EXFO Inc. (EXFO) CEO Philippe Morin on Q2 2020 Results – Earnings Call Transcript

EXFO Inc. (NASDAQ:EXFO) Q2 2020 Earnings Conference Call April 7, 2020 5:00 PM ET

Company Participants

Vance Oliver – Director, Investor Relations

Philippe Morin – Chief Executive Officer

Pierre Plamondon – Chief Financial Officer and Vice President of Finance

Conference Call Participants

Todd Coupland – CIBC

Thanos Moschopoulos – BMO Capital Markets

Tim Savageaux – Northland Capital Markets

Robert Young – Canaccord Genuity

Richard Tse – National Bank Financial

Daniel Chan – TD Securities

Operator

Good day, ladies and gentlemen. Welcome to EXFO’s Second Quarter Conference Call for Fiscal Year 2020. Today’s conference is being recorded.

At this time, I would like to hand things over to Vance Oliver, Director of Investor Relations. Please go ahead, sir.

Vance Oliver

Good afternoon, and welcome to EXFO’s second quarter conference call for fiscal 2020. With me 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 including the impact of the coronavirus pandemic on our employees, customers, and global operations. This 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 2020 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.

Philippe Morin

Thank you Vance and good afternoon everyone. First, during this difficult period, I hope that you and your families are all safe and sound. I would also like to extend my deepest gratitude to first responders, doctors, nurses and medical staff who are putting their lives at risk daily to combat this coronavirus pandemic. They deserve our thanks and our praise.

Now turning our attention to EXFO, despite the temporary shutdown of our manufacturing operations in China, due to their coronavirus outbreak, we delivered solid bookings of 72.9 million in the second quarter of 2020, including a double digit increase in Test and Measurement orders. We also reported sales of 55.3 million in the second quarter, while IFRS net loss amounted to $9 million.

We consider these quarterly results a momentary setback to our long-term profitable growth strategies. The good news is that we have returned to four manufacturing capacity in China. All EXFO sites are operational and our staff is committed to helping global network operators and webscale companies to thrive during this challenging period.

Throughout this global pandemic, the safety of our employees, communities and customers remains and will continue to remain at the center of all actions. Following up on an IT issue that we initially reported in February, the virus was detected and quickly contained at EXFO. IT specialists were brought in to help resolve the situation and I can safely say this matter is behind us. We turned this incident into an opportunity to also firm up our IT security systems.

With manufacturing and IT issues firmly under control, EXFO is open for business. We are very busy with customer meetings through virtual demos, webinars, and conference calls. We are finding created ways to meet our customer needs and we’re continuing to book orders albeit at a slower pace than last year at the same period.

We also believe that EXFO’s Test and Measurement Solutions along with our SASS solutions are essential during these unprecedented times. Since our customers are being challenged by surge in bandwidth demand while coping with reduced staff. The telecom industry is mission critical more than ever with network capacity, reliability, and scalability playing an increased role in creating opportunities for EXFO’s innovative solution.

Several network operators and webscale companies for example have increased capital spending to meet the global trend of daily communicating from home. EXFO with its wealth of test and service assurance solutions enables the deployment of such bandwidth intensive applications in virtualized cloud-based networks.

Our solution to help customers maintain peak performance and we also help them with faster troubleshooting under these disruptive conditions by providing geolocation analytics, virtual VPN remote monitoring, and active monitoring of network and subscriber anomalies just to name a few of our solutions.

Although we are open for business, government imposed lockdown in many countries within the Americas, Europe, and Asia have affected our visibility of future business. Therefore EXFO has decided to suspend quarterly and annual guidance. We will do our best to provide the investment community with qualitative commentary about the company’s upcoming prospects, but it will not be possible to offer revenue and earnings guidance for the foreseeable future.

In addition, we’re continuing through engagements with our customers and our partners to access the medium to longer-term business impact of this coronavirus pandemic. And at present time, we’ve decided to have tightened cost control measures, including a hold on all our future hires.

Now, a little bit lost in the shuffle of this pandemic with our launch of Nova Adaptive Service Assurance in mid-February. It’s the first intelligent automation platform enabling mobile operators to deliver ultra-reliable and high quality service expense in 4G and 5G environment. At the heart of this, Nova ASA is a real-time automated assurance solution, Nova SensAI acting as a central nervous system for our platform.

