PassPass --
Thanks for bringing this company to my attention. Here's a few highlights from EXFO's IPO prospectus:
sec.gov
1) Demand:
Demand for fiber-optic test, measurement and monitoring equipment has been driven by increased production and deployment of optical fiber and related equipment in order to meet the growing demand for telecommunications capacity. Ryan, Hankin & Kent, a leading telecom market research firm, forecasts that Internet traffic will increase from 350,000 terabytes, or trillions of bytes, per month at the end of 1999 to more than 15 million terabytes per month in 2003, representing a compound annual average growth rate of 156%.
2) Profitability:
Sales........(FY 1997, 1998, 1999) $24,475 $31,605 $42,166 (3 mos 1999 vs 2000) $18,728 $29,111
Basic and fully diluted net earnings per share (for same time periods) ......... $0.08 $0.12 $0.14 $0.05 $0.10
Gross margins (same time periods) .................................... 60.6 64.1 64.4 62.5 67.0
Sales increased 55.4% from $18.7 million for the six months ended February 28, 1999 to $29.1 million for the six months ended February 29, 2000. This growth was primarily due to the higher demand for our scientific products and a general increase in sales of our other products. Accepted orders increased 74.2% from $18.2 million for the six months ended February 28, 1999 to $31.7 million for the six months ended February 29, 2000.
4) History, including ties to University of Geneva. (I figure an instrumentation company with Swiss roots has to be pretty good.)
In 1996, GEXFO Investissements Technologiques inc., a company controlled by Germain Lamonde, acquired a majority interest in GAP Optique S.A., a Swiss limited liability company carrying out activities in the field of fiber-optic testing and measurement technology. In 1996, GEXFO, EXFO, GAP Optique and the University of Geneva entered into agreements whereby GAP Optique, EXFO and GEXFO obtained worldwide exclusive rights to commercially develop, manufacture and market specified technologies relating to fiber-optic telecommunications testing and measurement instruments developed by the University of Geneva. In addition, GAP Optique, EXFO and GEXFO acquired priority rights over the marketing of fiber-optic telecommunication testing and measurement instruments prototypes designed by the University of Geneva. This agreement was renegotiated under similar terms and conditions in 1999 for a five-year term. On June 1, 2000, we acquired the 85% interest held by GEXFO in GAP Optique for a consideration equal to its book value of approximately $16,000 and GEXFO transfered all of its rights in the agreements to us.
In February 2000, we acquired all of the shares of Nortech Fibronic Inc., a company specializing in fiber-optic testing and temperature-sensing for a total consideration of $2.8 million of which $2.1 million was paid in cash. We also issued C$800,000 (approximately $540,000) of Class "G" shares and a debenture of C$200,000 (approximately $135,000) bearing no interest and payable on November 30, 2000. . . .
We currently employ more than 650 employees and our products are distributed in over 70 countries. We have been profitable each year of our 15-year existence . . . .
5) Advanced products ---
In 1999, we released the first version of our remote fiber test system, which surveys and monitors a fiber-optic network. Our remote fiber test system consists of rack-mounted remote test units, which are strategically deployed along a fiber-optic network and a test system controller that retrieves information from as many remote test units as required. The test system controller is typically located inside a network operations center. The information obtained from these remote test units is combined with data from a geographic information system in our software to pinpoint the exact location of a system failure.
6) Industry recognition ---
We have received 40 industry and commerce awards. Every year since 1995, we have been recognized as one of the 50 Best-Managed Private Companies in Canada by Arthur Andersen Consulting and the Financial Post.
7) Certification ---
We have maintained ISO 9001 certification since 1994.
8) Market case ---
[The following industry background is old-hat to most, but is worth repeating as statistics change fairly rapidly.]
Optical Networking Market
The past decade has witnessed an explosive growth in the volume of data traffic largely due to the soaring popularity of the Internet and related bandwidth-intensive applications. According to the Angus Reid Group, a leading market research company, the number of Internet users around the world is expected to increase from 300 million in early 2000 to 1 billion by 2005. Ryan, Hankin & Kent, a leading telecom market research firm, forecasts that Internet traffic will increase from 350,000 terabytes, or trillions of bytes, per month at the end of 1999 to more than 15 million terabytes per month in 2003, representing a compound annual average growth rate of 156%.
