EXFO Inc. (EXFO) CEO Philippe Morin on Q4 2019 Results - Earnings Call Transcript

Oct. 09, 2019 11:15 PM ETEXFO Inc. (EXFO)
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EXFO Inc. (NASDAQ:EXFO) Q4 2019 Earnings Conference Call October 9, 2019 5:00 PM ET

Company Participants

Vance Oliver - Director of Investor Relations

Philippe Morin - Chief Executive Officer

Pierre Plamondon - Chief Financial Officer and Vice President of Finance

Germain Lamonde - Founder and Executive Chairman

Conference Call Participants

Thanos Moschopoulos - BMO Capital Markets

Robert Young - Canaccord Genuity

Tim Savageaux - Northland Capital Markets

Todd Coupland - CIBC

Operator

Please standby. Good day, and welcome to EXFO's Fourth Quarter and Year End Conference Call for Fiscal 2019. Today's conference is being recorded.

At this time, I would like to turn the conference over to Vance Oliver, EXFO’s Director of Investor Relations. Please go ahead.

Vance Oliver

Good afternoon, and welcome to EXFO's fourth quarter and year end conference call for fiscal 2019. With me on the line today are Philippe Morin, EXFO's Chief Executive Officer; and Pierre Plamondon, CFO and Vice President of Finance. Germain Lamonde, EXFO's Founder and Executive Chairman, will also be available to answer questions during the Q&A period.

A reminder that this conference call will include certain forward-looking statements and/or 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/or 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 reconciliation of these non-IFRS numbers to our IFRS results is available on our website at www.exfo.com/investors.

All dollar amounts in this conference call are expressed in U.S. dollars, unless otherwise indicated. At this point, I will turn the call over to Philippe.

Philippe Morin

All right. Thanks, Vance and good afternoon, everyone. So, EXFO reported a strong fiscal 2019 on all of our key financial metrics with growth in revenue, in bookings, in earnings and as well on cash flow from operations.

Now to highlight some of our key financial numbers, I’ll start with revenue, they are increased by 6.4% to a record high at $287 million in 2019 and bookings improved 11.2% to a high of $298 million.

Obviously, we benefited from a full year contribution from the Astellia acquisition in 2019. It’s also important to note that the double-digit increases in bookings year-over-year reflects four monitoring contract wins now related to 5G deployments including a multi-year, $4 million booking order in our fourth quarter of 2019.

Now these multi-year, multi-million dollar deals are essential for EXFO to achieve the necessary scale to better absorb our fixed cost and with recurring revenues representing now 15% of our total revenues in 2019 and that’s up from a low double-digit numbers we had in our prior years.

Turning to the bottom-line, our IFRS net loss was reduced by nearly 80% to $2.5 million in 2019. Our adjusted EBITDA surged 49% to $25.6 million, surpassing our annual profitability target of $24 million and our cash flow from operations improved 20% year-over-year to $17.2 million.

So in addition, we’ve fully integrated our transformative acquisitions of Astellia. We completed our reorganization plan to bolster efficiency and profitability, all while maintaining a sound operational discipline.

Overall EXFO delivered a solid performance in 2019 with a heightened degree of predictability, including sales results above the midpoint of management guidance for now four consecutive quarters.

So let’s take a quick look on how we performed on a product-line basis in 2019. In terms of our Test and Measurement product family, our sales increased 3.7% year-over-year, while our bookings improved 8.4%.

As the number one supplier now in the optical test equipment market, EXFO took advantage of ongoing fiber deployments on a global basis while gaining market share to deliver record sales and bookings in our T&M business in 2019.

We see growth – when we look at our three key customer segments, number one, the Communication Service Providers, they are continuing fiber build-outs at high speed deployment in metro, regional and access network to meet growing bandwidth.

Our second group, the cable companies, are following suit with fiber deep initiatives to remain competitive. And our third customer segment, the webscale operators, are building datacenter closer to the network edge to ensure a superior quality of experience for end-users.

On the wireless side, the network operators are deploying small cells, connecting with optical fiber in densely populated areas to deliver the next-generation services that subscribers are demanding. All these market trends contributed to the strong performance of our Test and Measurement business and this is where EXFO shines with our unmatched optical test portfolio.