The combined offering leverage is machine learning to provide mobile operators with high new feasibility into subscriber experience and network performance. The good news is we already trialed with this highly defensive service assurance solution with three lead customers and a feedback has been extremely positive.

Now in closing, I’d like to express my heartfelt thanks to the entire EXFO team for delivering under trying conditions not only in the second quarter, but a I know as they will in the weeks ahead. What makes me most proud is that we’ve kept our global customer base upraise throughout and maintain a high level of customer support.

So at this point, I will turn the call over to Pierre to over our financials.

Pierre Plamondon

Thank you, Philippe. Good afternoon everybody. Sales decreased 25.2% to $55.3 million in the second quarter of fiscal 2020 from $73.9 million in the second quarter of 2019. As previously mentioned, sales dropped year-over-year, mainly due to the negative impact of the COVID-19 outbreak on our manufacturing operation in China and supply chain.

In addition, we didn’t benefit from the same high level of calendar year and spending received in Q1 2019 and shipped in Q2 2019, and also we didn’t organize into revenue a 4.9 million order for network totally software as we did in the same period last year.

Bookings we know has dipped 4.2% year-over-year to 72.9 million in the second quarter 2020. In the second quarter of 2020, 14.7% in terms of measurement booking was offset by a 32.3% decrease in booking on our SASS product line. As just mentioned, we booked [$50 million] contract for our network deposit-rich software in the second quarter in 2019, including solutions and production and services, but we didn’t benefit from such large orders in the second quarter 2020.

Gross margin before depreciation and amortization amounted to 57% of sales in the second quarter 2020, compared to 60.7% in the second quarter 2019. In the second quarter of 2020 the corona virus outbreak led to a temporary shutdown of our manufacturing facility in China. This negatively impacted our sale in growth boundaries as a portion of cost of sales is fixed in the short-term.

In addition, we secured a loss of first contract related to our network topology mentioned before in the second quarter 2019, which carried margins above our corporate average. In terms of operating expenses, selling and administrative expenses total 24.3 million or 44% of sales in the second quarter 2020, compared to 25.5 million or 34.4% of sale in the same period last year.

The 1.2 million decrease during the expenses mainly reflects lower commission payoffs on lower sales level in the same quarter 2020. Also the other term of IFRS 16 plays its part [in registering our administrative] expenses year-over-year.

Net R&D expenses reached 12.6 million or 22.7% of sales in the second quarter of 2020, compared to 12.2 million or 16.5% of sales in the second quarter 2019. The 0.4 million increase in net R&D expenses can mainly be attributed to inflation and some increases, as well as project mix year-over-year.

IFRS net loss in the second quarter 2020 totaled 9 million or minus $0.16 per share. In comparison, IFRS net earnings reached 5.2 million or $0.09 per share in the second quarter of 2019. IFRS net loss in the second quarter 2020 included $1.5 million in after-tax amortization of intangible assets, 0.4 million in stock-based compensation costs and foreign exchange loss of 0.4 million.

Geographically, the Americas accounted for 48% of total sales in Q2 2020. Europe, Middle East and Africa represented 31% of sales, while Asia-Pac totaled 21% of sales. In comparison, the sales split was 50%, 34%, and 16% among the three geographic regions in the second quarter of 2019. In terms of customer mix, our top customer accounted for 8.2% of total sales in Q2 2020, while our top three represented 19.5%.

Turning to a few key points on the balance sheet, our cash position increased to $20.9 million at the end of Q2 2020 from 17.6 million in the previous quarter. This 3.3 million increase is mainly due to 7.1 million in cash flow from operation. This cash flow from operation were partially offset by 2.1 million for the purchase of capital assets and 1.5 million for the repayment of lease obligation and long-term risk.

At the end of Q2 2020, EXFO had a net cash position of 2.8 million and available revolving credit facilities up to 46.8 million. Now at this point, I would turn the call over to the operator to start the Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] We’ll go first to Todd Coupland. Todd, your line is open. Please check your mute button.

Todd Coupland

Can you hear me okay?

Operator

Now we can sir.

Todd Coupland

Apologizes for that. Good evening everyone. I had a few questions and I will just walk through them here if I could. First, on the income statement, the OpEx that you had in the quarter, is that about the right level of OpEx to think about prior to seeing some turn up in sales once we get into COVID?

