This discussion and analysis contains forward-looking statements within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical
information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify
forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantee of
future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty, including
trade wars; our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures to
anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global communications test, monitoring and
analytics solutions markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regard to the timing and nature of customer orders;
delay in revenue recognition due to longer sales cycles for complex systems involving customers’ acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and
other upcoming products; our ability to successfully expand international operations and to conduct business internationally; and the retention of key technical and management personnel. Assumptions relating to the foregoing
involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual
Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable
based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These
statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date
of this document. This discussion and analysis should be read in conjunction with the consolidated financial statements.
The following discussion and analysis of financial condition and results of operations is dated January 8,
2019.
All financial data are expressed in US dollars, except as otherwise noted, and determined based on
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This
discussion and analysis
also contains financial data that do not comply with IFRS. Where such measures are presented, they are defined, and the reader is informed.
COMPANY OVERVIEW AND RECENT DEVELOPMENTS
We are a leading provider of test, monitoring and analytics solutions for fixed and mobile communications
service providers (CSPs), web-scale operators and network equipment manufacturers (NEMs) in the global communications industry. Our broad portfolio of intelligent hardware and software solutions enable network
transformations related to fiber, 5G and 4G/LTE, virtualization and big data analytics. Ultimately, customers rely on our solutions to increase network capacity and improve quality of experience for end-users, while driving
operational efficiencies.
We received two separate innovation-related awards from the Metro Ethernet Forum (MEF) in the first quarter
of fiscal 2019. Our software verifier agent, a software solution providing advanced layer-2 to layer-7 testing and end-to-end visibility, received the Technology Solutions Award for Service Assurance from the MEF. We also
accepted a Proof of Concept Award from the MEF for our contribution to a collaborative project, named Blade Runner, delivering augmented reality over a 5G wireless network. We covered service assurance by providing virtual
probes to enable closed-loop automation and seamless service continuity. We had previously obtained the TMForum Outstanding Catalyst Innovation Award for our involvement in the Blade Runner project. We also expanded our 400G
test portfolio with the release of a module featuring an Open Transceiver System. This modular design enables compatibility between current and future high-speed transceivers with our field and lab test platforms. We also
introduced an automated fiber inspection tool for testing polarity, continuity and connector cleanliness on multifiber cables.
Our sales, which include the contribution from newly acquired Astellia S.A. (Astellia), increased 9.2%
to $69.2 million in the first quarter of fiscal 2019 compared to $63.4 million for the same period last year. Bookings (purchase orders received from customers), which include the contribution from Astellia, increased
significantly by 23.3% to $81.2 million in the first quarter of fiscal 2019, for a book-to-bill ratio of 1.17, from $65.9 million for the same period last year. In the first quarter of fiscal 2019, Astellia’s sales and
bookings amounted respectively to $7.5 million (or $8.4 million before the $0.9 million adjustment for the acquisition-related deferred revenue fair value) and $7.8 million. Non-IFRS sales, which represent total sales plus
acquisition-related deferred revenue fair value adjustment, amounted to $70.1 million in the first quarter of fiscal 2019. See page 42 of this document for a complete reconciliation of non-IFRS sales to IFRS sales.
Net loss amounted to $7.5 million, or $0.14 per share, in the first quarter of fiscal 2019, compared to net earnings of
$2.7 million, or $0.05 per diluted share, for the same period last year. Net loss for the first quarter of fiscal 2019 included net expenses totaling $6.3 million, comprising $2.5 million in after-tax amortization of
intangible assets, $0.4 million in stock-based compensation costs, $2.7 million in after-tax restructuring charges, $0.9 million for the acquisition-related deferred revenue fair value adjustment, and a foreign exchange
gain of $0.2 million. For the same period last year, net earnings included net expenses totaling $0.7 million, comprising $0.9 million in after-tax amortization of intangible assets, $0.4 million in stock-based
compensation costs, $0.2 million for positive change in the fair value of the cash contingent consideration, $0.8 million in after-tax acquisition-related costs, and a foreign exchange gain of $1.2 million.
Net loss in the first quarter of fiscal 2019 included $5.1 million for the net loss of newly acquired
Astellia, which included $1.8 million in after-tax amortization of acquired intangible assets. Excluding Astellia’s net loss, our net loss would have amounted to $2.4 million, or $0.04 per share in the first quarter of
fiscal 2019, which included after-tax restructuring charges of $2.6 million.
Adjusted EBITDA (net earnings (loss) before interest, income taxes, depreciation and amortization,
stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, change in fair value of cash contingent consideration, and foreign exchange gain) reached $2.7 million, or
3.9% of sales, in the first quarter of fiscal 2019, compared to $6.1 million, or 9.6% of sales for the same period last year. Adjusted EBITDA is a non-IFRS measure. See page 42 of this document for a complete
reconciliation of adjusted EBITDA to IFRS net earnings (loss).
In September 2018, as part of our fiscal 2018 restructuring plan and the shutdown of our operations in
Toronto, Canada, we entered into a binding agreement to sell one of our buildings for net proceeds of $3.2 million. The transfer of ownership is expected to occur in the second quarter of fiscal 2019 and will result in a
pre-tax gain of $1.8 million that will be recorded in our consolidated statement of earnings for that quarter.