Turning to our SaaS product family, sales and bookings increased 16.2% and 21% respectively, mainly due again to the full year contribution from Astellia and more than five multi-year, multi-million dollar contract wins which are proof points of our successful growth strategy.

From one of these contracts, we recognized in revenue a $4.9 million order for our network topology solution in 2019 coupled with a services deal expanded over three years. This contract win is at the heart of what differentiates EXFO from other players in the service assurance and analytic space.

Our network topology solution allows EXFO to apply a very unique lens to network performance, service reliability and subscriber experience.

As such we are deploying software that maps the relationship between network resources and the related services across multiple domains. The end result is a holistic view of the network with the ability to detect and troubleshoot and fix issues in the shortest of time.

And that’s precisely what our customers are demanding as they want to offer a better end-user experience despite network operations are becoming more and more complex with the virtualization of their network.

So we are therefore providing them with an extra set of eyes or relevant context as they move forward with massive fiber and 5G deployment. We are also pleased to see that EXFO is now ranked second in global market share for probe based monitoring systems behind NETSCOUT according to Analysys Mason it’s a well respected research firm specializing in the telecom industry.

In their report, and their latest market report on automated assurance systems, we’ve now achieved 9% market share in our calendar 2018 placing EXFO ahead of Javi and Anritsu. The report also highlighted our comprehensive portfolio and stated that we are well positioned to support the communication service providers’ evolution to 5G. These latest findings strongly support the growth strategy EXFO has implemented in recent years.

So looking ahead to fiscal 2020, EXFO is well prepared to execute its growth strategy, leveraging both fiber and 5G secular growth drivers across several geographies.

In the Americas, U.S. network operators are embroiled in a heated race to deliver the 5G-related services first to their customers on a nationwide basis. The competitive landscape is such that optical spending will continue on fiber densification, fiber-to-the-home and datacenter interconnect initiatives, while RAN optimization and monitoring solutions should increasingly gain traction when commercial rollouts of 5G networks become mainstream in 2020.

In the EMEA, we are anticipating a stronger emphasis on fiber deployments deeper in the network since 5G spectrum auctions are still not completed in several countries. But there are some mobile network operators in Europe and Middle East who have now begun limited deployment of 5G networks.

And so as mentioned earlier, we’ve already had a handful of contract wins related to 5G monitoring in our books and the funnel is widening with an increasing focus on virtualization architecture. Consequently, we are expecting an inflection in our SaaS business into our second half of fiscal 2020 in both the Americas and EMEA.

Now finally in the Asia PAC region, we are expecting major investment in core fiber networks to support enhanced mobile broadband services such as virtual and augmented reality and video gaming applications. And for EXFO’s part, we have established ourselves as a trusted partner for leading network equipment manufacturers in that region, especially for our high-end optical test solution.

So now let me provide you with our financial outlook for the first quarter of our fiscal year 2020. We are forecasting sales between $70 million and $75 million for the first quarter ending November 30th, while our IFRS net loss should range between negative negative $0.05 to negative $0.01 per share.

IFRS net loss includes $0.04 per share in after-tax amortization of intangible assets and stock-based compensation costs. This guidance was established by EXFO management based on existing backlog as of the date of this conference call, the seasonality in expected bookings for the quarter and exchange rates as of the day of this call.

For fiscal 2020, we are targeting adjusted EBITDA of $33 million based on the newly adopted IFRS 16 standards for leases.

And at this point, I would like to turn the call over to Pierre who will discuss in more details our financials.

Pierre Plamondon

Thank you, Philippe. Good afternoon everybody. Annual sales increased 6.4% to $286.9 million in fiscal 2019 from $269.5 million in 2018. As previously mentioned, EXFO benefited from the full year contribution from Astellia acquisition in 2019 and a $4.9 million contract win from network topology software. These factors were partially offset by currency fluctuations year-over-year.

Bookings meanwhile improved 11.2% to $287.8 million in 2019, for a book-to-bill ratio of 1.04 which allow us to bill our backlog year-over-year. This increase in backlog has been expected as we transition to more system-based solutions.

