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EXFO Inc (EXFO)
Q1Â 2020 Earnings Call
Jan 7, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day everyone, welcome to EXFO's First Quarter Conference Call for Fiscal 2020. [Operator Instructions]. At this time, I'd like to turn the conference over to Vance Oliver, Director of Investor Relations. Please go ahead, sir.
Vance Oliver -- Investor Relations
Good afternoon and welcome to EXFO's first quarter conference call for fiscal 2020. 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 filed 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 results with IFRS numbers is available in the Q1 2020 news 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 will turn the call over to Philippe.
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
All right. Thank you, Vance, and good afternoon everyone. First of all, I'd like to take the opportunity to wish everyone on the call here a Happy New Year. Now turning to our financial results, EXFO opened fiscal 2020 with a strong first quarter performance, with sales increasing 6.3% year-over-year to $73.6 million.
Now this marked the fifth consecutive quarter, with our sales results finished above the midpoint of our management guidance. We're also pleased with our reported adjusted EBITDA of $7.5 million or 10.3% of sales, which set EXFO on the right path to achieve our profitability target of $33 million for the fiscal year. Our organic sales increase is mainly due to a steady influx of Test and Measurement orders that were booked and shipped in Q1 2020 versus a back end loaded Q1 2019.
And notably, we benefited from strong demand from EXFO's optical test solutions in our Asia-Pac region in our first quarter of 2020 and increased appetite of our 400-gig test equipment along with our high-end lab solution. Our bookings, however, were down versus the same period last year. And if you recall, we had reported our second highest bookings level of $81.2 million in Q1 2019 which was due to an unprecedented calendar year -- calendar -- year end spending on the part of service providers in Americas for our Test and Measurement products.
Now given less -- less than year spending -- year end spending and some annual maintenance contracts renewal being pushed out in the second quarter, our bookings totaled $69.9 million for a book to bill ratio of 0.95 in the first quarter of 2020. Now we're not overly concerned about the data point as we secured three SASS orders, totaling more than $2.5 million in the first quarter of December, sorry -- the first week of December, related to our RAN optimization, real-time network topology, and as well active monitoring from mobile backhaul networks.
Now these deals would have narrowed the bookings gap had they've been obtained a few days earlier and are still a proof point that we're increasing our relevancy with our SASS offering. Now speaking of our SASS offering, we recently rebranded all of their solutions under the new Nova name for Nova name brand for better consistency and positioning clarity. I'm confident these solutions will increasingly gain traction as we get closer to deployment of 5G networks later in the fiscal 2020.
So in short, our Test and Measurement business with sales of up to 12.4% year-over-year continues to thrive [Phonetic] based on our innovation we bring to the market and ongoing tailwinds related to fiber build outs and high-speed deployments. On the SASS side, sales were down 8.6% year-over-year. As we expected, we witnessed order lumpiness as we build scale and navigate through complex customer requirements related to 5G and virtualized networks.
Now let me provide you with our guidance for Q2 2020. We're forecasting sales between $66 million and $71 million for the reporting period, extending from December 1st, 2019 to February 29th, 2020. It should be noted that EXFO recognized into revenue a $5 million network topology order in Q2 2019, but we don't anticipate a similar high margin software deal in Q2 2020. Looking at the bottom line, IFRS net loss is expected to range between negative $0.09 per share to negative $0.05 per share for the second quarter of 2020.
IFRS net loss includes $0.05 per share and after-tax amortization of intangible assets, stock-based compensation costs and anticipated foreign exchange loss. So at this point, I will like to turn the call over to Pierre to cover our financials.
Pierre Plamondon -- Chief Financial Officer
Thank you, Philippe. Sales increased 6.3% to $73.6 million in the first quarter 2020 from $69.2 million in the first quarter of 2019. As previously mentioned, we increased our sales year-over-year, mainly due to a more steady flow of customers among other [Phonetic] in Q1 2020 compared to the same period last year, in which a significant portion of our other were back-end loaded and only recognized into revenue in the following quarters.