Forward-looking statements – expected net loss for the first quarter of fiscal 2019
For the three months ended November 30, 2018, we had forecasted our net loss to range between $0.20 and $0.16
per share. Actual net loss per share amounted to $0.14, that is $0.02 lower than the low-end of our net loss range, mainly due to lower than expected restructuring charges during the quarter, as well as higher than expected
foreign exchange gain due to more favorable period-end foreign exchange rates. In addition, some planned hiring in the first quarter of 2019 was postponed or cancelled.
RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the
periods indicated)
|
|
Three months ended
November 30,
|
|
|
Three months ended
November 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
69,201
|
|
|
$
|
63,391
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
|
|
28,897
|
|
|
|
23,289
|
|
|
|
41.8
|
|
|
|
36.7
|
|
Selling and administrative
|
|
|
26,375
|
|
|
|
23,193
|
|
|
|
38.1
|
|
|
|
36.6
|
|
Net research and development
|
|
|
15,224
|
|
|
|
11,252
|
|
|
|
22.0
|
|
|
|
17.8
|
|
Depreciation of property, plant and equipment
|
|
|
1,429
|
|
|
|
1,154
|
|
|
|
2.1
|
|
|
|
1.8
|
|
Amortization of intangible assets
|
|
|
2,940
|
|
|
|
1,119
|
|
|
|
4.2
|
|
|
|
1.8
|
|
Change in fair value of cash contingent consideration
|
|
|
–
|
|
|
|
(155
|
)
|
|
|
–
|
|
|
|
(0.2
|
)
|
Interest and other expense
|
|
|
377
|
|
|
|
338
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Foreign exchange gain
|
|
|
(215
|
)
|
|
|
(1,218
|
)
|
|
|
(0.3
|
)
|
|
|
(1.9
|
)
|
Earnings (loss) before income taxes
|
|
|
(5,826
|
)
|
|
|
4,419
|
|
|
|
(8.4
|
)
|
|
|
6.9
|
|
Income taxes
|
|
|
1,641
|
|
|
|
1,740
|
|
|
|
2.4
|
|
|
|
2.7
|
|
Net earnings (loss) for the period
(2)
|
|
$
|
(7,467
|
)
|
|
$
|
2,679
|
|
|
|
(10.8
|
)%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings (loss) per share
|
|
$
|
(0.14
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other selected information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before depreciation and amortization
(3)
|
|
$
|
40,304
|
|
|
$
|
40,102
|
|
|
|
58.2
|
%
|
|
|
63.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross research and development
|
|
$
|
17,225
|
|
|
$
|
13,063
|
|
|
|
24.9
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
287
|
|
|
$
|
–
|
|
|
|
0.4
|
%
|
|
|
–
|
%
|
Selling and administrative expenses
|
|
$
|
397
|
|
|
$
|
–
|
|
|
|
0.6
|
%
|
|
|
–
|
%
|
Net research and development expenses
|
|
$
|
2,057
|
|
|
$
|
–
|
|
|
|
3.0
|
%
|
|
|
–
|
%
|
Income taxes
|
|
$
|
3
|
|
|
$
|
–
|
|
|
|
–
|
%
|
|
|
–
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(3, 4)
|
|
$
|
2,728
|
|
|
$
|
6,059
|
|
|
|
3.9
|
%
|
|
|
9.6
|
%
|
(1)
|
Cost of sales is exclusive of depreciation and amortization, shown separately.
|
(2)
|
Include net loss from Astellia of $5.1 million for the three months ended November 30, 2018 (nil in
2017).
|
(3)
|
Refer to page 42 for non-IFRS measures.
|
(4)
|
Astellia negatively impacted the adjusted EBITDA by $2.3 million or 3.3% of sales for the three
months ended November 30, 2018 (nil in 2017)
|
RESULTS OF OPERATIONS
Sales and Bookings
The following tables summarize sales and bookings by product line in thousands of US dollars:
Sales
(1)
|
|
Three months ended
November 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Test and measurement
|
|
$
|
49,764
|
|
|
$
|
50,186
|
|
Service assurance, systems and services
|
|
|
19,416
|
|
|
|
12,968
|
|
|
|
|
69,180
|
|
|
|
63,154
|
|
Foreign exchange gains on forward exchange contracts
|
|
|
21
|
|
|
|
237
|
|
Total sales
|
|
$
|
69,201
|
|
|
$
|
63,391
|
|
Bookings
|
|
Three months ended
November 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Test and measurement
|
|
$
|
63,996
|
|
|
$
|
52,854
|
|
Service assurance, systems and services
|
|
|
17,221
|
|
|
|
12,788
|
|
|
|
|
81,217
|
|
|
|
65,642
|
|
Foreign exchange gains on forward exchange contracts
|
|
|
21
|
|
|
|
237
|
|
Total bookings
|
|
$
|
81,238
|
|
|
$
|
65,879
|
|
Sales by geographic region
The following table summarizes sales by geographic region:
|
|
Three months ended
November 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Americas
|
|
|
51
|
%
|
|
|
53
|
%
|
Europe, Middle-East and Africa (EMEA)
|
|
|
33
|
|
|
|
23
|
|
Asia-Pacific (APAC)
|
|
|
16
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
(1)
|
Refer to page 44 for quarterly sales by product lines for fiscal 2018.
|
For the three months ended November 30, 2018, our sales increased 9.2% to $69.2 million, compared
to $63.4 million for the same period last year, while our bookings significantly increased 23.3% to $81.2 million, compared to $65.9 million for the same period last year, for a book-to-bill ratio of 1.17
.