Philippe Morin

Yes. The level, I’ll make a high-level comment and I’m sure Pierre will add to that. So, the level of OpEx that we have right now is pretty much I would say at the level that right now we are operating with. As I mentioned, we’ve decided to put a hiding fees and obviously although the other discerner spend will be – every dollar will be looked at. So, the OpEx would probably from a spend point of view will probably go down from what you have seen here, but at this point I would say with the hiring fee that we have in place and the focus we are putting on any other kind of spend and I would expect OpEx to slightly go down, but being that kind of range. Pierre, do want to comment?

Pierre Plamondon

Yes. I would add also that the currency went down since February and that’s [indiscernible] positive impact on OpEx in U.S. as well. So on the currency, we should have some saving assuming that the currency [indiscernible] related that it is right now. So, with the COVID we need to assume that travelling would be deeply reduced and we should see some saving on the travelling in addition of the hiring fee that we are doing.

Todd Coupland

Great. Thank you. And then I just noticed on free cash flow, while you just lost a few million dollars before noncash working capital items, you had big cash names from accounts receivable. So, I am assuming that you’re not going to see that every quarter. So, the way to think about burn at this point is a few million dollars above non-cash working capital, is that – tell me if I’m thinking about that correctly? Thanks.

Philippe Morin

Yes. You’re right. So, as we have been impacted in the last month for the – our sales, so the accounts receivable went pretty down at the end of the quarter, which is good for the cash. We do expect that the accounts receivable will be back in line. We deliver that we have seen in the past in 15 million roughly in [sale in receivables]. Therefore, we believe that [cash to finance] the cash flow so we should expect that – [our consumable] will go up and will require some cash. With respect to that, we should be able to fund the operation without any problem.

Philippe Morin

And Todd, just to complement to your first question Todd, sorry, you know we also are putting measure that I should have mentioned, but on the spend as well. OpEx should also go down slightly because of some of the decision we made on contractors and just kind of spending like that as well. That we should – that will decrease as we get into our second.

Todd Coupland

Okay. And then my last question is, just update us on what the U.S. carriers are going with respect to 5G deployment, has that come to a complete halt and COVID needs to get out of the way before network deployments can start again? Just update us on what you’re hearing from your carrier customers regarding their 5G deployment plans? Thanks a lot.

Philippe Morin

Yes. So, Todd, I mean, we engage customers. Obviously they are buried by customers, right, by operators and you made specifically on America, but we are and that’s part of our constant engagement and [indiscernible] having to understand better. What will happen as we exit the COVID pandemic in terms of investment? It is clear that there are needs now for bandwidth growth that sort of they are looking at investment there. On the 5G side, I think it is still a bit too early to see if they are going to increase or delay. In some other countries in Europe, we’ve seen actually some of the spectrum option to be delayed as the countries have to deal with the virus. So, we are going to – this is part of the discussions we are having in Dallas. We are having with our customers to better understand, you know how, once we emerge out of the crisis how the investments and where are the priorities are going to be.

Todd Coupland

Okay. Appreciate the color. Good luck everyone.

Philippe Morin

Thank you, Todd.

Operator

Our next question comes from Thanos Moschopoulos.

Thanos Moschopoulos

Hi, good afternoon. With respect to the supply chain, you mentioned China is up and running, but any other issues that could prove to be a risk as part of as far as the component shortages, your other jurisdictions are manufacturing or for the time being the supply chain to be fine?

Philippe Morin

So two points on that one Thanos. Number one, as you mentioned, so our facilities in Shenzhen up and running. We have other facilities as you know, Québec City [indiscernible] all manufacturing facilities are open. Now that we have to deal with our supply chain of component is mainly out of China as well. We are able to really maintain our capability there where we have now what I call I would call more shorter-term challenges on freight and logistics, sometimes country locked down.

So, and sometimes a bit more logistic challenge, but overall I do view that position with our supply chain, our facilities across our multiple sites. Across our obviously China being up and running now giving us an opportunity to respond faster with our customers and I may be see a competitive advantage versus some of the competitors that I know have facilities in factories in countries that are still locked down.

Thanos Moschopoulos

And so how is it that your factories in China are operational, is it that during these jurisdictions that aren’t locked down or do you [indiscernible] in different jurisdictions?

Philippe Morin

Yes. That’s exactly it and we will fall into central services because of the telecommunication market and so that’s why all of our factories and manufacturing facilities are open?