We also benefited from stronger demand for our solution in the Asia-Pac region in Q1'20 compared to Q1'19. Bookings meanwhile decreased 13.9% year-over-year to $69.9 million in the first quarter of 2020 for a book to bill ratio of 0.95. Gross margin before depreciation and amortization improved to 58.9% of sale in the first quarter of 2020 from 58.2% in the first quarter of 2019.
The adoption of IFRS 16 raised our gross margin by 0.4% in Q1 2020, while our Q1 '19 gross margin included 0.4% for restructuring expenses. In terms of operating expenses, selling and administrative expenses decreased to $24.5 million, or 33.3% of sales in the first quarter of 2020 from $26.4 million or 38.1% of sales in the first quarter of 2019. The $1.9 million decrease in SG&A expenses reflect the full impact of our 2018 restructuring plan, the adoption of IFRS 16 and no restructuring charges in Q1 2020.
Net R&D expenses dropped to $11.7 million or 16% of sales in the first quarter of 2020 from $15.2 million or 22% of sales in the same period last year. Likewise, the $3.5 million decrease in net R&D expenses is linked to the positive impact of our 2018 restructuring plan, the adoption of IFRS 16 and no restructuring charges in Q1 2020 compared to $2.1 million expense in Q1 2019. On the other end, SG&A and net R&D expenses were negatively affected by inflation and 2019 salary increases.
IFRS net loss totaled $0.1 million or $0.00 per share in the first quarter of 2020 compared to a loss of $7.5 million of $0.14 per share in the first quarter of 2019. IFRS net loss in the first quarter 2020 included $1.4 million in after-tax amortization of intangible assets $0.5 million in stock-based compensation costs and a foreign exchange loss of $0.1 million. IFRS net loss was impacted by restructuring charges of $2.7 million in the first quarter of 2019.
Adjusted EBITDA totaled $7.5 million or 10.3% of sales in the first quarter of 2020 compared to $2.7 million or 3.9% of sales in the first quarter of 2019. EXFO adopted IFRS 16 related to "Leases," [Phonetic] on September 1st 2019, which had a positive impact on adjusted EBITDA of $0.9 million, or 1.2% of sales, in the first quarter of 2020.
Prior period amounts were not adjusted. Geographically, the America accounted for 54% of total sales in Q1'20. Europe, Middle East and Africa represented 29%, while Asia Pacific totaled 17%. In comparison, the sales split was 51%, 32% and 16% among the three geographic region in the first quarter of 2019.
In terms of customer mix, our top customer accounted for 11.9% of total sales in Q1 '20 while our top three represented 19.7%. Turning to a few key points on the balance sheet. Our cash position decreased by $1.9 million to $17.5 million at the end of the first quarter of 2020. This decrease is mainly due to $6.5 million in cash flow used by operation, $2 million for the purchase of capital asset, $1.5 million for the repayment of lease liabilities and the long-term debt and $0.2 million for the redemption of share capital. These cash amounts were partially offset by an $8.4 million increase in our backlog in the first quarter of 2020.
At the end of Q1 '20, EXFO has a net debt position of $0.8 million and available revolving credit facilities up to $47.7 million. At this point, I will turn the call over to the operator for the start of the Q&A.
Questions and Answers:
Operator
Thank you. [Operator Instructions]. We'll go first to Thanos Moschopoulos with BMO Capital Markets.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Hi, good afternoon. So Philippe if I look at your results this quarter and the guidance for next quarter, it would seem you're looking for the first half of the fiscal year to be relatively flat year-over-year. So I mean based on your commentary, should we attribute that primarily to a tough year-over-year comp or what's the bigger picture here? Is it maybe that you're still seeing some pause from operators as they sort out through their 5G requirements?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yeah, now, I think the -- so, yes, so you're right. So when you look at the first half to first half, it will be roughly around a flat performance coupled to -- I would say two facts. One is the Test and Measurement lumpiness that we had last year, the year-end money was greater than what we've done this year, what we've seen this year. And as well, the CenturyLink customer know the context around [Indecipherable] that we've announced last year if you remember the $5 million purchase order that also came into Q2 that we don't believe we're going to realize a similar type of contract this quarter.
