EXFO Inc.

 

EXFO makes test equipment for telecom companies (testing both equipment and signal) and they have been expanding into providing service assurance services to test and monitor network operation.  The company has grown from its beginnings in a garage although the company has gone through periods of organic growth and growth through acquisition as well as periods of stagnation.  The stock has retraced much of its gains from late 2015 to early 2017 and is not far from its 5-year lows.  With a newly appointed CEO (the founder and controlling shareholder retired), the company could see renewed focus on execution and growth.  EXFO reports its financials in $U.S.

 

Ests      4Q18   1Q19   FY18    FY19

Revs    71.8m  76.6m  273.2   309

EPS      0.08     0.07     0.12     0.29

 

P=CAD $4.64, US $3.56, net debt/cap=2.5%, gross cash 15m but 19m debt and 23m in def revs, additional NWC=42m 

TTM EPS=0.14, 25X TTM EPS, 12X FY19 estimate which looks high depending on how long it takes to cut Astellia’s costs and/or drive growth but also how their seasonal strength compares to its current seasonal weakness.

October 17, 2018 Exited position. 

4Q18   .06 vs .10 w 25% TR, est .08

  • 10/11/2018 P=C$4.64, US$3.56, TTM EPS .14, P/E=25X, FY19 P/E=12X

  • Revs +12% to 69.2m mainly due to acquisitions (est 71.8m down from 76.7m), GM ex restr 61.1% vs 62.1%, adj EBITDA 6.1m vs 8.5m, FY18 EBITDA 17.2m vs 22m and expected 20m

  • Bookings -4.8% to 63.1m, B/B=0.91

  • FY18 top customer 9.1% vs 10.1%, Top 3 were 15.9% vs 18.4%

  • Guidance: 1Q19 Revs 66-71m (est 76.6), IFRS EPS (.20)-(.16) including .13 in negative items

  • And revising FY19 EBITDA target to 24m (from at least 30m)

  • Results continue to be not great, during the quarter the company announced a restructuring program to boost profitability and my concern was this was a response to weak results which turns out to be the case, execution has not improved and I question estimates of future profitability.  

3Q18   .01 vs .02 w 20% TR, est .00 down from .04

  • 07/10/2018

  • IFRS EPS (.11) vs (.08)

  • Revs +23.4% to 72.2m, +8.7% ex 8.6m from Astellia, GM 59.9% vs 58%, adj EBITDA 2.5m vs 2.3m (4.7m EXFO, -2.2m Astellia)

  • Bookings +14.8% to 73.1m, B/B=1.01, Top customer 5.7%, top 3 15.2%

  • 4Q Guidance: Revs 68-73m (est 76.7), IFRS EPS (.05)-(.01) incl .10 in intangibles and stock comp, adj .05-.09, est .08, expect 20m EBITDA in FY18

  • While adjusted EPS is better than their outlook, guidance does not point to improved profitability to achieve FY19 estimates, mgmt. categorizes this as a “good” quarter, saw some order pushouts, expect cross-selling opportunities in FY19 and 5G wins.

2Q18   (.02) vs .05 ex acquisition costs, w 0% TR, est .04 down from .06

  • IFRS EPS (.08) vs .02, core EXFO EPS ex Astellia w 25% TR .04 vs .04

  • Revs +7.8% to 64.7m (+4.8% ex 1.8m from Astellia), GM 60.9% vs 61.7%, adj EBITDA ex 1.4m acquisition costs 3.9m vs 4.9m, EBITDA ex Astellia impact 4.8m vs 4.9m

  • Bookings +17.3% to 65.6m (+12.9% ex 2.5m from Astellia), B/B=1.01

  • Top customer 9.6%, top 3 16.9%

  • Astellia has capabilities, technology, and customers that are complementary to EXFO, mgmt. discussed how Astellia won monitoring deal with 3UK.

  • 3Q Outlook: Revs 68-73m (est 64.5m), IFRS EPS (.19)-(.15) incl (.09) stock comp and intangibles, mgmt. feels negative impact from Astellia will be short-lived, also in its seasonal weak period.

  • Results and guidance definitely weaker than expected but it appears to mainly be due to Astellia acquisition and its low seasonal period (core EXFO EBITDA and EPS were ok, not great but ok.

  • Company expects 22m adj EBITDA in FY18, felt it was on track to 26m prior to Astellia acquisition, expects at least 30m EBITDA in FY19.

1Q18   .06 vs .06 ex items w 30% TR, est .05 up from .02

  • EPS also ex 0.8m acquisition costs, Revs incl 1.4m from Yenista acquisition

  • Revs +2.6% to 63.4m, GM 63.3% vs 63.1%, adj EBITDA 6.06m vs 6.3m, 9.6% vs 10.2%

  • Bookings flat at 65.9m, B/B=1.04, top customer 13.8%, top 3=21.6%

  • 2Q Guidance: Revs 59-64m (est 62.6m), IFRS EPS (.08)-(.04) incl .10 negative items, excludes Astellia acquisition which should close soon.

4Q17   .09 vs .07 ex items, using 30% TR, est 0.00

  • Revs flat at 63.0m, GM 61.9% vs 61.6%, adj EBITDA 8.5m vs 6.2m, 13.6% vs 9.8%

  • Bookings +6% to 66.3m, B/B=1.05

  • FY EBITDA 22.0m vs 22.0m, top customer 10.1% vs 7.1%, top 3 18.4% vs 15.6%

  • Business transformation has been taking hold, top 20 customers now 42% from 35%

  • 1Q18 Guidance: Revs 60-65m, IFRS EPS (.01)-.03 incl .02 intangibles and stock comp

  • FY18 EBITDA target 26m (+18%), same target as last year, excluding Astellia acquisition, still targeting 15% EBITDA margins in medium term.

Mid Q updates

  • Acquired 33% stake (€8.6m) in Astellia (in France) and plans to launch a friendly takeover, total implied equity value €25.9m, closing should be near end of CY17

  • In exclusive negotiations to acquire Yenista Optics (in France) which makes advanced optical test equipment for R&D and manufacturing markets. FY16 revs were €5.2m, company was profitable

3Q17   .02 vs .05, est .08

  • Revs -3.9% to 58.5m at low end of guidance,

  • Bookings +6.5% to 63.7m, B/B=1.09 vs 0.98

  • Implemented another restructuring with benefits to be felt in FY18

  • 4Q Guidance: Revs 58-63m (est 67m), EPS (.03)-.01 incl .03 intangibles and .04 fx loss, non-IFRS .04-.06 (est .08), YTD EBITDA 13.5m, not a chance of hitting 26m

2Q 17.05 vs .07, est was .06

  • Revs +12% to 60m (guidance was 58-63), GM 61.7% vs 64.7%, EBT 6.5% vs 9% (EBT -18.7%)

  • Announced CEO transition

  • Guidance: Revs 58-64m vs 61m (est 64m), EPS (.02)-.02 incl .02 stock comp and intangibles, and .01 fx gain, est .08, FY guidance of 26m EBITDA still attainable but more difficult (4.9m in 2Q, 11.2m YTD)