Thanos Moschopoulos

Okay great. And then similarly as you think the customers obviously part of uncertainty out there, but in terms of their day-to-day operations because they are central services are these still considering our technicians to execute on previously planned deployments or what are you seeing in the field in that perspective?

Philippe Morin

Yes. It’s a good question Thanos. So, first of all I would say, the amount of the meetings we are having is, we are very active, very, very busy. So that’s kind of the good news. A lot of our customer meetings are done over videoconferencing and so on by very, very creative ways to do demos and subsequently as what we wanted to. In terms of projects and activities, what I would say is it falls into two kind of categories.

Obviously, the ones that require constructions like fiber construction, fiber being dig into ground and so on. Those kind of projects in most of the countries has locked down are kind of are being delayed. So all of the other activities are, you know with regards to bandwidth growth, VPNs activity and monitoring the network. What we’re seeing is still a lot of activity there, there is still a lot of field technicians going to houses and apartments to make sure that the connectivity and the bandwidth are secured, and this is where our products and solutions are really coming across as differentiating.

We spend a lot of our effort in automation in bringing more intelligence so that when a technician goes in the house, he could troubleshoot much faster. We have centralized fiber monitoring system so that from a central office you can monitor where the fiber issues might happen and we’ve got capability to monitor where you have congestions with our service assurance platforms. So, I would actually tell you that we have more activity. Our funnel has actually increased on the SASS side since the COVID crisis compared to the TNM side.

Thanos Moschopoulos

Okay. And then finally in terms of the bookings number in the quarter, remind us is this the quarter where you have a season or higher level of maintenance and support metals coming through?

Philippe Morin

The maintenance contract tends to happen at the end of the calendar year, right. So they tend to be more of you know the quarter hitting our Q1 and Q2 sometimes a bit in Q2 for the delayed contract, but it tends to be a bit more on Q1 and Q2.

Thanos Moschopoulos

Okay. Yes. So, I guess [indiscernible] is whether that contributed disproportionately to the bookings number, but as you said, I guess similar to Q1 impact and the Q2 impact?

Philippe Morin

Yes.

Thanos Moschopoulos

Okay great. I will leave it there, thanks.

Philippe Morin

Thank you, Thanos.

Operator

[Operator Instructions] We will now go to Tim Savageaux.

Tim Savageaux

Hi, good afternoon. Couple of questions here. I wonder if you could talk about, I think it is about a 15% year-over-year increase in test and measurement bookings, and give us some color on kind of what the drivers where on that increase on a year-on-year basis?

Philippe Morin

Tim, so two main drivers coming in. One is, again on what we call our transport and data comp or what [indiscernible] 400 gig, 100 gig solution, optical RS, this was again a good performance of our portfolio. So, we are continuing and we tend to sell this to the webscale guys. We tend to sell it to the NEMs, but even some of operators and their lab. So that continues to be a strong performance.

The other one, nice growth on the manufacturing – our manufacturing customers what we call NVR, and now they are a very strong quarter for manufacturing capacity and if you recall we have reinvested by to an acquisition of Yenista and we continue to really see some nice growth of our particular business there with manufacturing of – example of transceivers, but also manufacture of optical components and that continues to fuel some nice growth for us.

Again our physical interface as physical products [indiscernible] so that continues to do really well there is more fiber deployment and fiber to the internet, but in terms of growth percentage I would say it is, you know the 400 to 400 gig and our manufacturing NVRs product line.

Tim Savageaux

That’s great color. Thanks. Clearly built some backlog here in the quarter, and which would presumably be a tailwind heading into Q3, so you’ve obviously got some headwinds as well. You mentioned you’re continuing to book orders, but at a reduced rate. I wonder in lieu of any guidance, maybe talk to us about the month of March is sort of what’s the sort of magnitude, the kind of run rate order decline and would you expect that more than offset what should be something on the order of a $10 million tailwind in terms of building backlog heading into Q3?

Philippe Morin

Yes. I mean that’s obviously the big question in terms of the ability of what we’re seeing. I would say the good news, there is two good news for us. One is, there is a backlog, we have good backlog in our TNM. There is a good backlog on our SASS business that we are absolutely going to leverage in the next quarter and next quarters. You know on the SASS side, we still have over $60 million of backlog, but we want to continue and then obviously if you do a quick math between what we have done in terms of revenue and we tend to have a book-to-bill ratio of one, you can see that type of backlog we have on the TNM side as well.