In the fourth quarter of 2019, sales reached 70.2 million, while bookings attained 70.9 million for a book-to-bill ratio of 1.01. Gross margins before depreciation and amortization amounted to 58.6% of sales in fiscal 2019 compared to 61% in 2018. In the fourth quarter of 2019, gross margins reached 66.9% of sales.

Our gross margin decreased in 2019 mainly due to a full year contribution from Astellia. Astellia delivered lower margins than our typical corporate margin as a portion of its sales includes professional services contracts. Our gross margin was also negatively affected by a less favorable mix of the same mix year-over-year. We believe that our gross margin will range between 58% and 60% in fiscal 2020.

Moving to operating expenses. Selling and administrative expenses totaled $98.6 million in fiscal 2019, flat compared to the $98.8 million in 2018. In the fourth quarter of 2019, SG&A expenses totaled $23 million. Although SG&A expenses were relatively flat year-over-year in dollars, it should be recalled that we had Astellia in our book for full year in 2019 compared to seven months in 2018.

Consequently, our reorganization plans and cost control measures proved to be very effective during the past year. SG&A expenses as a percentage of sales dropped to 34.4% in 2019 from 36.7% in 2018. We expect for 2020, our SG&A expenses would range between 32% and 34%.

Net R&D expenses totaled $50.6 million in fiscal 2019, compared to $57.2 million in 2018. In the fourth quarter of 2019, net R&D expenses amounted to $11.1 million.

The 6.6 decrease – the $6.6 million decrease in net R&D expenses in 2019 can be mainly attributed to our restructuring plan, which was completed at the end of Q2 2019 and decreased the – and to a decrease of restructuring expenses compared to the previous year. These factors were partially offset by adding Astellia into our books for full year in 2019.

As a percentage of sales, net R&D expenses reached 17.6% in 2019, compared to 21.2% in 2018. We expect that net R&D expenses will range between 16% and 18% of sales in 2020. IFRS net loss in 2019 totaled $2.5 million or $0.04 per share. In the fourth quarter of 2019, IFRS net loss amounted to $0.2 million or $0.00 per share.

In terms of geography, sales in EMEA, America and Asia Pacific regions increased 9.5%, 6.2% and 1.6% respectively in 2019.

Looking at the sales split, the Americas accounted for 50% of sales. America represented 32% while Asia Pacific totaled 18%. Turning to customer diversification, our top customer accounted for 6.9% of sales in 2019 while our top three represented 18.1% of sales.

Moving on to a few key points on the balance sheet. Our cash position increased $4.4 million year-over-year to $19.4 million at the end of 2019. We generated $17.2 million in cash flow from operations and received $3.3 million for the disposal of capital assets. These elements were partially offset by $7.5 million for the purchase of capital assets and $8 million for the repayment of bank loans and long-term debt.

Finally, in terms of IFRS 16, it's the new accounting standard for leases that became effective for EXFO as of September 1, 2019. Going forward, operating leases will be recognized as a long-term asset and the debt on the balance sheet. On our statement R&D, former lease expenses will be recorded as depreciation expenses instead of prior expenses allocated in cost of sales, SG&A and R&D line items.

Therefore, for fiscal 2020, we anticipate that adjusted EBITDA of $33 million will be positively affected approximately by $4 million by this new accounting standard. We do not expect a material impact to IFRS net earnings.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question today from Thanos Moschopoulos with BMO.

Thanos Moschopoulos

Hi, good afternoon. I know that you alluded to it in your prepared remarks, but just to maybe go back to gross margins, so to be clear, that was primarily – the gross margins dipping this quarter was primarily due to higher professional services mix is my understanding. And so - or was there anything specific to Q4, like should we start to see a bit of a recovery into Q1 or not?

Philippe Morin

So Thanos, as Pierre highlighted, so it's combination of two things. One is the – as you talked about, as we go through the Astellia transformation, there is some aspects of professional services that we’re continuing to work and transform but it did impact in terms of our overall gross margin.

