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Edited Transcript of EXF.TO earnings conference call or presentation 2-Apr-19 9:00pm GMT

Q2 2019 EXFO Inc Earnings Call

QUEBEC Apr 12, 2019 (Thomson StreetEvents) -- Edited Transcript of EXFO Inc earnings conference call or presentation Tuesday, April 2, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Germain Lamonde

EXFO Inc. - Founder & Executive Chairman

* Philippe Morin

EXFO Inc. - CEO & Director

* Pierre Plamondon

EXFO Inc. - CFO & VP of Finance

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Conference Call Participants

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* Justin Keywood

GMP Securities L.P., Research Division - Director of Equity Research

* Richard Tse

National Bank Financial, Inc., Research Division - MD and Technology Analyst

* Robert Young

Canaccord Genuity Limited, Research Division - Director

* Thanos Moschopoulos

BMO Capital Markets Equity Research - VP & Analyst

* Timothy Paul Savageaux

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Todd Adair Coupland

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

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Presentation

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Operator [1]

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Good day, and welcome to the EXFO's Second Quarter Financial Results for Fiscal 2019 Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to EXFO. Please go ahead.

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Unidentified Company Representative, [2]

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Good afternoon, and welcome to EXFO's Second Quarter Conference Call for Fiscal 2019.

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 Q2 2019 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.

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Philippe Morin, EXFO Inc. - CEO & Director [3]

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Thanks, and good afternoon, everyone.

And very pleased that today EXFO delivered an outstanding second quarter with strong revenue and bookings growth, profitability and as well as cash flow generation.

First on revenue. Our revenue increased by 14.2% year-on-year to $73.9 million, which is at the high end of our guidance range of $70 million to $75 million. The double-digit sales increase can mainly be attributed to a full quarter contribution from Astellia and as well as strong results from our test and measurement and network topology solutions. These same factors are responsible for our robust sales growth of 11.7% as we reached our halfway mark of our fiscal year 2019.

Second, on bookings. Bookings improved 16% year-on-year to $76.1 million for a book-to-bill ratio of 1.03 in our second quarter. Obviously, a strong book-to-bill ratio above 1 always represents business momentum, and this is following our second-highest bookings results which was $81 million, and for the company's history that took place in our Q1 -- our prior quarter, Q1 2019.

Third, on our profitability. Our adjusted EBITDA totaled $8.8 million, close to 12% of our sales in our second quarter 2019. This improved level of profitability clearly demonstrates the leverage in our operating model, when we have increased revenue from high-end, high-margin system-based solutions that impact our bottom line. And as we looked at our midway point of our fiscal 2019, our adjusted EBITDA now stands at $11.5 million which is on plan to achieve our $24 million annual target.

Finally, our cash flow. Cash flows from operations surged to $18.7 million in the second quarter, raising cash and raising short-term investments to $27 million and returning EXFO to a positive net cash position of $10.7 million.

Now cash flow generation has always been a key priority for the company, but more so following the acquisition of Astellia last year, and that focus has translated into a strong replenishment of our cash position. Now all these proof points demonstrate that we're on track with our profitable growth strategy and amid a very rapidly changing communication industry. And I'm really a firm believer that companies that can adapt to this multiple customer transformation and that can evolve with customers' requirements like fiber buildout at the network edge or 5G wireless deployment or network virtualization, those companies that can adapt will thrive in our industry.

Now let's take a closer look on how our 2 major businesses, product families, performed in our second quarter. In terms of test and measurement, sales were up 1% year-over-year despite reduced legacy copper access sales which are characterized by large and intermittent deals. Now the key growth theme for our test and measurement business in North America was around network densification in preparation for 5G wireless networks.

I do anticipate that this trend will accelerate in upcoming months as communication service providers race to fiberize their optical edge and their front-haul networks in support of 5G commercial deployments. And clearly, our optical and high-speed transport test solutions will continue to benefit from this trend as 10-gig and 100-gig rates permeates various parts of the network.

Now if we look in Europe, we're seeing a growing appetite for fiber to the prem test solutions, especially fiber-to-the-home flavor. After several years of building out metro-optical networks, many European service providers are now accelerating their fiber investment to the edge of the network to meet the rising bandwidth requirements of their customer base. Now this market dynamic obviously plays well to EXFO's strength as our OTDR capability, along with our award-winning intelligent Optical Link Mapping (sic) [Optical Link Mapper] software capabilities have captured the majority of available orders.

Now in addition, our 400-gig test solutions for network equipment manufacturers and advanced test solutions for labs made significant inroads with customers globally. I'm also pleased with Yenista's revenue contribution in recent quarters, confirming the rationale of the acquisition that we did for that company 18 months ago. Yenista's high-end optical spectrum analyzers have clearly filled a gap in our optical test portfolio for the lab and manufacturing environment.

