Test system vendor EXFO has continued its M&A-driven transformation with the completed acquisition of French network monitoring and analytics specialist Astellia, a move that gives the Canadian firm a strong foothold in the mobile operator market, especially in Europe.

EXFO (Nasdaq: EXFO; Toronto: EXF) snapped up a 33.1% stake in Astellia last August and stated its intentions to acquire the rest of the stock in a move that valued the French firm at €25.9 million (US$32.1 million). Now it has acquired 97.44% of the shares, giving it more than 95% of the voting rights and is ready to put its acquisition strategy into action. (See Eurobites: EXFO Makes Move on Astellia.)

The deal builds on a number of other small takeovers that have helped EXFO expand beyond its traditional optical test market and, says CEO Philippe Morin, enables it to focus on mobile network monitoring and analytics as well as traditional test processes. (See EXFO Snaps Up Ontology for Network Visibility and EXFO Acquires Optical RF Test Technology from Absolute Analysis.)

"Our history is in fiber test and there's still plenty of business to be had there, especially in Europe where there's still a lot of fiber deployment to be done -- we see a strong cycle for about the next five years," says the former Ciena man. "But we decided we wanted to be stronger in mobility, and three of the four acquisitions we have made in the past couple of years have helped that strategy, with our RF interference testing purchase, the acquisition of Ontology, which will be an important component in the 5G world with its discovery and network visibility capabilities, and Astellia. We needed to get better at service assurance for mobility and this is a company that can help," he told Light Reading during the recent Mobile World Congress show.

"There are a number of good reasons why Astellia is a good fit for our plans," added the CEO. "First, it gives us a strong presence in EMEA and a nice set of Tier 1 customers we didn't already have, such as Orange, Telefónica and Zain." In total, Astellia brings 120 customers to EXFO's roster.

It also gives EXFO additional scale. "We needed to acquire a company that can give us market knowledge and business understanding -- we couldn't get where we wanted to be by just growing organically. Astellia has about 400 staff and also comes with about $45 million in annual revenues and that takes us to being a company with annual sales of more than $300 million," said Morin. (More on the financials a bit later.)

Astellia's headcount includes a professional services team based in Valencia (as a result of the 2014 acquisition of Ingenia Telecom) that Morin sees as strategically important, as they have a wealth of knowledge about mobile network operations from having conducted more than 5,000 network audits.

In addition, Astellia has successfully developed virtual, cloud-based network probes, with the company's virtualized solution receiving particular praise following a recent deployment in the UK: Morin regards those virtualization capabilities as critical to brokering new engagements at mobile operators. (See Three UK's Core Network Transformation Requires New Approach to Assurance.)

"Astellia fitted a lot of gaps that we had … in terms of where networks are going, and where operators are going. We have a nice portfolio," added Morin.

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Now his team needs to bring the various aspects of the portfolio together to offer a coherent proposition to operators as they make their 5G plans that include increased process automation and a greater need for network, service and customer visibility.

Towards those goals, EXFO is also looking at how artificial intelligence tools can be incorporated into the testing, monitoring and assurance of networks to deliver greater automation and agility. "We're leveraging the AI skills that are well developed in Montreal -- it's a key area of focus for the universities there. We're working closely on R&D with the universities" and also looking to attract key graduates to the company, he added.

EXFO will also have some work to do on its financials. Astellia may be bringing about $45 million in annual revenues but there's a reason its price tag was only $32.1 million.

Astellia posted annual revenues of €38.6 million ($47.8 million) in 2017, down by 21% from 2016 due to a weak order book at the start of the year, a scaling back in Asia and the impact on customer purchasing decisions of the EXFO acquisition (which created some short-term uncertainty). Also, Astellia has reported operating losses for the past four years. The good news for 2018, at least, is that the order book was stronger and there will now be an opportunity for cross-selling and other synergies.

But EXFO's investors will certainly not want to see this latest acquisition dragging on the company's bottom line. In its most recent full financial year, to August 31 2017, EXFO reported revenues of $243.3 million, up 4.6% year-on-year, while its adjusted EBITDA (after one-time costs) was flat at $22 million. There will need to be some notable growth if EXFO, with Astellia on board, is to top the $300 million mark in its current financial year, but what investors and analysts will be more focused on are the margins and costs that will present a tougher challenge for the ambitious Canadian vendor.

EXFO's share price currently stands at $4.35, giving it a market value of $243 million.

— Ray Le Maistre, Editor-in-Chief, Light Reading