So that's kind of a combination of those two things.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Okay. And then if we just look at sort of the SASS business, I mean, the bookings have been a little softer in the last three quarters. Now obviously, that's in lumpy segments, but how would you characterize the pipeline, your discussions with operators how -- and how those have evolved over the last while? I mean, would you still expect to see an inflection point maybe later this year as there is more 5G activity or is there any change in that time frame?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yeah. So we're going to continue to see I guess we're predicting the inflection point more into the latter part of our fiscal year. We see some of our --if you remember, we have three phased approach with regards to 5G deployment. The first one is around the whole impacting our Test and Measurement for fiber build-out and small cells and we're seeing the benefit of that. The second phase is the RAN optimization, mobile backhaul monitoring and so on and that's continuing.
And we do expect to see some demand as I mentioned in my opening remarks. And then the 5G real [Phonetic] core deployment which we expect more into an inflection point into the latter part of 2020. We do see that there is still work being done, RFQs being going through that hopefully will convert into our second half or 2020 in terms of our performance from a bookings point of view.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Okay. Would you still hope to achieve mid-single digit revenue growth for the fiscal year?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yeah. And as I mentioned as well, achieving the $33 million of EBITDA as well.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Okay. And then a question for Pierre, taxes were higher this quarter. What do that relate to?
Pierre Plamondon -- Chief Financial Officer
You know, it's mostly a matter of timing of tax in different countries [Phonetic], but for the next quarter, we are expecting probably in again in tax expense average of $0.5 million for the quarter.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Okay. And then looking at your guidance, it would seem that opex should be relatively consistent in Q2 relative to Q1, is that correct?
Pierre Plamondon -- Chief Financial Officer
You need to remember that in Q2 we had the salary increases starting in January 1st, and we do have some abilities like insurance premium and so on that kick on again at the beginning of the year. So, and you have probably mentioned -- noticed that the currency is not playing in our favor in this quarter as the Canadian Dollar gets stronger compared to the previous quarter. So though -- all of those in a manner tend to increase our opex for next quarter.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Okay. And what level of FX gain or loss is embedded in your EPS guidance?
Pierre Plamondon -- Chief Financial Officer
It's roughly $0.01.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Okay. Alright. Thank you. I'll pass the line.
Pierre Plamondon -- Chief Financial Officer
Thank you.
Operator
We'll move next to Todd Coupland with CIBC.
Todd Coupland -- CIBC Capital Markets -- Analyst
Hi, good evening, everyone. I had a question on -- follow-up question on the 5G. What can we watch for from the outside to see whether the market is moving in line with your expectations over the course of this year? What are some of the signs we should watch for?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yes, so the -- we're monitoring ourselves as one, activities associated with antennas, small cells, deployment and fiber deployment associated with it. Second is, announcements around what I would call the 5G radio -- new radio selection from our customer base. And then the virtualization announcements around in terms of what they're looking at modernizing their network and these are kind of the bellwether we're looking at with regards to the activities. Obviously internally we see RFQs and RFIs that we received, but from an external point of view, these are kind of the activities, I would say are either leading front end indicators of the 5G deployment about to happen.
Todd Coupland -- CIBC Capital Markets -- Analyst
And the new -- I mean it's a good point on the new radios. I mean this has been something the sector has been watching for, for a while. Would you think that -- that happens when some of the later in calendar Q1, early Q2 releases from the carriers come out? Is that the kind of timing that's generally expected right now and so that will say yes the RFQs will turn into orders this year or do you have a different view of that?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yeah, I think it really depends on -- by countries, and it starts off, as you know, Todd, first of all there are going to be auction for the particular spectrum that in each of the respective countries, and then in certain countries you've seen already deployment of new radios being deployed. Obviously, the US, Korea, and China are examples of where that's taking place. And then right behind that, you've got the opportunities for not only the new radio, but the modernization or the virtualization of the core end and RAN, which follows right behind that. So that's kind of the leading indicators that I think the industry should be looking for.