And in addition there is also a mix on some of the products on the T&M side. So that’s bringing that to that level. Now when we look at our range for 2020, we are going to get back to the 58% to 60% gross margin level.

Pierre Plamondon

And then we’d add that – maybe Thanos, I would add that the – we have more [indiscernible] impact this quarter, okay about 90% compared to [70%] [ph] last year. That explains also the fact that the margin in that territory tend to be lower as well.

Thanos Moschopoulos

That makes sense. As Astellia starts to show stronger revenue growth and hits the inflection point you're looking for, would there be much operating leverage on the gross margin line or not especially. I am wondering, if whether for example, professional services staff might be underutilized at the moment in anticipation of deals that are coming?

Philippe Morin

You are bang on and we are starting to see that with a multi-year and multi-million dollar contract that we’ve got and we are showing that it’s being more software going forward and it’s really impacting. It’s going to start leveraging our overall gross margins flow through the EBITDA.

And when you look at where we stand, just to give you bit some more data point, we’ve got more than $65 million of backlog already in our SaaS business that we know we are going to be able to recognize at least 50% of that into our 2020 and that’s giving us as well the confidence in terms of where we stand with, with regards to our margins going forward for 2020.

Thanos Moschopoulos

And sort of on a related question. In terms of, for example, the four 5G deals that you called out, you said they are multi-year deals and so, with the revenue recognition typically be more front-end loaded, as is the case of the $4.9 million deal you called out or how does the linearity look over the three year – or over the multi-year term?

Philippe Morin

Yes, they tend to spread out fairly evenly over the multi-years tend to be two to three years. Sometimes the software licenses will come in, in the first year, like in some of the - what happened this year on the $4.9 million deal that we’ve announced.

But they tend to have deliverables associated with some of the key features in deployments and acceptance by our customers and they tend to go over the kind of being spread over the multiple years evenly.

Thanos Moschopoulos

Maybe one last one for me, in terms of – maybe just expanding in terms of the as you said the inflection point you are expecting in the second half and your visibility there. So, it sounds like, in recent months, you are seeing an ongoing progression in RFP activity, I guess as expected as operators get closer to 5G deployment, is that what’s happening?

Philippe Morin

Yes, so, we are starting to see – as I mentioned earlier, we are starting to see the wins coming in. As I mentioned, we now got four 5G wins that – 5G contracts and we are starting to see the number of activities RFQs continuing to gain momentum.

And so, yes, and it touches on – we have a very rich portfolio that takes into account, as an example, active service assurance to monitor lower latency that 5G will – if you are going to deploy small cell, how do you make sure that latency is at the spec of the 5G.

We are starting to look at RAN optimization for the new spectrum and the new small cell deployment and we expect that, that momentum to gain even more steam as we head into our second half of our 2020 fiscal year.

Thanos Moschopoulos

Thanks very much once again.

Philippe Morin

Thank you.

Vance Oliver

Thank you

Operator

Next we’ll hear from Robert Young with Canaccord Genuity.

Robert Young

Hi, good evening. The inflection that you are talking about, is that fiscal H2 or is that calendar H2 2020?

Philippe Morin

It’s fiscal, Robert.

Robert Young

Okay. And last quarter, you’re highlighting some architectural decisions in virtualizations that were causing some pause and now it sounds like you are talking about seeing some momentum in 5G. And so is that pause, are you through that pause? You no longer see that or am I mixing up two different drivers here?

Philippe Morin

Yes, when you look at the monitoring of the – or the capability that we can provide from a service assurance portfolio, there are some aspects that we can start seeing some momentum now. So, fiber deployment, as an example is where small cells need fiber and we are seeing the benefit of that on T&M.

So monitoring capability as an example, and I just talked about being able to monitor and assure a particular latency spec that we are starting to do that as people deploy small cell. The RAN optimization is starting to gain momentum as they are now looking at new spectrum, new small cell deployment and so on.

The virtualization of the core and virtualization of the network, that’s the same that I talked about, Robert more of the second half and 2021 deployments and that would require, as I mentioned a completely new architecture on our behalf on the customers’ operation side and that’s what’s we continue to see that inflection point being more into the second half – fiscal year and moving into 2021.