Beginning in the first quarter of fiscal 2019, we are reporting sales and bookings based on two newly created
product families: Test and measurement (T&M) as well as Service Assurance, systems and services (SASS). Optical, transport and copper test solutions make up the T&M product family, including portable equipment for
the field and benchtop units for the lab and manufacturing environments. The SASS family mainly consists of service assurance, fiber monitoring, analytics and professional services as well as other systems-related solutions
like network simulation and network topology discovery. This broad product family tends to be software-intensive with longer sales and revenue-recognition cycles than the T&M group. We believe this breakdown better
reflects our long-term strategy, while enhancing comparisons against industry peers and investors’ understanding of our business. This classification replaces our former Physical-Layer and Protocol-Layer product groups. The
main changes involve fiber monitoring solutions, which were previously in the Physical-Layer product group, moving into SASS, and transport testing moving from the Protocol-Layer group into T&M.
Sales
In the first quarter of fiscal 2019, the 9.2% increase in total sales year-over-year comes from the positive
effect of our recent acquisition of Astellia, which delivered sales of $7.5 million (nil in 2018).
In the first quarter of fiscal 2019, excluding the positive effect of the recent acquisition of Astellia, our
sales slightly decreased 2.6% year-over-year. Although we reported a book-to-bill ratio of 1.17, a significant portion of our bookings were back-end loaded, which prevented us from turning some of these bookings into
revenue. This negatively affected our sales for the quarter. In addition, our sales were negatively impacted by currency fluctuations impact year-over-year.
In the first quarter of fiscal 2019, sales of our T&M product line slightly decreased 0.8% year-over-year.
This slight year-over-year decrease in sales is due to the timing of orders received as in the first quarter of 2019, bookings of our T&M product line significantly increased year-over-year, but a large portion of these
bookings were back-end loaded, which prevented us from turning some of these bookings into revenue. In addition, our T&M sales were negatively impacted by currency fluctuations year-over-year.
In the first quarter of fiscal 2019, sales of our SASS product line increased 49.7% year-over-year, mainly
due to the positive effect of the acquisition of Astellia, which contributed $7.5 million in sales. Excluding the positive impact of Astellia, sales of our SASS product line decreased 8.0% year-over-year in the first quarter
of fiscal 2019, mainly due to lower sales from our fiber monitoring systems (a sub-group of our SASS product line), as we recognized larger orders for this sub-group in the first quarter of 2018. Finally, our SASS sales were
negatively impacted by currency fluctuations year-over-year.
Bookings
In the first quarter of fiscal 2019, the 23.3% increase in total bookings year-over-year comes in part from
the positive effect of our recent acquisition of Astellia, which delivered bookings of $7.8 million (nil in 2018). In addition, in the first quarter of fiscal 2019, we benefited from larger calendar year-end budget spending
on the part of some CSPs in the Americas for our T&M product line compared to the same period last year. Otherwise, in the first quarter of fiscal 2019, our total bookings were negatively impacted the currency
fluctuations year-over-year.
In the first quarter of fiscal 2019, bookings of our T&M product line increased 21.1% year-over-year,
mainly due to larger calendar year-end budget spending on the part of some CSPs in the Americas. In addition, we made significant progress in the EMEA region for this product line year-over-year and to a lesser extent
in the APAC region.
In the first quarter of fiscal 2019, bookings of our SASS product line increased 34.7% year-over-year, mainly
due to the positive effect of the acquisition of Astellia, which contributed $7.8 million in bookings during the quarter. Excluding the positive impact of Astellia, bookings of our SASS product line decreased 26.3%
year-over-year in the first quarter of fiscal 2019, mainly due to lower bookings from our fiber monitoring systems, a sub-group of our SASS product line, as we received larger orders for this sub-group in the first quarter
of 2018. Bookings of fiber monitoring systems, as well as other SASS, are characterized by large intermittent orders from customers. In addition, our SASS product line bookings were to some extent negatively impacted by
currency fluctuations.
As we gradually evolve from a supplier of dedicated test instruments to a supplier of end-to-end system-based
solutions, our quarterly sales and bookings are becoming increasingly subject to quarterly fluctuations, as we are managing more complex, multimillion-dollar deals that have prolonged sales and revenue recognition cycles
related to our SASS. This has been amplified with the recent acquisition of Astellia.
Customer concentration
In the first quarters of fiscal 2018 and 2019, our top customer accounted for 13.8% and 9.0% of our sales
respectively. In the first quarters of fiscal 2018 and 2019, our top three customers accounted for 21.6% and 19.6% of our sales, respectively.
GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION
(non-IFRS measure — refer to page 42 of this document)
Gross margin before depreciation and amortization reached 58.2% of sales for the three months ended
November 30, 2018, compared to 63.3% for the same period last year.