Now on our Service Assurance, Systems and Services side, the sales increased 63.9% year-over-year or 28% if we exclude the Astellia -- Astellia's revenue contribution.

Now as announced earlier this year in January, a $4.9 million network topology deal with a Tier 1 U.S. service provider allowed EXFO to post double-digit sales growth on an organic basis. This key contract win comes also with a multimillion-dollar customer support plan over the next 3 years. So our real-time topology solutions plays a critical part of this customer's network transformation by mapping network resources with related services to provide a comprehensive view of that network inventory.

So our SASS product family also received solid revenue contribution for our fiber monitoring solutions in our second quarter which continues to resonate with service providers worldwide but especially in Asia Pac. Our fiber monitoring system is also an extension of our OTDR solutions which allows a centralized real-time monitoring of optical networks to detect fiber breaks or fiber performance issues. Our monitoring solution reduces troubleshooting time and allows cost savings for service providers like NBN in Australia that have deployed our solutions.

As we continue our transition towards software-based solution and as we increase the relevancy of our SASS solution with Tier 1 service providers, the funnel of similar network topology and fiber monitoring deals will widen and our revenue recognition will become more predictable.

So now let me provide you with our guidance for Q3 2019. We're forecasting sales between $70 million and $75 million for the reporting period extending from March 1 to March 31, 2019. Looking at the bottom line, IFRS net loss is expected to range between negative $0.04 and $0.00 per share for the third quarter of 2019. IFRS net loss does include expenses of $0.05 per share and after-tax amortization of intangible assets and stock-based compensation cost.

Now at this point, I'd like to turn the call over to Pierre so he can cover the financials in more detail.

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Pierre Plamondon, EXFO Inc. - CFO & VP of Finance [4]

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Thank you, Philippe.

Sales increased 14.2% to $73.9 million in the second quarter 2019 from $64.7 million in the second quarter 2018. We increased our sales year-over-year mainly due to a $7.5 million revenue contribution from Astellia compared to $1.8 million for the 1 month during the same period in 2018. We also recognized into revenue the $4.9 million order for network topology that Philippe talked about earlier. These factors were partially offset by a negative currency impact on revenue based on the stronger average U.S. dollars as we have some sales in Canadian dollar and euro but report in U.S. dollar our financials.

Gross margin before depreciation and amortization amounted to 60.7% of sales in the second quarter of 2019 compared to 60.9% in the second quarter of 2018.

Although our gross margin remain relatively stable year-over-year, there are some moving parts. As mentioned before, we recognize into revenue our high-margin $4.9 million network topology deal in this current quarter 2019. This was mitigated by the full quarter contribution from Astellia which, as expected, carry a lower gross margin than our corporate average due to higher proportion of sales coming in from professional services.

In terms of operating expenses, selling and administrative expenses totaled $25.5 million or 34.4% of sales in the second quarter 2019 compared to $24.9 million or 38.5% of sales in the same period last year.

The $0.6 million increase in SG&A expenses reflects a full quarter contribution from Astellia, some increases year-over-year and restructuring charges in Q2 '19. These expenses were reduced by our restructuring plan with some help from currency fluctuation on cost as the average value of the Canadian dollar and the euro decreased compared to the U.S. dollar. We also incurred acquisition-related costs of $1.4 million in the second quarter 2018 compared to 0 for the most recent quarter.

Net R&D expenses reached $12.2 million or 16.5% of sales in the second quarter of 2019 compared to $13.1 million or 20.2% of sales in the same period last year. The $0.9 million decrease in net R&D expenses is directly related to our restructuring plan with the added benefit of currency fluctuation. These positive effects were partially offset by the full quarter impact of Astellia acquisition, salary increases and restructuring charges in Q2 '19.

IFRS net earnings in the second quarter 2019 totaled $5.2 million or $0.09 per share. In comparison, IFRS net loss attributable to the parent interest reached $4.7 million or $0.08 per share in the second quarter 2018.

IFRS net earnings in the second quarter 2019 included $1.9 million in after-tax amortization of intangible assets, $0.5 million in stock-based compensation costs, $0.5 million in after-tax restructuring charges, $0.6 million for acquisition-related fair value adjustment of deferred revenues, and a foreign exchange loss of $0.4 million.

These expenses were offset by the sale of a building under EXFO's restructuring plan that generated a gain of $1.7 million in the second quarter 2019. We also benefited from a deferred income tax recovery of $2.4 million in the second quarter.

Geographically, the Americas accounted for 50% of total sales in Q2 '19; Europe, Middle East, Africa represented 34%; while Asia Pacific totaled 16%. In comparison, the sales split was 49%, 33% and 18% among the 3 geographic regions in the second quarter of 2018.

In terms of customer mix, our top customer accounted for 14.9% of total sales in Q2 '19 while our top 3 represented 24.7%.

