Take a pass on EXFO for now, says National Bank

A better quarter in terms of revenue from EXFO (EXFO Stock Quote, Chart, News TSX:EXF) wasn’t enough to move the needle for National Bank Financial analyst Richard Tse, who maintained his “Sector Perform” rating for the stock in an update to clients on Wednesday.

Quebec City-headquartered EXFO, a provider of tests and analytics for communication service providers (CSPs) and network equipment manufacturers (NEMs), reported its fiscal fourth quarter results on Wednesday for the period ended August 31.

It’s been a rough ride for the company over the COVID-19 pandemic, which showed in the company’s numbers. EXFO saw its quarterly year-over-year revenue stay flat at $70.6 million compared to $70.2 million a year ago, while for the fiscal year revenue dropped 7.4 per cent to $265.6 million. Adjusted EBITDA for the Q4 was $4.9 million compared to $6.2 million a year earlier, while for the fiscal 2020, EXFO’s adjusted EBITDA came in at $18.2 million or 6.8 per cent of sales compared to $25.6 million or 8.9 per cent of
sales for fiscal 2019. (All figures in US dollars.)

Management withdrew its guidance going forward but did say the fiscal year ended on a positive note and that demand for field testing equipment should bounce back as customer take up their fibre deployment projects.

“We also expect continued growth from our lab and manufacturing test solutions, especially in the ultra-high-speed area with our pending acquisition of InOpticals. In addition, we expect our Nova Adaptive Service Assurance platform to benefit from the momentum of our recent contract wins, the ramp-up of cloud-native 5G architectures and heightened activity in the network core,” said CEO Philippe Morin in a press release.

Tse called the quarterly results mixed, with a beat on revenue but lower than expected on bookings and profitability. Tse had forecasted Q4 revenue and adjusted EBITDA of $66.7 million and $11.9 million, respectively, while the Street consensus was $65.4 million and $6.5 million, respectively. Bookings came in at $62.9 million, which was down 11.2 per cent year-over-year but up 6.6 per cent compared to the previous quarter.

Tse said the company’s book-to-bill ratio for the Q4 of 0.89x was down from 1.01x a year earlier and, while seasonally impacted, continued to be the lowest for the company in the past five years and caused by a drop in bookings in the Test and Measurement segment, which was down 13.7 per cent year-over-year to $43.5 million in the quarter.

“In our opinion, EXFO has the potential to benefit from a valuation re-rating by harvesting incremental opportunities with the pending global 5G deployments. That said, there’s uncertainty around the timing of those deployments given COVID-19…”

On management’s withdrawing of guidance, Tse wrote, “That should not be entirely surprising for anyone following this name, particularly given its solutions require relatively more physical presence at the point of deployment.”

“With respect to 0.89x book-to-bill in the quarter, while soft (below 1.0x), the Company attributed it to seasonality, but we believe some of the softness can also be attributed to the challenging backdrop. With respect to EXFO’s financial position, $32.8 million in cash and equivalents puts the Company on a reasonably solid footing all things being equal. Bottom line, we continue to believe EXFO’s valuation represents a fairly valued name based on a balanced risk-to-reward profile,” Tse said.

For the fiscal year ahead, the analyst is forecasting revenue of $292.1 million and adjusted EBITDA of $26.3 million, followed by revenue of $308.7 million and adjusted EBITDA of $30.9 million in fiscal 2022. Tse is maintaining his “Sector Perform” with the new target of $3.50 (previously $4.00), which at press time represented a projected return of 11.0 per cent.

“In our opinion, EXFO has the potential to benefit from a valuation re-rating by harvesting incremental opportunities with the pending global 5G deployments. That said, there’s uncertainty around the timing of those deployments given COVID-19. In addition, even prior to this pandemic, this was a highly competitive market that’s historically constrained on operating leverage. For now, we’re maintaining our Sector Perform rating,” Tse wrote.

EXFO’s share price gained 56 per cent in 2019 but 2020 has been a different story, with the stock down 35 per cent, giving back much of the previous year’s gains.

Last month, EXFO announced service assurance contracts with five new customers, including a previously announced agreement with Irish telecom company Eircom. Together, the contracts added about $5.0 million to the company’s bookings for its Q4 2020 and, according to management, show the market’s acceptance of its Nova service assurance solutions.

“These contract wins, which will bolster our SASS backlog for fiscal 2021, represent strong proof points that our recently launched Nova Adaptive Service Assurance vision is resonating strongly with customers,” said Morin in a September 1 press release. “Given heightened demand for remote, centralized monitoring solutions in this new environment, Nova Adaptive Service Assurance’s capabilities allow mobile operators to automate critical functions, thus significantly reducing time to detect and resolve network issues
without the presence of staff on-site at network operations and service operations centres.”