EXFO Increases Sales and Bookings for a Fifth Consecutive Quarter

EXFO Increases Sales and Bookings for a Fifth Consecutive Quarter

    Business Editors/High-Tech Writers

    QUEBEC CITY, Quebec--(BUSINESS WIRE)--Jan. 12, 2005--EXFO Electro-Optical Engineering Inc. (NASDAQ:EXFO) (TSX:EXF.SV):

--	Reached US$21.6 million and US$23.3 million in sales and bookings, respectively
--	Generated 42.7% of sales from products on the market two years or less
--	Enhanced protocol test offering with next-generation SONET/SDH and VoIP/IP Video test functionalities

    EXFO Electro-Optical Engineering Inc. (TSX:EXF.SV) (NASDAQ:EXFO) reported today sales and bookings growth for a fifth consecutive quarter.
    Sales increased 35.3% to US$21.6 million in the first quarter ended November 30, 2004, from US$16.0 million in the first quarter of fiscal 2004 and 1.2% from US$21.3 million in the fourth quarter of 2004. Net bookings increased 37.9% to US$23.3 million in the first quarter of fiscal 2005 from US$16.9 million in the same period last year and 14.2% from US$20.4 million in the fourth quarter of 2004.
    Gross margin accounted for 52.7% of sales in the first quarter of fiscal 2005 compared to 51.0% in the first quarter of 2004 and 55.1% in the fourth quarter of 2004.
    GAAP net loss in the first quarter of fiscal 2005 totaled US$2.4 million, or US$0.03 per share, compared to US$2.0 million, or US$0.03 per share, in the same period last year and US$2.3 million, or US$0.03 per share, in the fourth quarter of 2004. On a pro forma basis(a), net loss in the first quarter of fiscal 2005 amounted to US$814,000, or US$0.01 per share, compared to US$2.1 million, or US$0.03 per share in the first quarter of 2004 and net earnings of US$1.4 million, or US$0.02 per share, in the fourth quarter of 2004.
    Included in the GAAP and pro forma figures of the first quarter of fiscal 2005 is a foreign-exchange loss of US$1.0 million due to the strength of the Canadian Dollar versus the US dollar.
    "I am really pleased with our fifth consecutive quarter of sales and bookings growth, increases in the mid-30% range for these respective metrics year-over-year and the recent contract win with an additional US-based Tier-1 network service provider," said Germain Lamonde, EXFO's Chairman, President and CEO. "On the strength of our continued R&D investments, leadership position in the fiber-to-the-whatever (FTTx) market, differentiated new protocol test offering, and increased sales and marketing intensity, we are confident of achieving our targeted sales growth of 20% year-over-year."
    "The sudden 10% increase of the Canadian dollar in the last quarter certainly affected our profitability, even with our hedging policies," Mr. Lamonde added. "Nevertheless, we remain more than ever committed to returning to profitability on a pro forma basis in fiscal 2005."

Segmented Results (In millions of US dollars) Sales Earnings (Loss) from operations ------------------------ ------------------------------- Q1 2005 Q4 2004 Q1 2004 Q1 2005 Q4 2004 Q1 2004 ------- ------- ------- -------- ------- ------- Business Segment Telecom Division $ 17.4 $ 16.8 $ 12.2 ($1.0) $0.0 ($2.4) Photonics And Life Sciences Division $ 4.2 $ 4.5 $ 3.8 ($0.3) ($2.1) ($0.7) ------- ------- ------- ------ ----- ------ Total $ 21.6 $ 21.3 $ 16.0 ($1.3) ($2.1) ($3.1) ------- ------- ------- ------ ----- ------ ------- ------- ------- ------ ----- ------

    Operating Expenses

    Selling and administrative expenses amounted to US$7.4 million, or 34.3% of sales, for the first quarter of fiscal 2005 compared to US$5.9 million, or 36.7% of sales, for the same period last year and US$6.3 million, or 29.8% of sales, for the fourth quarter of 2004.
    Gross research and development expenses totaled US$3.8 million, or 17.6% of sales, in the first quarter of fiscal 2005 compared to US$3.6 million, or 22.4% of sales, in the first quarter of 2004 and US$3.6 million, or 17.0% of sales, in the fourth quarter of 2004.

    First-Quarter Business Highlights

--	Confirming its leadership position in the rapidly growing FTTx test market, EXFO shipped several FTTx-related orders to a Tier-1 network service provider who accounted for 25.0% of total sales in the first quarter of 2005. Subsequent to the quarter-end, EXFO also announced that a suite of FTTx products has been certified by a second major US-based network service provider on an exclusive basis for the next four years.
--	Leveraging its ongoing R&D investments, EXFO launched seven products in the first quarter of 2005, including a next-generation SONET/SDH analyzer for testing IP networks, an Ethernet test solution with voice-over-IP (VoIP) test capabilities, and an optical spectrum analyzer for coarse wavelength division multiplexing (CWDM) applications in metro and access networks. Sales from new products that have been on the market two years or less rose to 42.7% of sales in the first quarter of 2005.
--	EXFO's ongoing efforts to renew with profitability were impeded in the first quarter of 2005 by a 9.6% increase in the Canadian dollar versus the US dollar. This rapid and significant increase not only generated a foreign-exchange loss of US$1.0 million, but also flowed through EXFO's entire statement of earnings since a significant amount of the company's operating expenses are denominated in Canadian dollars.