Robert Young

Okay. So there is a second driver on the horizon that you see sort of clearing up as these architectural decisions go away and you’ve got to reference customer in Three UK that proves that point out for you. But that’s an inflection maybe two years from now.

Philippe Morin

I would say as long as two years, because we are going to – like, there are going to be other – our customers are going to go in with what we call the Three UK architecture with the cloud-native virtualized network and you are going to start seeing more and more of these accounts starting in the second half of 2020 and then real volume in market momentum into the 2021 and we expect to win those as we get new account going into this cloud-native network deployment.

Robert Young

Okay. And then, lastly, I want to push a bit on the EBITDA guide, $33 million. If I exclude the $4 million benefit from IFRS 16, it’s $29 million. I think last quarter you said you’d expected to get an incremental benefit from the restructuring maybe $2.5 million.

And so that doesn’t leave a lot of growth from 2019 what you reported today to 2020. And so I am curious like what sort of growth you expect in that EBITDA line driven by top-line growth rather than the restructuring? And then I’ll pass the line.

Philippe Morin

Yes, so effectively, when you look at what – so, we’ve delivered $25.6 million this year. If you take the IFRS impact of $4 million, it means, we would be looking at a $29 million EBITDA target before the IFRS adjustment that’s representing a 13% improvement in terms of where we – versus where we did delivered in 2019.

I am really confident that we will deliver that number and I think where we see – where we are at the beginning at the year. This is where we are willing to commit. And again as we move through the year, if we feel that there are some adjustments that we need to be made, we’ll obviously announce it, but as where we stand now, this is the visibility that we are looking for.

And that’s based on roughly on mid-single-digit revenue growth that we are also forecasting, Robert. So, it’s a combination of those, even call it a bit of prudence as well, but it’s really making sure that, like we’ve now shown, we’ve delivered four quarters in a row of what we said we were guiding.

We delivered on a EBITDA growth that we guided for. We want to make sure we have the same predictability in our business model for 2020 as well.

Robert Young

And as I look at from a slightly different angle, the single-digits growth and you expect EBITDA margins to be relatively similar to this year notwithstanding any unexpected growth. Would that be a good way to think about it or do you think you can expand EBITDA margins?

Philippe Morin

Again, the – when you look at – again, what we are guiding and then if you assume a kind of single-digit, we would be increasing our EBITDA percentage on a revenue percentage point of view. When we factor in our outlook, we also have to include obviously all of the inflation cost and all of the others and things that we are seeing.

One thing I could again reiterate is, both on the T&M, we have a good view of visibility of what’s going to happen in the next six to nine months. And on the SaaS side, let me reiterate again, our backlog is giving us, with the backlog at $65 million where we believe we can be – while we recognize about 50% of that is giving us also a good visibility of where we think we can land with the SaaS revenue and margin associated with it.

Robert Young

Okay. Okay, thanks. And maybe one last thing, just maybe an update on how your business is doing in China with all – you got some exposure to Huawei and some other parts and lots of issues there. Maybe you can just update us there and I’ll pass the line. Thanks.

Philippe Morin

Yes, now in China, Robert, as you asked last quarter, Huawei is a customer of ours. It’s less than 5% of our – in terms of our revenue and even though with all the challenges and macroeconomic associated with China, we are not seeing any material impact – negative material impact to – on the China side.

Robert Young

Okay, thanks.

Philippe Morin

Thank you.

Operator

[Operator Instructions] We’ll hear from Tim Savageaux with Northland Capital Markets.

Philippe Morin

Hi, Tim.

Tim Savageaux

Hi there. Sorry about that. Afternoon. Excuse me. I wanted to ask a few questions focused on the Test & Measurement side and on fiber optic test in particular. And I guess, the first one would be focused on what look to be pretty solid results with your book-to-bill back about one year. In an environment that appears at least maybe a little unsettled in terms of fiber-to-the-home.

Saw a warning in a recording recently from smaller fiber-optic systems suppliers. You seem to be looking at a little more stable demand environment. I wonder if you might be able to comment on some of that broader volatility relative to what EXFO has seen or is seeing in the market.