Turning to a few key points in the balance sheet. Our cash position increased to $27 million at the end of Q2 '19 from $20.1 million in the previous quarter. This $6.9 million increase is mainly due to $18.7 million in cash flow from operations and $3.2 million for proceeds from the disposal of the building we sold in Q2. These items were partially offset by $12.5 million reduction of the bank loan, $1.8 million for depreciation of capital asset, $0.7 million for the repayment of long-term debt and $0.1 million for the redemption of share capital under our normal course issuer bid. At the end of Q2 '19, EXFO had a net cash position of $10.7 million and available revolving credit facility up to $53 million.

At this point, I will turn the call over to the operator for the start of the Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Thanos Moschopoulos with BMO Capital Markets.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [2]

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Philippe, maybe to summarize, I guess, your commentary on how the market environment's looking, it sounds like you're seeing building demand in preparation for 5G. That's already translating into an uptick in the optical test and measurement side. And then you mentioned the NEMs progress. Does that about capture it? Maybe just diving deeper into the copper issue that you mentioned as well. How long should that be a headwind for? Is that just a question of (inaudible) or I guess, reflecting the restructuring you've done in that business. And how long will that be a drag for year-over-year?

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Philippe Morin, EXFO Inc. - CEO & Director [3]

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So yes. So the market dynamics, Thanos, continues to be -- on our high speed and optical portfolio continues to be fairly consistent as the first 2 quarters that we just went through. So 10 gig, 100 gig for fiber deployment, fiber to the antenna, in preparation -- or densification in preparation for 5G. The data center interconnect, especially North America, that continues to be a big trend. But as I highlighted as well, Europe continues to grow for us at a faster pace, actually, than North America thanks to the fact that you're starting to see much more deployment of the fiber-to-the-home and fiber to the prem, and therefore, the impact on our -- both our fiber characterization equipment and as well 10 gig and 100 gig. The NEMs, as you highlighted, we're very happy with now the progress we made. The acquisition, as I said, of Yenista took place 18 months ago. By the time you do the integration, train your sales team, we're now seeing now the benefit of that acquisition and the rationale behind being able to take a stronger position in the labs and manufacturing business. And Q2 was a good proof point of that performance. With regard to copper, as you mentioned, we are continuing to see some business on copper but our investment's focus continues to be more -- where we see the market evolving is on fiber and fiber deployment. Copper does continue to have some business, but we feel that we are going to continue to see that market going through a bit of a headwind as our customers are transitioning away from copper and continuing to transition more and more towards fiber deployment.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [4]

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I guess the question is how much longer should that be a year-over-year drag? I guess, the impact probably just diminishes over time given the uptick you're seeing on the optical test side, would that be correct?

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Philippe Morin, EXFO Inc. - CEO & Director [5]

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Yes -- no. I think -- yes, I think we're always surprised that legacy kind of business always takes more time to reduce. So I think we're going to continue to see some business -- we're going to obviously continue to support our opportunities with our existing customers. So I do expect we're going to continue to see business for the next few quarters, but that's going to continue to diminish as we move through our fiscal year.

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Germain Lamonde, EXFO Inc. - Founder & Executive Chairman [6]

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Yes. And this is a business that's -- I was going to say, Thanos, to your question, this is a business that is very -- pretty stable and such a business is not going to decline very fast. And given the fact that this is not a big part of our business overall, the significance when it comes to the overall numbers of the business is rather small.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [7]

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Great. Maybe just a couple of modeling questions. Remind us, is this the quarter in which the maintenance -- the customer support bookings usually come through, where there's the pronounced seasonality in that regard?

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Philippe Morin, EXFO Inc. - CEO & Director [8]

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Yes, so Q1, Q2 tends to be that. Q2, obviously, being -- having the month of December when you have the year-end, and so for customers that didn't sign, in December, you tend to get that into the January month. So it does have that benefit from the maintenance contract renewal.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [9]

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Okay. And maybe just one last one for me. On the NEMs business, just remind us what the sales cycles look like in that business. Is that a fairly quick turns business? Or is that more of a design process where a customer makes a longer-term decision as to whose products to use, and then once they do, it ramps quickly after that?

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Philippe Morin, EXFO Inc. - CEO & Director [10]

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Yes -- no, I think the -- it's, I would say, a bit longer sales cycle than the normal T&M business, the portable business, but it is a much faster cycle than -- especially if you put that in context, Thanos, of our service assurance business which is a much more longer sales cycle.

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Operator [11]

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And we'll go next to Todd Coupland with CIBC.

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Todd Adair Coupland, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [12]

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I also wanted to ask about 5G. I just wanted to understand your comment. So what I heard was copper is not a significant part of our business, but it is going to continue to be a bit of a headwind, although not a material one. So I guess what my follow-up question is, I get your point on calling out 4G densification to prep for 5G, but what I'm not sure on or what's not clear is you're basically saying that business is flattish. So is there any way for you to unpack for us what kind of growth you're seeing from 5G? Or is it just not material enough for you to call it out? So color on that would be helpful.