    Business Outlook

    EXFO forecasts sales between US$21.0 million and US$24.0 million and a GAAP net loss between US$0.03 and US$0.00 per share for the second quarter of fiscal 2005. Excluding stock-based compensation costs, amortization of intangible assets, restructuring charges and other unusual items, the company expects to report pro forma net loss/earnings between a loss of US$0.01 per share and earnings of US$0.02 per share.

    Conference Call and Webcast

    EXFO will host a conference call today at 10 a.m. (EST) to review its financial results for fiscal 2004 during the course of its Annual and Special Meeting of Shareholders and cover first-quarter results for fiscal 2005. To listen to the conference call and participate in the question period via telephone, dial 1-416-695-9748. Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available between 7 a.m. and 11 p.m. until January 19, 2004. The replay number is 1-416-695-5275. The audio Webcast of the conference call will also be available on EXFO's Website at www.exfo.com, under the Investors section.

    Reconciliation of pro forma net earnings (loss) with GAAP net loss

    (a) Pro forma net earnings (loss) represents net loss excluding stock-based compensation costs, amortization of intangible assets, restructuring charges and an unusual tax recovery. All figures are in thousands of US dollars except per share data.

Actual Results Three months ended November 30, --------------------- 2004 2003 --------- ---------- (unaudited)

Net loss in accordance with GAAP $ (2,373) $ (2,008)

Pro forma adjustments: Stock-based compensation costs 137 5 Amortization of intangible assets 1,222 1,285 Restructuring charges 200 - Unusual tax recovery - (1,406) --------- ----------

Pro forma net loss $ (814) $ (2,124) --------- ---------- --------- ---------- Basic and diluted net loss per share in accordance with GAAP $ (0.03) $ (0.03)

Basic and diluted pro forma net loss per share $ (0.01) $ (0.03)

Outlook Three months ending February 28, 2005 --------------------------

(unaudited)

Basic and diluted net loss per share in accordance with GAAP From $ (0.03) To $ 0.00

Pro forma adjustments: Stock-based compensations costs 0.00 0.00 Amortization of intangible assets 0.02 0.02 Restructuring charges 0.00 0.00 --------- ----------

Basic and diluted pro forma net earning (loss) per share From $ (0.01) To $ 0.02 --------- ---------- --------- ----------

    EXFO discloses pro forma financial data in order to provide supplemental information regarding its results of operations and to enhance investors' overall understanding of its core financial performance and its prospects for the future. EXFO believes that investors benefit from seeing its results through the eyes of management in addition to seeing the GAAP information. This non-GAAP information facilitates management's comparison of current results with the company's historical results of operations and strategic plan and with those of its peers. This information is not in accordance with, or an alternative to, GAAP and may not be comparable to similarly titled measures reported by other companies.

    About EXFO

    EXFO is a recognized test and measurement expert in the global telecommunications industry through the design and manufacture of advanced and innovative solutions as well as best-in-class customer support. The Telecom Division, which represents the company's main business activity, offers fully integrated and complete test solutions to network service providers, system vendors and component manufacturers in approximately 70 countries. One of EXFO's strongest competitive advantages is its PC/Windows-based modular platforms that host a wide range of tests across optical, physical, data and network layers, while maximizing technology reuse across several market segments. The Photonics and Life Sciences Division mainly leverages core telecom technologies to offer value-added solutions in the life sciences and high-precision assembly sectors. For more information about EXFO, visit www.exfo.com.

    Forward-Looking Statements

    This news release contains forward-looking statements within the meaning of the U. S. Private Securities Litigation Reform Act of 1995 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition that refer to expectations, projections or other characterizations of future events and circumstances. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including economic uncertainty; capital spending levels in the telecommunications, life sciences and high-precision assembly sectors; fluctuating exchange rates and our ability to execute in these uncertain conditions; the effects of the additional actions we have taken in response to such economic uncertainty (including workforce reductions, ability to quickly adapt cost structures with anticipated levels of business, ability to manage inventory levels with market demand); market acceptance of our new products and other upcoming products; limited visibility with regards to customer orders and the timing of such orders; our ability to successfully integrate our acquired and to-be-acquired businesses; the retention of key technical and management personnel; and future economic, competitive and market conditions. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report on Form 20-F and our other filings with the U. S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document and shall not be revised or updated to reflect events after the date of this document.