So that’s the first point. So, the backlog is giving us a good base to work from. The second item is, I do believe the fact that we – all of our facilities, our sites, and our functions whether because our employees are working from home where all our facilities that are essential are operating allows us to quickly respond with customers that they may have [indiscernible].

We are seeing that out of some countries in Asia, mainly in China that things are picking up really well and we can respond. And the third is, the lack of visibility because of the coronavirus. It is very difficult to kind of predict how our customers are going to in terms of ordering equipment, ordering solutions, and most of our customers had people on site, they can receive the equipment of their warehouses, but it’s clearly, as I mentioned in my opening statement a bit slower and plus we still don’t know how quickly we’re going to re-emerge out of this crisis. And that’s what’s preventing us from giving more detailed guidance.

Tim Savageaux

Understand about the guidance. It’s just, kind of, you know to the extent you’ve got some real time data. That’s what I was asking about although I understand that’s probably not enough to form a trend either. On the flip side, you mentioned that and we’ve seen this pretty extensively throughout cable, telecom, you know obviously significant increases in network traffic, you know leading in many cases to expedited capacity, you made reference to that, but I wonder if you could talk a little bit more specifically about how that manifests itself kind of in EXFO’s business, whether you’d see it more kind of in access network augmentations and field tech roles to address those or more in kind of high-speed metro core capacity to the extent that you’ve seen customer behavior change in these last few weeks to deal with increased traffic, any more color on kind of all that is developed to be great?

Philippe Morin

Yes. So the trend that we’re seeing on the – the still I need to make sure that the field techs are fully give with innovative solutions and automated solutions. So, we’re seeing, we have launched a product called Optical Explorer a few months back that is getting a lot of attention because it does help the fuel technician to troubleshoot much, much faster than the previous solutions based on our power meters and so on. And we’re seeing a need for field techs to be better so that as they go they are in 207 apartment they can do their troubleshooting faster.

The second thing is around our centralized kind of more solutions, which are Service Assurance. We’re providing geolocation analytics, and that allows people to – our operators to figure out if they’re having particular congestions into their network, same thing on VPN. There’s no tremendous amount of VPNs are required now. Now you got a monitor VPNs, and we’re providing solutions and these are software solutions.

So that’s why I was mentioning the funnel for those particular application has increased for us. And so – and then I would say, we’re really seeing opportunities, where on fiber monitoring, in particular, this particular activities we’re seeing, where people need, again, as you know, the knock centers of fewer people, they don’t – they’re not fully staffed. And to be able to provide them with solutions that are pretty automated and easy to install centrally and manage is also giving us an edge.

So, the place we’re seeing a decrease in a slowdown, as I mentioned, is on construction build out, and that’s kind of understandable, but I think the places we’re seeing now more growth is on field technicians and then on our centralized SASS offering.

Tim Savageaux

Got it. I’m sorry, thanks. And last question for me. One area, and you’ve kind of talked to it a bit, but like to get you to be a little more specific that you guys do have control over is obviously your spending from an OpEx perspective? And you mentioned sort of anecdotally, a couple of items that should be providing downward pressure, any chance of quantifying that a bit more? Should we be expecting something like at least a 10% sequential decline in OpEx in Q3? Or as you look at all these kind of anecdotal things, how does that kind of add up?

Philippe Morin

Yes. Time, what I would say is that, again, I think you’ve seen in the past, we’ve always been very, very diligent with our cost and our spending, we’re going to continue to do that. And whether it’s on hiring fees or no replacement or contractor spend on, to me, that’s kind of the main focus. As we are doing our business assessment, talking to our customers around the medium-term, longer-term, we’ll have to see what are the other options if we need to go there.

I do feel like a medium optimistic by nature, but I do feel that based on our positions, based on our solution, based on the fact that the telecom industry is so mission-critical and the backlog that we’ve got, I think, we can – we’re in a good position to navigate the storm, but again, there is some uncertainty that we’ll need to assess in the next few weeks based on what we’re seeing in the market.

Tim Savageaux

Okay, thanks.

Philippe Morin

Okay.

Operator

Our next question is Robert Young. Your line is open.