In the first quarter of fiscal 2019, gross margin before depreciation and amortization included $0.3 million, or
0.4% of sales in restructuring charges (nil in 2018).
In addition, in the first quarter of fiscal 2019, we recorded in our sales foreign exchange gains on our
forward exchange contracts of $21,000, compared to foreign exchange gains of $0.2 million in the same period last year, which contributed to a decrease of 0.2% in gross margin before depreciation and amortization
year-over-year.
Excluding these items, gross margin before depreciation and amortization would have amounted to 58.6%
of sales in the first quarter of fiscal 2019, compared to 63.1% of sales in the same period last year, 4.5% lower year-over-year.
In the first quarter of fiscal 2019, newly acquired Astellia, a sub-group within our SASS product line,
delivered lower margins than our typical average margin, which negatively impacted our gross margin before depreciation and amortization year-over-year. In addition, in the first quarter of fiscal 2019, a less favorable
product mix overall compared to the same period last year resulted in the decrease of our gross margin before depreciation and amortization year-over-year.
Finally, in the first quarter of fiscal 2019, we recorded higher inventory writeoffs compared to the same
period last year, which contributed to decreasing our gross margin before depreciation and amortization by 0.5% of sales year-over-year.
SELLING AND ADMINISTRATIVE EXPENSES
For the three months ended November 30, 2018, selling and administrative expenses were $26.4 million, or 38.1%
of sales, compared to $23.2 million, or 36.6% of sales for the same period last year.
In the first quarter of fiscal 2019, our selling and administrative expenses increased $3.2 million compared
to the same period last year.
In the first quarter of fiscal 2019, we incurred additional expenses compared to the same period last year,
following the acquisition of Astellia. In addition, inflation and salary increases, as well as restructuring charges of $0.4 million (0.6% of sales) contributed to increasing our selling and administrative expenses
year-over-year.
However, in the first quarter of fiscal 2019, the positive impact of our 2018 restructuring plan reduced our
selling and administrative expenses compared to the same period last year. In addition, in the first quarter of fiscal 2019, the increase in the average value of the US dollar compared to other currencies had a positive
impact on our selling and administrative expenses year-over-year.
Finally, in the first quarter of fiscal 2018, our selling and administrative expenses included $0.7 million
(1.1% of sales) in acquisition-related costs following the acquisitions of Astellia and Yenista Optics Inc., compared to nil this quarter.
In the first quarter of fiscal 2019, our selling and administrative expenses amounted to 38.1% of sales, 1.5%
higher compared to 36.6% of sales in the same period last year, mainly due to newly acquired Astellia.
RESEARCH AND DEVELOPMENT EXPENSES
Gross Research and Development Expenses
For the three months ended November 30, 2018, gross research and development expenses totaled $17.2 million,
or 24.9% of sales, compared to $13.1 million, or 20.6% of sales for the same period last year.
In the first quarter of fiscal 2019, our gross research and development expenses increased $4.2 million
year-over-year.
In the first quarter of fiscal 2019, we incurred additional expenses compared to the same period last year,
following the acquisition of Astellia, inflation and salary increases as well as restructuring charges of $2.1 million (3.0% of sales).
However, in the first quarter of fiscal 2019, the positive impact of our 2018 restructuring plan reduced our
gross research and development expenses compared to the same period last year. In addition, in the first quarter of fiscal 2019, the increase in the average value of the US dollar compared to other currencies had a positive
impact on our gross research and development expenses year-over-year
In the first quarter of fiscal 2019, our gross research and development expenses amounted to 24.9% of sales,
4.3% higher compared to 20.6% of sales in the same period last year, mainly due to newly acquired Astellia as well as restructuring charges.
Tax Credits
For the three months ended November 30, 2018, tax credits for research and development activities were
$2.0 million, or 11.6% of gross research and development expenses, compared to $1.8 million, or 13.9% of gross research and development expenses for the same period last year.
For the three months ended November 30, 2018, the increase in our tax credits compared to the same period last
year mainly comes from Astellia, which is entitled to tax credits on research and development activities carried out in France. However, in the first quarter of fiscal 2019, the increase in the average value of the US dollar
compared to the Canadian dollar and the euro had a negative impact on our tax credits year-over-year as our tax credits are denominated in these two currencies and we report our results in US dollars.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the business combinations we completed, we recorded intangible assets primarily consisting
of core technology and customer relationships. In addition, intangible assets include software.
For the three months ended November 30, 2018, amortization of intangible assets reached $2.9 million, compared
to $1.1 million for the same period last year.
The year-over-year increase in our amortization expense in the first quarter of fiscal 2019, compared to the
same period last year, was mainly due to the recent acquisition of Astellia.
FOREIGN EXCHANGE GAIN
Foreign exchange gains and losses are mainly the result of the translation of operating activities denominated
in currencies other than our functional currency, which is the Canadian dollar. A portion of our foreign exchange gains or losses results from the translation of cash balances and deferred income taxes denominated in US
dollars. We manage our exposure to currency risk in part with forward exchange contracts. In addition, some of our entities’ operating activities are denominated in US dollars, euros and British pounds, which further hedges
this risk. However, we remain exposed to a currency risk; namely, any increase in the value of the Canadian dollar compared to the US dollar would have a negative impact on our operating results.
