Optical/IP Testing

EXFO's Mixed Bag: Sales Up, a New CEO, Stock Slumps

Canadian test and measurement specialist EXFO continued to make headlines this week with the appointment of a new CEO and an impressive hike in revenues for its fiscal second quarter, but investors took fright at delayed orders, margin erosion and a less than stellar near-term outlook.

First, the positives. EXFO's revenues for the quarter that ended Feb. 28 came in at $60 million, up 12% year-on-year. That's the company's third consecutive quarter of double-digit sales increases. (See EXFO Reports Q2 Sales Hike.)

The most recent quarter's sales hike was fuelled mainly by demand for the vendor's optical test gear (lab and field), a portfolio it added to during the recent OFC event. (See EXFO’s New Platform Enables All-in-One Spectral & Transport 100G Testing Solution.)

And, at the same time, the company announced that its current chief operating office, industry veteran Philippe Morin (formerly of Ciena and Nortel), would become CEO from April 1. Morin replaces founder Germain Lamonde, who steps down 32 years after forming the company. But he's not going far -- Lamonde will become executive Chairman, with responsibility for EXFO (Nasdaq: EXFO; Toronto: EXF)'s M&A strategy, which has yielded recent results. (See EXFO Snaps Up Ontology for Network Visibility.)

So far, so good. Morin is well respected and well liked in the industry and sales are on the up.

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But... EXFO's share price took a 14.3% haircut Thursday to end the day at $5.10.

That's because the company's second quarter gross margin (before depreciation and amortization) came in at 61.7%, a number many companies would bite their left arm off to achieve, but that's down from 64.7% a year ago and lower than the 63.1% achieved in the first quarter.

In addition net profits are down (to $1 million from $4 million a year ago) and so are the bookings, which at $55.9 million were down almost $4 million from a year ago and down $10 million compared to the first quarter.

EXFO says that's due to delays in spending and deal approvals by customers, but investors will want to see those deals closed and the resulting sales coming in.

The test vendor also guided for third quarter revenues of $58 million to $63 million, which would be flat compared to a year ago: The run of double-digit sales growth is about to come to an end.

So there's an early test for the always upbeat Morin -- get those delayed orders in the bag and the sales and margin lines heading north again.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, International Group Editor, Light Reading

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