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Philippe Morin, EXFO Inc. - CEO & Director [13]

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Yes, I think the densification of the edge network -- of the wireless network is absolutely growing and happening as we speak. Whether it's in the context of 5G, as you said, Todd, or 4G and 4G plus, you are seeing fiber being deployed -- first of all, you are seeing much more smaller -- small cells being deployed, new antennas being deployed, new RAN, and then ultimately, fiberization of that taking place. We're seeing the benefit of that with the fiber characterization of both fiber densification and fiber deployment. And yes, when you look at our overall bookings growth from a T&M point of view, you would say it's kind of flattish, and that was the comment we made, is that it did include, and if you compared our Q2 2018 to Q2 2019, there was 2 impacts on that one. One, we meant -- we talked about the copper, tends to be more -- copper access tends to be more intermittent and bigger deal which happened in Q2 2018 and did not happen again this quarter. And then also, there was also an impact on foreign -- foreign exchange impact for about $1 million. So overall, when you take those 2 effects out, you would've seen again a growth coming from the fact that we are seeing densification at the edge of the network for 4G plus and preparation for 5G, and that's impacting positively our business.

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Todd Adair Coupland, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [14]

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And you did call it out as a common trend this year, your fiscal year. Did it actually accelerate in this quarter? Or is it consistent with the prior quarter?

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Philippe Morin, EXFO Inc. - CEO & Director [15]

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Again, it's very -- Q1 and Q2 have been good quarters for us consistently, and again, driven on top of that by, as I mentioned, the 100 gig being deployed for data center interconnect and the impact there on that business.

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Todd Adair Coupland, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [16]

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Let me ask the question one other way. So if we were to roll forward a year or so, when we're seeing wider deployment of 5G, does your growth and the impact of that look different than it is now? Or is it just a continuation of this trend? So would there be a material acceleration if the market plays out as generally expected?

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Philippe Morin, EXFO Inc. - CEO & Director [17]

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I think the -- if the market's generally you're seeing more customers, many more customers deploying into densification and outside of just North America, then yes, we would probably see a faster growth because that network densification tends to be more North American based versus Europe. As I mentioned in my opening statement, tends to be much more fiber deployment from fiber-to-the-home, fiber to the prem, where you're seeing some nice growth happening there as people are fiberizing their network to the edge, not necessarily in the context of wireless.

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Todd Adair Coupland, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [18]

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My second question had to do with the gross margins. So the network topology upside that you benefited from in the quarter, so if we were to think about the gross margin -- I got the impression that, that's a one-off impact. So if that's correct, should we see a decline in the gross margin with full Astellia contribution over the next couple of quarters? And if so, give us an idea on what that might look like.

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Philippe Morin, EXFO Inc. - CEO & Director [19]

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Yes, so the -- so that $4.9 million Tier 1, obviously, a contract. And as I mentioned also, it comes with a multiyear professional services contract does have again a positive impact for us this quarter. And -- but I wouldn't call it a one-off. I mean this is the topology -- the network topology capability where we can provide real-time inventory or real-time correlation of what's happening in the network is absolutely -- continued getting traction with other customers, granted we did really good news with this particular account. Going forward, obviously, when we look at our guidance associated with gross margin, and I'll let Pierre comment, we did take into account the fact that, that was a positive impact in our Q2. And we used that clearly when we provided our guidance. From a SASS business point of view, I want to reiterate that we have multiple solutions in that, whether it's network topology, fiber monitoring, our Astellia portfolio, our active portfolio, they tend to be -- as I mentioned many times, tend to be bigger deals and tend to be a longer sales cycle. Our objective is to bring critical mass to that funnel and critical scale to that funnel so that we can provide more predictability into our overall revenue profiling. But clearly, we're not at that level yet in terms of the scale of that. But I think that this is -- what we've announced in Q2 was another good proof point of that, of our capability of achieving it and really highlighting the fact that we have -- we're on a journey to get that scale in that business and, therefore, the predictability in our revenue profiling.

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Pierre Plamondon, EXFO Inc. - CFO & VP of Finance [20]

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And maybe one more comment. So for sure, the mix of the projects will have an impact on the margin. And especially in this quarter, we have 3 months contribution from Astellia. And as we said, Astellia has a margin profile lower than the historical business of EXFO, has delivered a lot of profit in services, okay. So sequentially -- if you look to sequentially in Q1, we have 58.7% gross margins in Q1, now we're at 60.7%. We did increase the gross margin. Yes, you're right, the $4.9 million did help to increase the gross margin, or otherwise the rest of the business is still stable. And we do incorporate now the Astellia full quarter next quarter, and the comparison quarter-over-quarter will be more easy to do.