For the three months ended November 30, 2018, we recorded a foreign exchange gain of $0.2 million compared
to $1.2 million for the same period last year.
During the first quarter of fiscal 2019, the period-end value of the Canadian dollar decreased versus the US
dollar but increased compared to the euro, compared to the previous quarter, and overall, we reported a foreign exchange gain of $0.2 million during that period. In fact, the period-end value of the Canadian dollar
decreased 1.9% versus the US dollar to CA$1.3301 = US$1.00 in the first quarter of fiscal 2019, compared to CA$1.3055 = US$1.00 at the end of the previous quarter. However, the period-end value of the Canadian dollar
increased 0.9% versus the euro to CA$1.5069 = €1.00 in the first quarter of fiscal 2019, compared to CA$1.5210 = €1.00 at the end of the previous quarter.
During the same period last year, the period-end value of the Canadian dollar decreased versus the US dollar
and the euro, compared to the previous quarter, which resulted in a foreign exchange gain during the quarter. Overall, we reported a foreign exchange gain of $1.2 million during that period. In fact, the period-end value
of the Canadian dollar decreased 2.7% versus the US dollar to CA$1.2888 = US$1.00 in the first quarter of fiscal 2018, compared to CA$1.2536 = US$1.00 at the end of the previous quarter. In addition, the period-end value
of the Canadian dollar decreased 3.4% versus the euro to CA$1.5331 = €1.00 in the first quarter of fiscal 2018, compared to CA$1.4825 = €1.00 at the end of the previous quarter.
Foreign exchange rate fluctuations also flow through the P&L line items as a portion of our sales are
denominated in Canadian dollars and euros and a significant portion of our cost of sales and operating items are denominated in Canadian dollars, euros, and Indian rupees and we report our results in US dollars. In the
first quarter of fiscal 2019, the increase in the average value of the US dollar compared to the Canadian dollar, the euro and the Indian rupee year-over-year resulted in a positive impact on our operating expenses. In the
first quarter of fiscal 2019, the average value of the US dollar increased 4.0%, 2.4% and 11.0% year-over-year respectively, compared to the Canadian dollar, the euro and the Indian rupee.
INCOME TAXES
For the three months ended November 30, 2018, we reported income tax expenses of $1.6 million on a loss
before income taxes of $5.8 million. For the corresponding period last year, we reported income tax expenses of $1.7 million on earnings before income taxes of $4.4 million.
These distorted tax rates mainly resulted from the fact that we did not recognize deferred income tax assets
for some of our subsidiaries at loss and acquisition-related costs for business combinations are non-deductible for tax purposes. In addition, we had some other non-deductible losses and expenses, such as stock-based
compensation costs. However, a significant portion of our foreign exchange gain was a result of the translation of the financial statements of our foreign subsidiaries from their local currency to the functional currency
and was therefore non-taxable. Otherwise, our effective tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 27% for these periods.
Please refer to note 8 to our condensed unaudited interim consolidated financial statements for a full
reconciliation of our income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Requirements and Capital Resources
As at November 30, 2018, cash and short-term investments totaled $20.1 million, while our working capital
was at $26.9 million. Our cash and short-term investments increased by $5.0 million in the first quarter of fiscal 2019 compared to the previous quarter-end.
The following table summarizes the increase in cash and short-term investments during the first quarter
of fiscal 2019 in thousands of US dollars:
Increase in bank loan
|
|
$
|
11,257
|
|
Cash flows used by operating activities
|
|
|
(2,475
|
)
|
Purchases of capital assets
|
|
|
(2,882
|
)
|
Repayment of long-term debt
|
|
|
(717
|
)
|
Unrealized foreign exchange loss on cash and short-term investments
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
$
|
5,023
|
|
The unrealized foreign exchange loss resulted from the translation, in US dollars, of our
Canadian-dollar-denominated cash and short-term investments and was included in accumulated other comprehensive income in the consolidated balance sheet.
Our short-term investments of $2.0 million consist of debt instruments issued by high-credit-quality
corporations; therefore, we consider the risk of non-performance of these financial instruments to be limited. These debt instruments are not expected to be affected by a significant liquidity risk.
For the purpose of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis.
We believe that our cash balances and short-term investments totaling $20.1 million, combined with our
available revolving credit facilities of up to $40.6 million, as well as the $3.2 million net proceeds from the sale of one of our buildings, will be sufficient to meet our liquidity and capital requirements for the
foreseeable future, including any possible working capital requirements from our new acquisitions. In addition to these assets and credit facilities, we have unused available lines of credit of $23.5 million for foreign
currency exposure related to forward exchange contracts. However, possible operating losses, additional restructuring costs and/or possible investments in or acquisitions of complementary businesses, products or technologies
may require additional financing. There can be no assurance that additional debt or equity financing will be available when required or, if available, that it can be secured on satisfactory terms.
Sources and Uses of Cash
We finance our operations and meet our capital expenditure requirements through a combination of cash flows
from operating activities, the use of our cash and short-term investments, borrowing under our existing credit facilities as well as the issuance of subordinate voting shares.
Operating activities
Cash flows used by operating activities were $2.5 million for the three months ended November 30, 2018,
compared to cash flows provided of $2.4 million for the same period last year.
