and as well, the FTP88100 and GE Power Blazer, would that be another one? And then, if there are other ones, could you sort of round them off for us?

Germain Lamonde

Yes, in fact we can actually name a number of them. Of course, we talked of, as you pointed out, the TravelHawk Pro, we talk about our FTB-880 it’s a very important new product, really has tremendous impact. We just released simply the 1588 and the single key category changed to it which is very, very critical for wireless operators. We keep on launching additional capabilities in our protocol simulation space. We’ve released a 10 gig card that we’ve started to ship to customers, which has a huge traction and level of interest in the marketplace. So there is a series of products. Not all of them are super fancy, we just released, as I said earlier, this month a brand new OTDR product that's got real traction, as well. So, I’m quite convinced about the traction for the future.

Robin Manson-Hing - CIBC World Markets

Okay, great. Two more questions.

Germain Lamonde

We will take one last question, maybe?

Robin Manson-Hing - CIBC World Markets

Okay, sure. Okay then, just I guess the building in Montreal, how is that coming in terms of filling it? Could you talk a little on that?

Pierre Plamondon

We still have space for rent, so this is still open. So we have a real estate agent looking to find tenants for the building for the two floors available right now.

Germain Lamonde

Which would basically reduce some expenses and improve profitability as well. All right, so I would like to thank you very much Robin for your questions and I like to thank you everyone as well for taking time away from your very busy schedules to join us today for this call. So just in closing, just a few key takeaways before we close the call. First of all, we’re staying on course with our strategy of leveraging key newly launched innovations and include a market focus. Secondly, we have reduced SG&A and net R&D by $7.5 million in three quarters and that is despite a new onset or increases in inflation. So, so far in this is fiscal year that we will continue to closely manage our costs because we’re very focused on delivering the earnings and EBITDA growth on the mid-term basis.

Finally, we firmly believe its only a matter of time before network operators are spending on a global basis, since fundamental drivers in telecom industry remains very intact and I firmly believe – believer that our positioning is very, very good in the marketplace. So on this; this concludes our third quarter 2013 conference call. And on behalf of the entire EXFO team, thank you very much for joining us today.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank your for your participation and ask that you please disconnect your lines.

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EXFO Inc. (EXFO): FQ3 EPS of -$0.01 misses by $0.02. Revenue of $58.9M misses by $0.1M. (PR)