Philippe Morin

Yes, from a fiber deployment point of view, Tim, we see two major growth vectors. One is, again the 5G small cells requires fiber densification is predominantly out of the North America continuing to be giving us some strong growth and continuing good business with what I would call datacenter connectivity and within the datacenter as well.

So, the second growth vector is predominantly is - in coming out of Europe with fiber-to-the-home, fiber-to-the-building. We ended up having about 8% year-on-year overall T&M booking and that’s mainly driven out of fiber deployment. But I really like what we are hearing out of Europe, predominantly out of the UK and out of Germany where we are seeing a much more aggressive fiber-to-the-home deployment plan than we’ve seen in the past year.

And again, this is our – where we shine, this is where EXFO is really well positioned to capture market share. So those two growth vectors are really what – what’s really fueling our on-demand. And as I mentioned, we had a record breaking year in over $200 million of bookings for our Test & Measurement business and what I will call the fiber deployment is a big part of that record breaking year.

Tim Savageaux

Great. And to follow-up, you mentioned the 8% bookings growth, revenue growth below 4% really building some backlog there. I wonder if you could address any drivers between looking at that delta between bookings and revenue in T&M for fiscal 2019.

Philippe Morin

Yes, I know, again on T&M we are able to, again increase our backlog with this year. We didn’t - obviously we didn’t spend too much time with our decision to go and invest into the NIMs or MDRs or the Manufacturing Development and Research Center with the Yenista acquisition more than a year ago is really paying dividends for us.

And that’s where some of the backlog has been. So that’s optical spectrum analyzer – high-end optical spectrum analyzers and we had some really nice large orders coming in for manufacturing for labs and the 400 gig is gaining momentum as well.

That tends to be Tim, where we do increase a bit of a backlog while on the physical kind of types of products our fiber probes and OTDRs, we tend to be able to recognize fairly quickly the revenue there. So, your question therefore, your observation on our backlog reflects our success with regards to our business in labs and manufacturing where we have a bit of longer lead time and therefore a bit more backlog.

Tim Savageaux

Anyway to size that R&D and production type business, relative to carrier as you look at your total Test & Measurement? How significant is that getting?

Philippe Morin

It’s you know, from a point we saw – just at a high level, we don’t break that. We don’t provide that breakdown. But if I would tell you, our business still represents with the carrier, the service provider still represents about 85% of our business.

So, the remaining 15% comes from, what I will call our NIM/MDR which now some of that NIM piece will go into field deployment, but the highest growth percentage for us in our T&M businesses actually came from the manufacturing lab and research piece of our business.

Tim Savageaux

Got it. And one more for me. Thinking back to last quarter or last year in your fiscal first quarter, you saw where there was catch-up or budget flush, but you saw very strong bookings in that November quarter last year.

I wonder as you contemplate your guidance here, what kind of assumptions are built in with regard to any whether seasonal or otherwise driven uptick in T&M on the carrier side are you looking at last year as kind of an anomaly?

Philippe Morin

So, that’s a very good observation, Tim. Last year, exactly in Q1, we benefited from year-end bookings on the Test & Measurement. But if you recall, our Q4 was bit weaker. There was a bit of pent-up demand with combination of a year end. When we are forecasting our business for Q1, we do expect again some yearend money.

But we don’t expect at the same level at this point from our North American customers. Now we could be pleasantly surprised but we did not assume the same level of year end bookings as we achieved last year.

Tim Savageaux

Great. Thanks. I’ll pass it on and congrats on the results and the outlook for next year.

Philippe Morin

Thank you very much, Tim.

Operator

The next question will come from Todd Coupland with CIBC.

Todd Coupland

Yes, good evening everyone. I feel like there is confusing signals, mixed signals in the 5G market. Baylin called out a drastic reduction in, I guess, densification small cell. I understand that’s not pure 5G, but maybe a transition. AT&T has its activist shareholder issues. And then you have other customers in the U.S.