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Todd Adair Coupland, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [21]

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Okay. And then just lastly, that was a very strong EBITDA in the quarter for the reasons that we've been speaking about here. Do you have any updates on sort of your target -- annual target for EBITDA margins and EBITDA for this year? Any puts and takes around that?

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Philippe Morin, EXFO Inc. - CEO & Director [22]

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Yes, Todd, as I reaffirmed in my opening statement, we're absolutely on path to achieve -- we're on the right path to achieve our $24 million adjusted EBITDA goal that we set at the beginning of the year.

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Operator [23]

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We'll go next to Tim Savageaux with Northland Capital Markets.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [24]

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A couple of questions. First, with regard to guidance for revenue. I wonder if you could talk about the dynamics there. You're guiding kind of really flat with your guidance range last quarter. Obviously, that included a big $5 million onetime order. So to the extent you expect to make that up, would that be normal seasonal increases on the Test & Measurement side after the seasonally weak fiscal Q2? Or how would you sort of characterize the dynamics driving your guidance for next quarter by business segment?

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Philippe Morin, EXFO Inc. - CEO & Director [25]

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Yes. So thanks, Tim. Yes -- no, as we get to our Q3, Q3 tends to be -- when you look at the seasonality, tends to be a good quarter for our Test & Measurements business, so we do -- are looking forward to get that aspect of it. The other thing is we are leveraging on our book-to-bill ratio. That was also at 1.03. So that's helping us as well provide the guidance that we have. So we did build a backlog which we're going to be leveraging obviously this quarter. So for us, it's all of these type of factors that helped us provide the guidance that we've provided here.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [26]

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And sticking with Test & Measurements, obviously, you did see orders come down from a very strong level in fiscal Q1. But anything there outside of normal seasonality to comment on from a bookings perspective in Q2?

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Philippe Morin, EXFO Inc. - CEO & Director [27]

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Yes. And as I mentioned earlier, so I think when you look at the flatness or the -- from a point of view of Q2, is around, again, as I mentioned earlier, in Q2 2018, we did have a strong performance on our copper access, which again, that business is going to continue but maybe not as some of the big projects we've had. But I do think that the overall progress we're seeing and the momentum we're seeing on 10 gig, on 100 gig, on 400 gig as well, the NEMs is really going to continue to help us out. And then also if you remember, Tim, because I know we did talk about that, from a Q1 point of view, we did have some year-end money that ended up coming in as well into the quarter. So overall, when you look at it from a first half point of view, we've got nice double-digit growth on our T&M business, and overall, I think that it's -- we do see that momentum carrying forward into our second half.

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Germain Lamonde, EXFO Inc. - Founder & Executive Chairman [28]

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And I think overall, Tim, you're probably right, thinking that Q2 from a T&M's point of view tends to be seasonally weak as much as Q1 was very strong, and we tend to have a stronger Q3. What we've seen in Q2, as per Philippe's comments is that overall, very good results. Basically, the slowliness of Q2 in T&M standpoint were -- pretty much well offset with the near $5 million order that we got from a SASS standpoint. So this is really like a -- and we typically get a stronger Q3.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [29]

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Understood. And clearly, the budget flush in Q1 kind of exaggerates that comparison. Sequentially...

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Philippe Morin, EXFO Inc. - CEO & Director [30]

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Yes, that's why you've got to almost look at it from a first half point of view, Tim.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [31]

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Understood. And moving on to kind of bottom line guide for Q3. Assuming gross margins do come back down a bit, just given the mix impact, and it did look like R&D was a little bit lower than I would've expected in Q2. So you are seeming to forecast a little bit of a bump up on the OpEx side but not huge and you usually see some declines in your fiscal Q4. So I wondered if you could characterize sort of the direction of OpEx through the back half of the year given what looked to be lower-than-expected R&D in Q2, guidance for fairly modest increases in Q3.

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Pierre Plamondon, EXFO Inc. - CFO & VP of Finance [32]

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Maybe the overall comment is we're seeing the effect of the restructuring plan that we have implemented last year, okay. So we have said that we're going to deliver $8 million savings this year and annually on $10.5 million, and we're on line on that. We have to remember that for Q4, usually all expenses tend to be lower because of the vacation. So when you model for Q4, you need to assume that, probably. And this is the main element that you have to take care of.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [33]

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No, understood.

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Philippe Morin, EXFO Inc. - CEO & Director [34]

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And the other comment -- I was going to say, Tim, obviously, the other thing that we're -- I think we've done a good job of being diligent on our overall OpEx spend as well. So we're going to continue to do that both on sales and R&D to make sure that as we head into our second half here that we maintain control here on our overall OpEx lines.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [35]

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Yes, absolutely. My comment would be given where you're headed, your EBITDA target looks quite achievable relative to at least what I was expecting from an OpEx standpoint. So I think we -- it sounds like we should chalk that up to basically effective restructuring or execution on that restructuring plan. And I was going to ask about the EBITDA target, but you already answered that so I'll pass it on.