Todd Coupland -- CIBC Capital Markets -- Analyst
Okay. And if you were to, again, just to be -- see if we could be as precise as possible, characterize your view of the rollout of these indicators now versus three months ago, has it changed at all? And if so, how?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
What's changed versus three months ago, I would say for depending on the regions again, the level of some of our activities with response to responding to RFQs. I think six months ago, we were still having discussions around architecture and TOCs. Now we're seeing some RFQs for monitoring, for service assurance, virtual service assurance that are starting to come in and then increasing that -- with that level of increasing activity, depending again on the regions. So that would be the -- the difference between three to six months ago.
Todd Coupland -- CIBC Capital Markets -- Analyst
Okay, last question from me. Is there any way for you to characterize your market share, now, let's say versus last year or the last cycle? Do you directionally, can you give any commentary on that?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yeah, and I'll answer the market share. I mean, as you know, we have two business units. So on the Test and Measurement side, they're optical test solution, we believe we're number one market share and with the addition of our lab solutions, with the acquisition that we made two years ago in Yenista, we actually believe we have increased our position there. With regards to SASS, as you know, the market is very fluid, very dynamic, there's a lots of solutions involved in this. We like to use Analysys Mason data report about a month ago for the year of 2019 and they put us as number two at 9% market share for that year behind NetScout.
But again that was probably full [Phonetic] from a 2019 view. So with a very focused on the service assurance probe -- virtual probe monitoring capability. But as you know in our SASS product, we have fiber monitoring, we have a simulator product. So it becomes really more complex, trying to figure out exactly where we stand in terms of that total market -- market share. But overall, like in the pro-market, we have made some improvement in our market share in the last 18 months.
Todd Coupland -- CIBC Capital Markets -- Analyst
And is it too early to tell whether Astellia is going to help you raise your market share for 5G, particularly in the US?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Well, Astellia for sure helps us with regards to being adding a solution and a portfolio that we didn't have before, especially of virtualized solutions that we've been able to implement into three [Phonetic] UK and Europe. It also provides us with professional services capability that we didn't have before.
So absolutely it will help us in our positioning in North America for 5G and for service assurance deployment for 4G plus and 5G as well in North America.
Todd Coupland -- CIBC Capital Markets -- Analyst
Okay, great. I really appreciate the color. Thanks a lot.
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Thank you.
Operator
[Operator Instructions]. We'll move next to Tim Savageaux with Northland Capital Markets.
Steven -- Northland Capital Markets -- Analyst
Hi. This is actually Steven on for Tim. Thank you for taking my call. I was wondering if you guys could give us a little color, any indication on the drivers for your guide next year in terms of like optical and protocol?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
For the next quarter, you mean guidance for the next quarter?
Steven -- Northland Capital Markets -- Analyst
Yes, correct. [Speech Overlap] Yeah, I just want to like --[Speech Overlap] What was that?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Well, yeah -- No, I just want to make sure I thought you said guidance for next year. So I just want to make sure we're talking about guidance for next quarter.
Steven -- Northland Capital Markets -- Analyst
Yes, next quarter.
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yeah, yeah. So again, as you may know, Q2 for us is from a seasonality point of view is a quarter that goes from November -- sorry December, January and February, which is a bit more of a challenge for us in terms of both the T&M and the SASS because you've got obviously the holidays and Chinese New Year and so on. And so that's a part of one take into account when we do the guidance, the seasonality aspect of that. And as well, when you look at our backlog, you look at the booking level, our book-to-bill ratio being at 0.95. It really got us to a point where that's providing our guidance to make sure when we -- it is a realistic guidance for our revenue profile.
So it takes into account the seasonality, it takes into account the service provider approval process and budgeting process that they go through at the beginning of the calendar year and it's also take into account the backlog that we walked into the quarter following our bookings that we did in Q1.