So, what I am – so would that sort of like, backdrop, what I am hearing from you is, you are expecting to start to see U.S. 5G orders in the March timeframe. So, it hits your June and September quarters. Is that what you are saying?

And can you maybe just talk about some of those dynamics and how much I guess, puts and takes are still in the market for that to happen. Or there is a big plus minus factor around that starting to happen in the March timeframe? Thanks very much.

Philippe Morin

Yes, so Todd, just to be clear, today, we see our positive impact on our T&M business for fiber small cell densification and that could be related to 5G, but it could also be related to 4G where customers are just looking at getting better bandwidth and better throughput with the 4G, 4G plus type of network of deployment and we are seeing the benefits mainly I would say out of Americas and U.S. on that.

And we don’t – and we see that continuing for this year on our fiscal 2020. To your point around what’s going to happen in the second half, so now moving forward through the SaaS business, the good news now is we are starting to see in our multi-year bookings some components around – associated with 5G. And these components could be even doing today leveraging our capability to test capability specs that 5G will require as I mentioned earlier in the call latency.

We are starting to see customers looking at how do they optimize in a context of small cell as we start deploying the new spectrum for 5G, how do you make sure that you monitor and optimize the coverage in a more complex deployment associated with 5G and we have already components and secured business around that.

And then, when we see behind that is an upgrade to 5G that will include much more of a deeper virtualization of the core and the edge of the network. And that, we call that telco cloud and we are now deploying that into Three UK as you know.

But we do expect that there are going to more customers starting to deploy these new architecture on a global basis with that new end architecture and as I said that should take start coming in more into the second half 2020 fiscal.

Todd Coupland

And is it a gradual uptick? So it will go with – I guess subscriber growth and then think of momentum over the next two or three years or they are putting in a significant amount of capacity? How are the carriers thinking about planning around that?

Philippe Morin

Yes, I think to – one of the advantage we have is as we go through that transition with Three UK, there is a lot learnings that we are getting out of that and the transition by the way is as you scale a network we are graduating – gradually scaling that network. You don’t do that at one big bang.

So it’s a gradual transition and I do expect that what we are going to see with other customers as they move into telco cloud because it is a more complex deployment, a more complex operations and new technology associated with it when you move everything into the cloud.

And again, I think the learnings we are going through right now with Three UK will benefit us as we start looking at other deployments with other customers.

Todd Coupland

And sorry, one last question. You’re going to use your experience there for hopeful market share gains in the U.S. Has that actually happened or do you need to go out and win that business still?

Philippe Morin

We still need to – I mean, again in North America, so when we look at, I think your question was around the acquisition around Astellia is how do we take their portfolio and innovate into EXFO assets and then go and leverage that into North America where we have obviously strong go to market presence. And in the case of – yes, so that’s your question, so.

Todd Coupland

Yes.

Philippe Morin

So, we are starting to – we got to win those. This is about winning – now leveraging our existing relationship. As you know, we are into CenturyLink, Verizon, Comcast, some of the key accounts. We have strong relationships.

And that’s the idea to leverage the strength of our portfolio and leverage the fact that we’ve got professional services capability as well to start going in and winning not necessarily new logos as these are existing logos for us. But winning new opportunity, new deployment with our new enriched portfolio that we have.

Todd Coupland

Right. Okay, really appreciate the color. Thanks a lot.

Philippe Morin

Thank you.

Operator

That will conclude today’s question-and-answer session. I will now turn the conference over to CEO, Philippe Morin for final remarks.

Philippe Morin

All right. Thank you. And so, just a few key takeaways before we conclude this call today. So, first, EXFO delivered a strong fiscal year with revenue, bookings, earnings and cash flow from operations increasing across all the boards in 2019.

Second, we are well positioned for the fiber and 5G growth drivers that we are seeing with a highly differentiated offering both on our T&M side and as well, on SaaS. And finally, we are targeting $33 million in adjusted EBITDA for fiscal 2020 after surpassing our annual profitability target in 2019.

So this conclude our Q4 2019 conference call. On behalf of the entire EXFO team, thank you very much for joining us today.

Operator

That will conclude today's conference call. Thank you for your participation. You may now disconnect.

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