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Philippe Morin, EXFO Inc. - CEO & Director [36]

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Yes, the EBITDA target, I guess, again, reaffirming the $24 million EBITDA target for the year.

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Operator [37]

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And we'll go next to Justin Keywood with GMP Securities.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [38]

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Just on the strong cash generation in the quarter, obviously driven by deferred revenue, but I also noticed the accounts receivable came down quite a bit. Is that in relation to what's typical as far as Astellia and seasonal paybacks there? Should we expect that to normalize for the back half of the year?

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Pierre Plamondon, EXFO Inc. - CFO & VP of Finance [39]

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Q2 has been very good on execution, so I'm very proud of my team on credit collection, especially on the -- as you said, the maintenance contract. The Q2 is a strong quarter for the renewal and maintenance contract. And we pushed to get the collection of those contracts during the quarter, so a very good execution of that to drive the cash flow. For sure, the sale of the building bring $3.3 million in the bank as well. So that sale. So very good execution on the receivable. We should say also that the sale has been not back-end loaded this quarter, so that helped also the team to be able to collect on time the accounts receivable. So performance has been -- it's mostly on execution that we -- I think we did pretty good to collect our accounts.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [40]

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Okay. And then just as far as the competitive landscape, there has been announcements -- just highlighting the growth in the 5G area. I'm wondering if you could just speak to EXFO's advantages there and how you plan to position yourself against some of these competitors. And also as we look for the whole year, assuming you're going to achieve the EBITDA guidance, are you going to consider investing any of that extra EBITDA back into the business in maybe sales and marketing to achieve some of the opportunity out there in 5G?

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Philippe Morin, EXFO Inc. - CEO & Director [41]

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So on the 5G question, so we tend to play, I would say, at a high level into 3 main areas for 5G deployment. The first one is on, we -- we discussed it at the beginning of the call, which is around the fiber -- the fiberization, if I want to call it, of the cross-haul, so bringing more fiber to the antenna, and then both front-haul and backhaul. And we're seeing the benefit of that growth mainly, again, as I mentioned, in North America, where we're seeing lots of densification of the edge of the network with small cell deployment and new radio being deployed. The second place where we can play -- and is more around some of the -- we have some simulator type of products that allows us to also engage the network equipment vendors in terms of simulating type of behaviors of a 5G network, if you start increasing, as an example, IoT type of devices and so on. And we are engaged in a few accounts there. And then our capability around RAN optimization and geolocation. So as part of the Astellia acquisition, we did gain a very strong portfolio around RAN optimization and geolocation capability that as people start deploying 5G networks, we'll be able to play and then offer some solutions there that we hope we'll be able to do that mainly in 2020, but even at the beginning of this year. And then ultimately, as networks start getting virtualized, whether it's driven by 5G or the overall network virtualization, we have our service assurance, which is completely virtualized. And a proof point is our success and our win in Three UK, which is a virtualized telco cloud business that we're providing solutions there in a 4G network. But ultimately, we can port that functionality into 5G deployment. But again, I'll see that more -- we'll see that more into a 2020 deployment. So I hope that answers, but that's where we're playing in terms of 5G activities.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [42]

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That's helpful. And then on the idea of maximizing profits now versus investing in the business to capture the increasing opportunity, what's your view on that?

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Philippe Morin, EXFO Inc. - CEO & Director [43]

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Well, I think our #1 objective is to achieve the $24 million EBITDA target which would show a good execution on our part. Again, it would be another proof point that our strategy -- our profitable strategy is in the right direction. And then we'll see what -- depending on the dynamics, but I would say we need to bring more profitability to our shareholders and to the company. And I think that's where the focus will be.

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Germain Lamonde, EXFO Inc. - Founder & Executive Chairman [44]

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That's a very good comment, Philippe. And just to add on this, Philippe, for your information, Justin, basically, the long-term planning that we've got to keep improving our adjusted EBITDA as a percentage of revenue is still remaining very important to us. We'd say -- what Philippe has really been doing this quarter and showing this quarter is really the fact that we're starting to execute on our long-term plan. The focus is really to be back into where we used to be, the 12%, 14%, and eventually 15% range of adjusted EBITDA. And we really believe we can actually be there while delivering -- investing sufficiently in our long-term capabilities to capture market share.

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Operator [45]

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(Operator Instructions) And we'll go next to Robert Young with Canaccord Genuity.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [46]

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Maybe I'll push a little bit on the EBITDA guidance you've reiterated. Would it be fair to say that last quarter, when you gave -- laid that guidance out that it was less certain to you? It seems as though you were less confident than you are today, and I think probably most would agree that it seems that, that's very attainable because you're almost halfway there now. So why not raise the EBITDA guidance given what you've just reported this quarter or was it less confident in that last quarter?

