EXFO Electro-Optical Engineering (EXFO)

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Naveen Kasthuri

EXFO Inc. (EXFO) is a provider of test and service assurance solutions for wireless and wired network operators and equipment manufacturers. Its test and service assurance solutions are used during the life cycle of a network: research, development, manufacturing, installation, maintenance and monitoring.^[1] Unlike many of its competitors who have shifted focus to Asia, EXFO continues to maintain focus primarily on its North American businesses.^[2]

Business Growth

In fiscal 2010, sales increased 32.0% compared to 2009. EXFO's gross margin reached 62.4%, 1.1% higher compared to 61.3% in 2009. EBITDA amounted to $27.3 million, or 12.0 % of sales in fiscal 2010, representing an increase of 88.8% compared to 2009. Although this increase is exceptional, it is primarily due to a dip in sales during the 2008 Financial Crisis. Such growth results are visible across the industry.^[3]

Key Trends and Forces

Optical communications industry under pressure to provide broader array of digital services

In order to cater to growing demand for capacity and combination of services, network operators are migrating to Internet protocol networks to deliver triple-play services and lower costs. Optical networks also need increased agility to handle new, bandwidth-intensive applications as there may be sudden large changes in demand anywhere in the network. This leads to increasingly complex routers, switches, and cross-connect equipment. In order to support optical networks' needs, Spirent needs to continuously innovate to create products that cost less, have more functionality, require less power and space.

EXFO needs to focus more on international markets

With regard to geographic distribution, sales to customers in the Americas (US, Canada, Central and Latin America) represented 52% of EXFO's sales in 2010, while sales to customers in EMEA (Europe, Middle East and Africa) and Asia-Pacific accounted for 30% and 18% of sales, respectively.^[2] In comparison, the Americas, EMEA and Asia-Pacific accounted for 57%, 28% and 15% of sales, respectively, in 2009, and 55%, 30% and 15%, respectively, in 2008.^[2] Between 2008 and 2010, Asia-Pacific revenues as a percentage of total revenues grew by 3 points.^[2] EXFO needs to cater to the international community or it will lag behind competition.

Competition

Electro-Optical Engineering's main competitors are:

• JDS Uniphase (JDSU)
• EXFO Electro-Optical Engineering (EXFO)
• National Instruments (NATI)
• Anritsu Corp (TYO:6754)
• Aeroflex Holding (ARX)
• Keithley Instruments (KEI)
• LeCroy (LCRY)
• Veeco Instruments (VECO)
• Photon Dynamics (PHTN)
• Agilent Technologies (A)

Though most of these competitors focus on different businesses, all of them have divisions devoted to wireless and wireline testing services. National Instruments (NATI) and Agilent Technologies (A) focus exclusively on testing services and equipment, though they do not limit themselves to wireless and wireline testing services.

References

1. ↑ Reuters: EXFO Company Profile
2. ↑ ^{2.0 2.1 2.2 2.3} Wikinvest SEC Files: EXFO 2010 20-F, Page 30
3. ↑ Wikinvest SEC Files: EXFO 2010 20-F, page 47