Cash flows used by operating activities in the first quarter of fiscal 2019 were attributable to the net
earnings after items not affecting cash of $0.7 million, more than offset by the negative net change in non-cash operating items of $3.2 million; this was mainly due to the negative effect on cash of the $4.1 million
increase in our accounts receivable due to the timing of sales and receipts during the quarter, the $1.0 million increase in our income taxes and tax credits due to tax credit earned during the quarter not yet recovered, the
$1.4 million increase in inventories to meet future demand. These negative effects on cash were offset in part by the positive effect on cash of the $3.1 million increase in our accounts payable, accrued liabilities and
provisions due to the timing of purchases and payments during the quarter.
Cash flows provided by operating activities in the first quarter of fiscal 2018 were attributable to the net
earnings after items not affecting cash of $4.1 million, offset in part by the negative net change in non-cash operating items of $1.7 million; this was mainly due to the negative effect on cash of the $2.0 million increase
in our inventories required for specific orders received but not yet recognized in sales, and the $1.4 million decrease in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments
during the quarter, as well as the payment during the quarter of the fiscal 2017 annual bonuses to employees. These negative effects on cash were offset in part by the positive effect on cash of the $1.1 million decrease in
our accounts receivable due to the timing of sales and receipts during the quarter, the $0.3 million decrease in our prepaid expenses due to timing of payments during the quarter, as well as the $0.2 million increase in our
other liabilities during the quarter.
Investing activities
Cash flows used by investing activities were $2.5 million for the three months ended November 30, 2018,
compared to $22.1 million for the same period last year.
In the first quarter of fiscal 2019, we made cash payments of $2.9 million for the purchase of capital
assets. However, we disposed of $0.4 million worth of short-term investments during the quarter.
For the corresponding period last year, we made cash payments of $1.9 million, $9.5 million and $10.3
million, respectively, for the purchase of capital assets, the acquisition of Yenista and the investment in Astellia. In addition, we acquired $0.2 million worth of short-term investments during the quarter.
Financing activities
Cash flows provided by financing activities amounted to $10.5 million in the first quarter of fiscal 2018,
compared to cash flows used of $0.1 million during the same period last year.
In the first quarter of fiscal 2019, our bank loan increased by $11.2 million, but we repaid $0.7 million of
our long-term debt and other liabilities
We are committed under the terms of contractual obligations which have various expiration dates, primarily
for the rental of premises and equipment, licensing of intellectual property and long-term debt. The following table summarizes our undiscounted contractual obligations as at November 30, 2018 in thousands of US dollars:
|
|
Long-term
debt
|
|
|
Operating
leases
|
|
|
Licensing
agreements
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No later than one year
|
|
$
|
2,808
|
|
|
$
|
3,041
|
|
|
$
|
1,116
|
|
|
$
|
6,965
|
|
Later than one year and no later than five years
|
|
|
4,966
|
|
|
|
8,531
|
|
|
|
1,964
|
|
|
|
15,461
|
|
Later than five years
|
|
|
219
|
|
|
|
293
|
|
|
‒
|
|
|
|
512
|
|
|
|
$
|
7,993
|
|
|
$
|
11,865
|
|
|
$
|
3,080
|
|
|
$
|
22,938
|
|
In addition, as at November 30, 2018, we had letters of guarantee amounting to $1.1 million for our own
selling and purchasing requirements, which were reserved from our lines of credit; these letters of guarantee expire at various dates through fiscal 2022.
FORWARD EXCHANGE CONTRACTS
We are exposed to a currency risk as a result of our export sales of products manufactured in Canada, China, Finland
and France, the majority of which are denominated in US dollars and euros. In addition, we are exposed to currency risk as a result of our research and development activities in India (Indian rupees). These risks
are partially hedged by forward exchange contracts. Forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.
As at November 30, 2018, we held forward exchange contracts to sell US dollars for Canadian dollars and
Indian rupees at various forward rates, which are summarized as follows:
US dollars – Canadian dollars
Expiry dates
|
|
Contractual
amounts
|
|
|
Weighted average
contractual
forward rates
|
|
|
|
|
|
|
|
|
December 2018 to August 2019
|
|
$
|
22,200,000
|
|
|
|
1.2969
|
|
September 2019 to August 2020
|
|
|
19,500,000
|
|
|
|
1.2795
|
|
September 2020 to August 2021
|
|
|
5,100,000
|
|
|
|
1.2751
|
|
Total
|
|
$
|
46,800,000
|
|
|
|
1.2873
|
|
US dollars – Indian rupees
Expiry dates
|
|
Contractual
amounts
|
|
|
Weighted average contractual
forward rate
|
|
|
|
|
|
|
|
|
December 2018 to August 2019
|
|
$
|
4,000,000
|
|
|
|
68.77
|
|
The carrying amount of forward exchange contracts is equal to their fair value, which is based on the amount
at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net losses of $0.5 million as at August 31, 2018, and $1.2 million as at November 30, 2018,
mainly for our US/Canadian dollar forward exchange contracts.
The quarter-end exchange rate was
CA$1.
3301
= US$1.00 as at November 30, 2018.
SHARE CAPITAL
As at January 8, 2019, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each
and 23,659,043 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to number and without par value.