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Philippe Morin, EXFO Inc. - CEO & Director [47]

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Yes -- no. Robert, again, obviously, as you highlighted, when you begin a new year, you obviously have 12 months ahead of you and you're trying to provide guidance based on market dynamics and solution. I think, obviously, with what we just delivered, this very strong quarter and revenue growth on -- and bookings and cash and EBITDA, yes, overall, it makes you feel more confident because now, you've got 6 months behind you and you've executed fairly well on the first 6 months. So for me, it's -- again, there's still a lot of work in front of us. There's still another 6 months. And we obviously -- as we are reaffirming our guidance to get to the $24 million. And as we continue to execute, we'll see what it will be in Q4, how the market will continue to shape up. But we like -- I like where we're at. I mean, we're seeing good market traction with our T&M business. The acquisitions we're making are highlighting that we are on the right path for our journey of our transformation of the company and responding to the market. And we just got to -- and with the cash generation we did this quarter, I really like what our -- how the teams were executing and where we're heading for our full fiscal year, but still a lot of work ahead of us.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [48]

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Okay. And then the year-over-year gross margin with, I mean, the growth in the SASS business, I would have expected that the margins would have been higher. I think you mentioned earlier in the call that, that might have been related to professional services in the Astellia business. Is that -- did you say that? Maybe you could flesh that out a bit for me.

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Philippe Morin, EXFO Inc. - CEO & Director [49]

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Yes, that's what we said. So again, as we fully capture the full quarter of Astellia this quarter and its professional services, it does -- from a percentage point of view, a pressure on our margins versus the overall corporate level. But I do -- I want to reiterate, Robert, that professional services solution is absolutely critical for us as part of our solutions moving into SASS. It provides, obviously, stickiness with regards to our solutions, whether it's on RAN optimization or passive deployment. Or in the case of our Tier 1 network topology, you get now a 3-year professional services multiyear deal, 3-year deal. That continues to bring revenue and as well stickiness to the relationship. What we need to continue to focus on, obviously, is improving the margins on that business. And then that's where we're putting a lot of focus on that as we are continuing to get a better understanding of that business and as well as we continue to see the market dynamics going forward.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [50]

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And like looking forward, you just had a large booking, I think, that wouldn't -- in the Astellia business, should we expect the gross margins to be held back by the Astellia business in the second half? Or would you reiterate in that 59% to 61% range? How should we think about the strength in bookings?

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Philippe Morin, EXFO Inc. - CEO & Director [51]

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Yes, exactly right, you said, Robert. We're reiterating that range. And again, compare it to Q2. In Q2, we'll have a full quarter now of comparison between last year, with the Astellia being fully on that. If I -- from a range point of view, just to maybe quantify a bit, we'll probably be closer to the lower end of that range than the upper end of the range. So more closer to the 59%.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [52]

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Okay. Maybe 2 questions. Last -- if I exclude that large order in Astellia, book-to-bill is negative. Book-to-bill is negative in both the T&M business and the SASS business. And so is that a seasonality factor? Like how should we think about the strength of bookings? Because it sounds like you're very bullish on where you are right now, but I mean, excluding that Astellia order, you wouldn't have had very strong bookings this quarter.

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Philippe Morin, EXFO Inc. - CEO & Director [53]

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Yes, just to clarify. So if you extract -- first of all, it's not Astellia. If you extract the Ontology bookings, as you mentioned, we would still be book-to-bill in growth. So it's not lower.

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Pierre Plamondon, EXFO Inc. - CFO & VP of Finance [54]

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Total bookings for Q2 is $76 million, then the total bookings in Q2 '18 is $65.5 million so...

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Philippe Morin, EXFO Inc. - CEO & Director [55]

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So he's saying if you extract the Ontology deal, it's still positive, still above 1. And then on the T&M side, again, I'll reiterate, I know, it's -- I really like to see -- the momentum we're having on fiber, the momentum we're getting 100 gig, if you look at first half, I think we've got to look at this from a first half point of view because -- versus first half 2018. And we've got all at 9% growth, right. So we did $100 million in first half 2018 and then $109 million this first half. So I think that's the way you should look at it. So a book-to-bill that's greater than 1 that's reflecting the nice momentum we're having on that business.

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Germain Lamonde, EXFO Inc. - Founder & Executive Chairman [56]

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Yes. And on top of that, I would say that removing the larger deal in any given quarter is always a bit of an unfair comparison. In fact, we need to take out basically the largest deal of the prior quarter if we want to really compare apple to apple. We always have like -- of course, $4.9 million is bigger than average, but it's always like fairly good size deals every quarter.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [57]

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Right. I think maybe I misread it wrong. I think Astellia has like $10.3 million contribution. When I read that, I think I assumed that would've been 1 deal, but the way you're talking about it, that's not 1 deal, that's several deals, I guess.