Steven -- Northland Capital Markets -- Analyst
Okay, great. And then, and do you think you could give us any more color on like optical compared to like last year and even compared to this quarter?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Yes. So the -- So what happened last year, and again if -- just to remind everybody Q4 of 2018 was a softer quarter for us from a T&M point of view and Q1 was very strong as I mentioned in my opening statement. If you actually look at it from a six-month point of view and you compare the six months Q4 2019 with Q1 2020 with the same period a year before, what we're seeing is a T&M market that's absolutely from a bookings point of view pretty flat.
So what we're seeing is, more of an even out over six months of that particular activity in that particular market segment. We do foresee as we talk to our service provider customers and our web scale customer that they continue to do the fiber build out, there is -- you know, and on top of that, that's -- if you coupled with our 400-gig solution that were seeing some really nice momentum there and the ongoing lab, the iron lab solution that we have, we continue to foresee a good -- good high demand for that T&M portfolio.
Steven -- Northland Capital Markets -- Analyst
Okay, thank you.
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Okay.
Operator
We'll hear next from Christian Sgro with Canaccord.
Christian Sgro -- Canaccord Genuity Inc -- Analyst
Hi, good evening. Just one question Todd. With -- with a longer-term view, would you point out any seasonality across the two business segments? You often comment that the SASS segment is lumpy, but thinking about quarter-to-quarter, in the longer term, is it something we should be looking for in spending patterns and the spending environment?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
So there is more a seasonality associated with the T&M business than there is with the SASS business. The SASS business tends to be more lumpiness from the point of view of bigger contracts, longer sales cycles and when we close these deals, as I mentioned earlier, last year we closed there were $5 million deals of this assets tend to have multi-year multi-million dollar contract. So there is no seasonality on the SASS side, it's more about closing deals and their longer sales cycles are more complex type of deal versus T&M there is more seasonality aspect associated with it and as well, being able to convert those bookings that tends to be more back-ended into the quarter to be able to convert them into revenue.
Christian Sgro -- Canaccord Genuity Inc -- Analyst
Okay, that's helpful. But when you look quarter-to-quarter across the fiscal year, is there a period in the year where you would say that new customers are looking to -- I think you called it budget flush or clear the budget or spend more or is that not so much a theme anymore?
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
And your question is on SASS or on T&M or overall?
Christian Sgro -- Canaccord Genuity Inc -- Analyst
That's all T&M.
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Okay. So T&M, so the seasonality where -- there are year end money being spent, and we saw some of it this year but not as much as last year. It tends to be in Q1 of our fiscal quarter. Now this year, we saw some year-end money but not as much as the previous year.
Christian Sgro -- Canaccord Genuity Inc -- Analyst
That very helpful. All right, thank you for taking my questions.
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Thank you.
Operator
And at this time, I'd like to turn things back to CEO, Philippe Morin for closing remarks.
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
All right, thank you. So just a few key takeaways before we conclude this call today. So first, EXFO delivered a strong first quarter based on our sales. Mainly all of them are organic sales now, increasing 6.3% year-over-year and an adjusted EBITDA reaching $7.5 million or 10.3% of sales. Second, we received more than $2.5 million of SASS related orders in the first week of December and if we had secured these orders a few days earlier, our book to bill ratio would have been closer to 1 in our Q1 2020. And so consequently, timing of orders continues to affect our SASS business, as we build the scale of that particular business unit.
We evaluate the performance of our SASS business more and more into a six-month period. And I would actually encourage you to do likewise. So finally EXFO will be holding its Annual Meeting on Wednesday 9:00 AM at the Vantage Venues, Room L2 on the 27th floor, located at 150, King Street West in Toronto. Both shareholders and analysts are welcome to attend. At this point, this concludes our Q1 2020 conference call. On behalf of the entire EXFO team, thank you for joining us today.
Operator
[Operator Closing Remarks].
Duration: 29 minutes
Call participants:
Vance Oliver -- Investor Relations
Philippe Morin -- Chief Executive Officer and Chief Operating Officer
Pierre Plamondon -- Chief Financial Officer
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
Todd Coupland -- CIBC Capital Markets -- Analyst
Steven -- Northland Capital Markets -- Analyst
Christian Sgro -- Canaccord Genuity Inc -- Analyst