STRUCTURED ENTITIES
As at November 30, 2018, we did not have interests in any structured entities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a description of the critical accounting policies, judgments in applying accounting policies as well as
estimates and assumptions used in the preparation of our consolidated financial statements, refer to our Annual Report on Form 20-F for the year ended August 31, 2018, filed with the U.S. Securities and Exchange Commission
and the Canadian securities commissions.
NEW IFRS PRONOUNCEMENTS
Recently issued IFRS Pronouncements Adopted in Fiscal 2019
Financial instruments
The final version of IFRS 9, “
Financial Instruments
”, was issued in July 2014 and replaces IAS 39, “
Financial Instruments: Recognition and Measurement
”.
IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow characteristics of its financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were
carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. Requirements relating to hedge accounting, representing a new
hedge accounting model, have also been added to IFRS 9. The new standard is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively. We adopted this new standard on September 1,
2018 using the modified retrospective method. The following table summarizes the impact of its adoption on our consolidated balance sheet as at September 1, 2018, in thousands of US dollars:
|
|
As reported
as at
August 31, 2018
|
|
|
Adjustments
|
|
|
As adjusted
as at
September 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables – Trade
|
|
$
|
47,273
|
|
|
$
|
(303
|
)
|
|
$
|
46,970
|
|
Income taxes and tax credits recoverable
|
|
$
|
4,790
|
|
|
$
|
50
|
|
|
$
|
4,840
|
|
Total assets
|
|
$
|
284,544
|
|
|
$
|
(253
|
)
|
|
$
|
284,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
114,906
|
|
|
$
|
(253
|
)
|
|
$
|
114,653
|
|
Shareholders’ equity
|
|
$
|
177,921
|
|
|
$
|
(253
|
)
|
|
$
|
177,668
|
|
In addition, our financial instruments are accounted for as follows under IFRS 9 as compared to our previous
accounting policy with IAS 39:
Financial assets
|
Classification – IAS 39
|
Classification – IFRS 9
|
|
|
|
Cash
|
Loans and receivables
|
Amortized cost
|
Short-term investments
|
Available for sale
|
Fair value through other comprehensive income
|
Accounts receivable
|
Loans and receivables
|
Amortized cost
|
Other assets
|
Loans and receivables
|
Amortized cost
|
Forward exchange contracts
|
Derivatives used for hedging
|
Derivatives used for hedging
|
Financial liabilities
Bank loan
|
Other financial liabilities
|
Amortized cost
|
Accounts payable and accrued liabilities
|
Other financial liabilities
|
Amortized cost
|
Other liabilities
|
Other financial liabilities
|
Amortized cost
|
Long-term debt
|
Other financial liabilities
|
Amortized cost
|
Forward exchange contracts
|
Derivatives used for hedging
|
Derivatives used for hedging
|
Hedge accounting
All existing hedge relationships that were designated as effective hedging relationships under IAS 39,
continue to qualify for hedge accounting under IFRS 9. IFRS 9 does not change the general principles of how we account for effective hedges.
Revenue from contracts with customers
IFRS 15, “
Revenue from
Contracts with Customers
”, was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This
new standard contains principles that an entity must apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity recognizes revenue to depict the transfer of
goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018. We
adopted this new standard on September 1, 2018 using the modified retrospective method. We applied this standard retrospectively only to contracts that are not completed at the date of initial application.
We concluded that the main areas of impact relate to the allocation of the transaction price to the various
performance obligations under the contracts, the timing of revenue recognition for sales arrangement that contain customer acceptance clauses, and the sale of licenses that provide customers with the “right to use”
our intellectual property. The adoption of the new standard had no material impact on our consolidated financial statements.
Refer to note 2 to our condensed unaudited interim consolidated financial statements for the three months
ended November 30, 2018 and to our consolidated financial statements for the year ended August 31, 2018, for the effect of other recent accounting pronouncements on our consolidated financial statements.
RISKS AND UNCERTAINTIES
For the first quarter of fiscal 2019, there have been no material changes from the risk factors disclosed
in our Annual Report on Form 20-F for the year ended August 31, 2018.
NON-IFRS MEASURES
We provide non-IFRS measures (non-IFRS sales, gross margin before depreciation and amortization and adjusted
EBITDA) as supplemental information regarding our operational performance. Non-IFRS sales represent total sales plus acquisition-related deferred revenue fair value adjustment. Gross margin before depreciation
and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represent net earnings (loss) before interest, income taxes, depreciation and amortization, stock-based
compensation costs, restructuring charges, change in fair value of cash contingent consideration, acquisition-related deferred revenue fair value adjustment, and foreign exchange gain.
These non-IFRS measures eliminate the effect on our IFRS results of non-cash and/or non-operating statement
of earnings elements, as well as elements subject to significant volatility such as foreign exchange gain or loss. We use these measures for evaluating our historical and prospective financial performance, as well
as our performance relative to our competitors. These non-IFRS measures are also used by financial analysts that evaluate and compare our performance against that of our competitors and industry players in our sector.