The dramatic increase in Internet users and traffic has created a tremendous need for high-bandwidth communications networks. To meet this increasing demand for bandwidth, many communications service providers are designing and installing new networks based on optical fiber, deploying additional fiber within their existing networks, or using advances in optical technology such as dense wavelength division multiplexing, or DWDM. DWDM involves combining beams of light of slightly different wavelengths through a single fiber, with each wavelength carrying its own stream of information. This technique requires separate laser sources for each signal or channel and more complex equipment to control and amplify the signal in the network. Some DWDM systems can carry as many as 160 separate channels per optical fiber. According to Ryan, Hankin & Kent, the global DWDM and optical networking market is expected to increase from $13 billion in 2000 to $41 billion in 2003.
Until recently, most of the fiber deployed had been dedicated to long-haul and inter-office networks. The fiber-optic industry, however, is beginning to shift its focus towards more complex metropolitan networks for business-to-business applications and fiber-to-the-curb networks for residential applications. These networks require more complex optical systems than long-haul and inter-office networks.
Manufacturers are finding it difficult to keep pace with carrier demand for optical fiber and optical networking equipment. At the end of 1999, 22.7 million kilometers of fiber had been deployed in North America alone and this figure is expected to reach 68.1 million kilometers by 2004, according to Kessler Marketing Intelligence, a leading fiber-optic market research company. Corning Incorporated, a world-leading manufacturer of optical fiber, announced earlier this year that it plans to invest $750 million in order to expand its optical fiber manufacturing capacity by 50%. Nortel Networks Corporation, a leading supplier of DWDM equipment, announced in November 1999 that it will invest $400 million to triple its manufacturing capacity of high-performance optical
Internet systems.
Optical Test, Measurement and Monitoring Equipment Market
Conventional test, measurement and monitoring instruments used by telecommunications carriers and manufacturers of communications equipment were designed for electrical transmission systems and are unsuitable for optical networking. Unlike traditional electrical transmission systems, which transmit electrical signals along copper wires, fiber-optic transmission systems use pulses of light along glass or plastic fiber, often referred to as optical fiber. When light travels along optical fiber and through the optical components and systems that link, optical fibers together, it is subject to unwanted effects such as reflection, attenuation, noise and various types of dispersion, all of which degrade signal quality and reduce transmission performance. Fiber-optic test, measurement and monitoring equipment is critical for measuring these effects and helping communications carriers and manufacturers of optical components, value-added optical modules and optical networking systems ensure network performance and reliability. The following are the main uses for fiber-optic test, measurement and monitoring equipment:
- NETWORK INSTALLATION. Carriers and third-party network installers use test and measurement instruments to ensure the quality of networks as they are being deployed.
- NETWORK MAINTENANCE AND REPAIR. Carriers and third-party service companies use test and measurement instruments to diagnose and repair problems within an optical network.
- NETWORK MONITORING. By continually monitoring the quality of an optical signal as it passes through a network, carriers can reduce downtime through faster detection and diagnosis of network problems.
- MANUFACTURING. Manufacturers in the fiber-optic industry use test measurement equipment during production and assembly as well as for quality control and conformity testing.
- RESEARCH AND DEVELOPMENT. Developers and manufacturers in the fiber-optic industry require sophisticated test and measurement equipment during the prototyping stage of product development.
MARKET OPPORTUNITY
Demand for fiber-optic test, measurement and monitoring equipment is driven by the following key trends:
INCREASED PRODUCTION OF CABLE AND FIBER. Cable and fiber manufacturers are increasing production of optical fiber in order to meet the growing demand from telecommunications carriers. Manufacturers of optical fiber require additional test and measurement equipment to fulfill their product development and quality control requirements. Fiber and cable manufacturers require improved test and measurement instruments as they develop better products to respond to the demand for increased transmission speeds and higher DWDM channel counts.
QUALIFICATION OF EXISTING PLANTS AND FURTHER DEPLOYMENT OF FIBER. Carriers are upgrading their existing fiber networks, deploying more fiber and using more advanced optical transmission technologies, such as DWDM, to handle the increased demand for bandwidth. Test, measurement and monitoring equipment is required for the qualification of existing fiber plants; for the installation, maintenance and troubleshooting of newly deployed fiber and for the installation and verification of DWDM networks.
MORE COMPLEX OPTICAL NETWORKS. The trend towards more complex optical networks has rendered test, measurement and monitoring increasingly important. First-generation fiber-optic networks carried only one wavelength and demanded simpler loss measurements. Rapid advances in fiber-optic data transmission are producing networks with higher data speeds, higher power transmission lasers, greater distances without reamplification, more narrowly spaced DWDM channels and higher channel counts. Optical equipment used in these new and more complex networks requires the verification of several parameters for each DWDM wavelength and has created a demand for more complex test, measurement and monitoring instruments.
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