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Test & Measurement

EXFO Buys, Ixia Plummets

Telecom testing vendors EXFO (Nasdaq: EXFO; Toronto: EXF) and Ixia (Nasdaq: XXIA) were prominent in the news late Thursday -- one for its progress and the other for its disappointment.

Following significant growth in its most recent fiscal year, EXFO is bolstering its access technology testing portfolio with the $17.7 million acquisition of test and measurement assets from Consultronics Ltd. , the bulk of which comprises handheld DSL line and service testers that will complement EXFO's existing FTTx test tools. (See EXFO Buys Assets and Revenues Ramp at Test Vendors.)

EXFO says the Consultronics business generated $15.3 million in revenues, and earnings before interest, tax, depreciation, and amortization (EBITDA) of $1.3 million, in the 12 months ended November 2005, from customers such as BT Group plc (NYSE: BT; London: BTA), BCE Inc. (Bell Canada) (NYSE/Toronto: BCE), and Verizon Communications Inc. (NYSE: VZ). Consultronics has 130 on staff in Toronto, the U.K., and Hungary.

The move follows EXFO's contract win at Deutsche Telekom AG (NYSE: DT), which is investing billions in a new fiber-to-the-curb network that will then deploy VDSL technology for the final copper connection to customers' homes. The German incumbent is also a Consultronics customer. (See DT Selects EXFO , DT Flings Billions at Fiber Access, and DT, TI Set to Spend Big on Broadband.)

The purchase gives EXFO a ready-made top three market share position in the handheld xDSL test tool market, behind market leaders Sunrise Telecom Inc. (Nasdaq: SRTI) and JDSU (Nasdaq: JDSU; Toronto: JDU), which last year bought test vendor Acterna. (See JDSU Buys Into Testy Market.)

According to Frost & Sullivan , Consultronics held a 13 percent share of what was a $68 million market in 2004, while Sunrise had a 31 percent share and Acterna 20 percent. That market, though, will likely have grown significantly during 2005 as the uptake in broadband services continued to grow quickly. (See DSL Forum Touts Growth.)

The total xDSL testing market, the majority of which is for remote test solutions, was worth $358 million in 2004, Frost & Sullivan says. That figure will more than double by 2011. (See F&S Reports on DSL.)

The acquisition also gives EXFO tools that test specific broadband applications, such as VOIP and IPTV, areas of growing interest to carriers and the test sector's leading vendors. (See Telefónica Prepares for IPTV Test, Acterna Puts Video to the Test, Spirent Latest to Tackle Video Test, Agilent Tests Triple Play, and Shenick Launches IPTV Tester.)

EXFO's share price was up by 3 cents to $4.81 in early morning trading today.

The news from 10 GigE test tool specialist Ixia is not so good. Its volatile share price took a hammering this morning -- down $3.19, more than 21 percent, to $11.74 -- after it announced late Thursday that it was lowering its fourth-quarter guidance after revenues "were impacted by a sequential decrease in quarterly sales of over $4.0 million to its largest customer."

Fourth-quarter revenues will be between $37 million and $38 million, while earnings will be be 7 cents or 8 cents per share. Analysts were expecting revenues of $42.2 million and earnings of 13 cents per share. That "largest customer" is Cisco Systems Inc. (Nasdaq: CSCO), which, in the company's third quarter, accounted for $15 million, or nearly 36 percent, of its total revenues of $42.1 million. (See Ixia Reports Record Q3.)

Ixia stated during its third-quarter conference call that large orders were coming in more slowly than expected, and that the fourth quarter revenues would likely be sequentially flat. Clearly the slowdown was even greater than Ixia's management anticipated.

The company is quick to point out, though, that sales to companies other than Cisco "were at record levels in the fourth quarter and overall bookings were solidly ahead of shipments," stated CEO Errol Ginsberg in the company's prepared statement. "We continue to see a number of underlying positive trends, including the continued adoption of 10 Gigabit Ethernet and the roll-out of triple play services, which should benefit our growth over the long term."

The CEO also points out that Ixia is still making money: "We expect to generate over $7 million in cash in the [fourth] quarter, bringing our cash and investments to approximately $200 million." Full fourth-quarter results will be published on February 6.

— Ray Le Maistre, International News Editor, Light Reading

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