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Philippe Morin, EXFO Inc. - CEO & Director [58]

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Correct. That's correct.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [59]

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Okay. That's great. And then maybe just last one little question, a lot of talk at Mobile World Congress around edge compute. You talked about strength of your solution at the edge. What -- is that the commentary you had before? Was it around this edge compute, new driver in that work? Or is that something that would be an additional thing that EXFO might see in the future? Then I'll pass the line.

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Philippe Morin, EXFO Inc. - CEO & Director [60]

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Yes. And so edge compute -- so the dynamic I was talking about was more about the fiber densification associated with putting small cells and putting more antennas into the edge of the network. Now when you start talking about edge computing, there is a bit of dynamic that I mentioned earlier around the data center interconnect. And so as data centers get deployed more and more towards the edge. They'll tend to be interconnected at 100 gig. They'll be interconnect in the data centers with optical fiber. So that dynamic will also be good for EXFO as we start seeing more volume with edge computing being done because there will be obviously data centers that will need to be interconnected with fiber.

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Operator [61]

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We'll go next to Richard Tse with National Bank Financial.

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Philippe Morin, EXFO Inc. - CEO & Director [62]

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So let me conclude this call. All right. Thank you.

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Richard Tse, National Bank Financial, Inc., Research Division - MD and Technology Analyst [63]

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Just had one quick question.

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Philippe Morin, EXFO Inc. - CEO & Director [64]

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No, Richard, go ahead. Sorry.

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Richard Tse, National Bank Financial, Inc., Research Division - MD and Technology Analyst [65]

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Just a quick question for me. From a capital allocation standpoint for the rest of this year, how are you guys thinking about acquisitions in the context that you've had obviously a series of acquisitions in the past 2 years. Are you kind of on hold now? Or are you still looking for opportunities? Just a commentary on that please.

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Germain Lamonde, EXFO Inc. - Founder & Executive Chairman [66]

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Well, basically -- that's a very good question. In fact, we tend to be conservative when it comes to acquisition. We've been doing a few significant acquisitions in a short amount of time with the idea to transform to a new SASS business that we felt was very important for us to have the critical mass in this segment. We have made a point to work for at least 18 months with minimal acquisition with the intent to replenish our balance sheet, which is really -- as you're pointing out, is starting to get done. On the short-term basis, I wouldn't expect any acquisition -- any meaningful acquisitions to occur. But we're firm believers that acquisition is going to be part of our long-term mix. So we said 18 months to be on the side, building -- rebuilding our cash. We're now been -- hold steady. We're now at 14 or 15 months now. That doesn't mean that in 18 months' time, we'll get something else done. But the good news is we're progressing in the direction where we can start to address additional areas and consider additional deals. And whether this will be in 3 months, 6 months or 12 months, there's no guarantee of any point, but you should expect smaller acquisitions in the next -- for the next ones to come in play.

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Philippe Morin, EXFO Inc. - CEO & Director [67]

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And then Richard, just to add to this, I mean, for me the last 3 acquisitions have been -- we're integrating them. We're on track with all these integration. EXFO optics, which is Yenista, is performing now well. You heard that into our opening comments. Ontology is really an important set of functionalities that we believe we can bring even more relevancy. And then with Astellia, it's been a -- slightly a bit more than a year. We're bringing that into our overall portfolio, really leveraging what we have in terms of that -- whether it's the RAN optimization, the passive portfolio, and then really helping us gain more relevance in our customers. So lots of work still to do in terms of getting the full benefit of these acquisitions, but we're absolutely in the right track there, and we got to continue to make sure that we get the returns following those acquisitions.

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Operator [68]

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And we have no more questions at this time, so I hand the call back over to Philippe Morin for any additional or closing comments.

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Philippe Morin, EXFO Inc. - CEO & Director [69]

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All right, thank you very much.

So just a few key takeaways before we conclude this call. So first, again, we're very happy with what we delivered as an astounding second quarter results with both strong revenue, bookings growth, profitability, and as well, cash flow generation.

Again, I'll reiterate that through Mobile World Congress, through OFC and multiple, multiple customer meetings, our unique value proposition resonates really well with our customers, and as our solutions really help our customers transform their network by enabling them with fiber buildouts deep in the network edge, helping them get ready for fiber -- 5G wireless deployment, and as well, network virtualization. So clearly, we're -- EXFO is on track to -- with our profitable growth strategy, and that's done in a very rapidly transforming industry.

And then finally, EXFO is on target with our business plan at the halfway mark of our fiscal 2019. We reported double-digit sales growth, double-digit bookings growth, and we're on the right path to achieve the $24 million adjusted EBITDA goal for our fiscal year 2019.

So at this point, this concludes our Q2 2019 conference call. On behalf of the entire EXFO team, thank you very much for joining us today. Thank you.

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Operator [70]

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That does conclude today's conference. We thank you for your participation.