EXFO Electro-Optical Engineering Inc. Interim Consolidated Balance Sheet

(in thousands of US dollars)

As at As at November 30, August 31, 2004 2004 -------------------------------------------------------------------- (unaudited) Assets

Current assets Cash $4,848 $5,159 Short-term investments 93,726 83,969 Accounts receivable Trade, less allowance for doubtful accounts of $575 ($510 as at August 31, 2004) 12,850 12,080 Other 1,887 1,532 Income taxes and tax credits recoverable 7,954 7,836 Inventories 17,959 15,371 Prepaid expenses 1,660 1,513 --------------------------------------------------------------------

140,884 127,460

Income taxes and tax credits recoverable 879 449

Property, plant and equipment 16,212 15,442

Long-lived asset held for sale 1,600 1,600

Intangible assets 9,141 9,447

Goodwill 20,344 18,393 --------------------------------------------------------------------

$189,060 $172,791 -------------------------------------------------------------------- --------------------------------------------------------------------

Liabilities

Current liabilities Accounts payable and accrued liabilities $12,863 $11,393 Deferred revenue 1,132 805 Current portion of long-term debt 122 121 --------------------------------------------------------------------

14,117 12,319

Deferred revenue 1,403 1,123

Deferred grants 1,870 1,690

Long-term debt 303 332 --------------------------------------------------------------------

17,693 15,464 --------------------------------------------------------------------

Shareholders' Equity

Share capital 521,819 521,733 Contributed surplus 2,123 1,986 Cumulative translation adjustment 30,010 13,820 Deficit (382,585) (380,212) -------------------------------------------------------------------- 171,367 157,327 -------------------------------------------------------------------- $189,060 $172,791 -------------------------------------------------------------------- --------------------------------------------------------------------

EXFO Electro-Optical Engineering Inc. Interim Unaudited Consolidated Statements of Earnings

(in thousands of US dollars, except share and per share data)

Three months ended November 30, -------------------------------------------------------------------- 2004 2003 -------------------------------------------------------------------- --------------------------------------------------------------------

Sales $21,597 $15,962

Cost of sales (1,2) 10,225 7,815 --------------------------------------------------------------------

Gross margin 11,372 8,147 --------------------------------------------------------------------

Operating expenses Selling and administrative (1) 7,413 5,857 Net research and development (1) 2,780 2,829 Amortization of property, plant and equipment 1,094 1,321 Amortization of intangible assets 1,222 1,285 Restructuring charges 200 - --------------------------------------------------------------------

Total operating expenses 12,709 11,292 --------------------------------------------------------------------

Loss from operations (1,337) (3,145)

Interest and other income 724 156 Foreign exchange loss (1,035) (470) --------------------------------------------------------------------

Loss before income taxes (1,648) (3,459) --------------------------------------------------------------------

Income taxes 725 (1,451) --------------------------------------------------------------------

Net loss for the period $(2,373) $(2,008) -------------------------------------------------------------------- --------------------------------------------------------------------

Basic and diluted net loss per share $(0.03) $(0.03)

Basic weighted average number of shares outstanding (000's) 68,463 63,058

Diluted weighted average number of shares outstanding (000's) 68,990 63,657

(1) Stock-based compensation costs included in: Cost of sales $25 $- Selling and administrative 87 5 Net research and development 25 - -------------------------------------------------------------------- $137 $5 -------------------------------------------------------------------- --------------------------------------------------------------------

(2) The cost of sales is exclusive of amortization, shown seperately.

EXFO Electro-Optical Engineering Inc. Interim Unaudited Consolidated Statements of Cash Flows

(in thousands of US dollars)

Three months ended November 30, -------------------------------------------------------------------- 2004 2003 -------------------------------------------------------------------- --------------------------------------------------------------------

Cash flows from operating activities Net loss for the period $(2,373) $(2,008) Add (deduct) items not affecting cash Discount on short-term investments (150) 231 Stock-based compensation costs 137 5 Amortization 2,316 2,606 Deferred revenue 385 531 Deferred grants - (122) -------------------------------------------------------------------- -------------------------------------------------------------------- 315 1,243

Change in non-cash operating items Accounts receivable 290 (1,861) Income taxes and tax credits 346 (3,147) Inventories (947) 850 Prepaid expenses 16 730 Accounts payable and accrued liabilities 459 (791) --------------------------------------------------------------------

479 (2,976) -------------------------------------------------------------------- Cash flows from investing activities Additions to short-term investments (65,086) (79,925) Proceeds from disposal of short-term investments 64,330 82,841 Additions to property, plant and equipment and intangible assets (577) (405) --------------------------------------------------------------------

(1,333) 2,511 -------------------------------------------------------------------- -------------------------------------------------------------------- Cash flows from financing activities Repayment of long-term debt (28) (25) Exercise of stock options 86 61 Redemption of share capital - (2) Resale of share capital - 8 --------------------------------------------------------------------

58 42

Effect of foreign exchange rate changes on cash 485 379 --------------------------------------------------------------------

Change in cash (311) (44)

Cash - Beginning of period 5,159 5,366 --------------------------------------------------------------------

Cash - End of period $4,848 $5,322 -------------------------------------------------------------------- --------------------------------------------------------------------

--30--AWG/na*

CONTACT: EXFO Electro-Optical Engineering Inc. Vance Oliver, 418-683-0913, ext. 3733 vance.oliver@exfo.com

KEYWORD: NEW YORK INTERNATIONAL CANADA INDUSTRY KEYWORD: HARDWARE TELECOMMUNICATIONS NETWORKING INTERNET E-COMMERCE EARNINGS SOURCE: EXFO ELECTRO-OPTICAL ENGINEERING INC.

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