Finally, these measures help us plan and forecast future periods as well as make operational and strategic
decisions. We believe that providing this information to our investors, in addition to the IFRS measures, allows them to see the company’s results through the eyes of management, and to better understand our historical
and future financial performance. More importantly, it enables the comparison of our performance on a relatively similar basis against that of other public and private companies in our industry worldwide.
The presentation of this additional information is not prepared in accordance with IFRS. Therefore, the
information may not necessarily be comparable to that of other companies and should be considered as a supplement to, not a substitute for, the corresponding measures calculated in accordance with IFRS.
The following table summarizes the reconciliation of non-IFRS sales to IFRS sales, in thousands of US dollars:
|
|
Three months ended
November 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
IFRS sales
|
|
$
|
69,201
|
|
|
$
|
63,391
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related deferred revenue fair value adjustment
|
|
|
864
|
|
|
|
–
|
|
Non-IFRS sales
|
|
$
|
70,065
|
|
|
$
|
63,391
|
|
The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss), in thousands
of US dollars:
Adjusted EBITDA
|
|
Three months ended
November 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
IFRS net earnings (loss) for the period
|
|
$
|
(7,467
|
)
|
|
$
|
2,679
|
|
|
|
|
|
|
|
|
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,429
|
|
|
|
1,154
|
|
Amortization
|
|
|
2,940
|
|
|
|
1,119
|
|
Interest and other expense
|
|
|
377
|
|
|
|
338
|
|
Income taxes
|
|
|
1,641
|
|
|
|
1,740
|
|
Stock-based compensation costs
|
|
|
418
|
|
|
|
402
|
|
Restructuring charges
|
|
|
2,741
|
|
|
|
–
|
|
Change in fair value of cash contingent consideration
|
|
|
–
|
|
|
|
(155
|
)
|
Acquisition-related deferred revenue fair value adjustment
|
|
|
864
|
|
|
|
–
|
|
Foreign exchange gain
|
|
|
(215
|
)
|
|
|
(1,218
|
)
|
Adjusted EBITDA for the period
(1, 2)
|
|
$
|
2,728
|
|
|
$
|
6,059
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA in percentage of sales
|
|
|
3.9
|
%
|
|
|
9.6
|
%
|
(1)
|
Astellia negatively impacted adjusted EBITDA by $2.3 million, or 3.3% of sales in the three months
ended November 30, 2018 (nil in 2017).
|
(2)
|
Includes acquisition-related costs of $0.7 million in the three months ended November 30, 2017 (nil
in 2018).
|
QUARTERLY SUMMARY FINANCIAL
INFORMATION
(1)
(tabular amounts in thousands of US dollars, except per share data)
|
|
Quarters ended
|
|
|
|
November 30,
2018
|
|
|
August 31,
2018
|
|
|
May 31,
2018
|
|
|
February 28,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
69,201
|
|
|
$
|
69,216
|
|
|
$
|
72,217
|
|
|
$
|
64,722
|
|
Cost of sales
(2)
|
|
$
|
28,897
|
|
|
$
|
27,426
|
|
|
$
|
28,963
|
|
|
$
|
25,326
|
|
Net loss
|
|
$
|
(7,467
|
)
|
|
$
|
(3,951
|
)
|
|
$
|
(5,970
|
)
|
|
$
|
(4,660
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.08
|
)
|
|
|
Quarters ended
|
|
|
|
November 30,
2017
|
|
|
August 31,
2017
|
|
|
May 31,
2017
|
|
|
February 28,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
63,391
|
|
|
$
|
62,981
|
|
|
$
|
58,505
|
|
|
$
|
60,030
|
|
Cost of sales
(2)
|
|
$
|
23,289
|
|
|
$
|
23,972
|
|
|
$
|
24,555
|
|
|
$
|
22,989
|
|
Net earnings (loss)
|
|
$
|
2,679
|
|
|
$
|
844
|
|
|
$
|
(4,304
|
)
|
|
$
|
1,008
|
|
Basic and diluted net earnings (loss) per share
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.02
|
|
(1)
|
Quarterly financial information has been derived from our condensed unaudited interim consolidated
financial statements, which are prepared in accordance with IFRS, as issued by the IASB, applicable to the preparation of interim financial statements, including IAS 34, “
Interim Financial Reporting
”. The presentation currency is the US dollar, which differs from the functional currency of the company (Canadian dollar).
|
(2)
|
The cost of sales is exclusive of depreciation and amortization.
|
Sales by product lines for fiscal 2018:
|
|
Quarters ended
|
|
|
|
|
|
|
August 31,
2018
|
|
|
May 31,
2018
|
|
|
February 28,
2018
|
|
|
November 30,
2017
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Test and measurement
|
|
$
|
47,489
|
|
|
$
|
49,864
|
|
|
$
|
49,884
|
|
|
$
|
50,186
|
|
|
$
|
197,423
|
|
Service assurance, systems and services
|
|
|
21,649
|
|
|
|
22,174
|
|
|
|
14,457
|
|
|
|
12,968
|
|
|
|
71,248
|
|
Foreign exchange gains on forward exchange contracts
|
|
|
78
|
|
|
|
179
|
|
|
|
381
|
|
|
|
237
|
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
69,216
|
|
|
$
|
72,217
|
|
|
$
|
64,722
|
|
|
$
|
63,391
|
|
|
$
|
269,546
|
|