Robert Young

Good evening. Can you hear me? Okay. The line of questioning that Tim was on around the backlog. If I could dig into that a little more, I understand you’re not giving guidance, but perhaps, I think, you said $60 million backlog that’s on the SASS side. Would you be able to share any backlog that you built up on the T&M side? And the reason I’m asking about that, I’m assuming that the China is shutdown, to understand that’s mostly T&M handheld production. Would that have built up a backlog?

Philippe Morin

Yes. And that’s – yes. So, again, when you look at what happened in our Q2, the – we effectively lost almost a month of supply from our Shenzhen factory, which tends to be our higher volume kind of product and therefore, quickly turnaround in sales cycle. So, what I mentioned, though, to the background question, we have – we’ve mentioned before that we have about over 60 million of backlog in SASS and that’s still the case. So that’s a really good backlog.

And then for the TNM, although remember, we provide the backlog. You can kind of figure it out, our book-to-bill ratio tends to be close to 1, and we tend to be able to respond pretty faster – pretty fast to – with the TNM. So, kind of give you the kind of the backlog that we’re coming into our third quarter with.

Robert Young

Okay. So that sounds like $10 million to $15 million backlog there probably. And does that convert, as you said, book-to-bills 1? So that’s a pretty quick conversion, I would assume, you’d expect that to [indiscernible] through the quarter?

Philippe Morin

Yes. Obviously, it’s – again, with the lockdowns in farm, it’s the normal terms, I would say. Yes, it would convert pretty quickly. But we obviously need to make sure that, we can deliver and I’m pretty confident we will. There’s just we got to work through some of the challenges we have here with freight and logistics and talk and continuing with that.

Robert Young

The China shutdown, if I look at the actual operations, you said everything is up and running now. The only place you’ve been impacted is the Shenzhen manufacturing. As I understand it, all of your other manufacturing has been on uninterrupted, is that correct?

Philippe Morin

That’s correct. I mean, all our factory, obviously, we have to make sure we provide all the right security and cleanliness and associated with all the right measures that we need to do on our either facilities, but other than the COVID-19 security aspect, none of our either facilities weren’t impacted.

So that’s, again, as I’ll reiterate it’s good news throughout all this is that, we’re very – we’re open for business. And I do think that based on some of the bookings we’re seeing is, I do think that is giving us a short-term competitive advantage, because I know some of our competitors are – have facilities in countries that are still locked down.

Robert Young

Okay. And then – maybe is there any information you can give us on the timing of China production coming back? And you say, it’s working at full capacity now, when would that have hit full capacity, would have been sometime in March or would you have been back to normal by the end of February?

Philippe Morin

No, no, we will be back to at the beginning – really late February, but the very first week of March – sometime in March.

Robert Young

Okay.

Philippe Morin

It took, and as you know, around right, there was a lot of time to get all the employees back and get the whole supply chain. It took us pretty much all the month of February to get back on track. So the beginning of March is when we were back at full.

Robert Young

Okay. And then maybe in a line – different line of questioning just around the balance sheet and your access to capital, your cash went up, like previous question. When you look at the balance sheet, maybe it’s a little less cash I’ve seen on the balance sheet in past years. Are you happy with where it is now? How much cash do you generally think you need on the balance sheet one to fund your operations now? And then how much do you need to keep your customers happy who are probably looking at your balance sheet?

Philippe Morin

So, I’ll answer first and then [Pierre] will comment, I’m sure will provide more color. And again, based on where we are now, based on, again, what we – the fact that all our sites are open and the fact that there’s bandwidth growth and an aspect. I – we’re feeling okay with where we stand on a balance sheet. I mean, we’re not – I think we’ve got some nice backlog to play with. And I would just make sure, from the point of view of the business, we’re in a good position. But I’ll let [Pierre] comment and I’m sure he has more color.

Pierre Plamondon

Yes. So as a CFO, we want to have as much cash as possible, for sure, but we did have a line of credit up to $70 million. So we were in good shape to – for the next quarters. And I think that the balancing that we have is from our customers. So, I don’t think that our customer would be afraid with which we have and back to positive EBITDA. That’s the goal that we have for the rest of the year.

Robert Young

Okay. Maybe just one last clarification before I let the line go. When I said $10 million to $15 million backlog in TNM, the way I got to that was just looking at the $55 million report in the $60.5 million at the midpoint of the guidance before all this happen. I’m just – is – am I wrong in that math, or is there something else there from the IT systems [indiscernible] I should be thinking about?

Philippe Morin

No, no, Rob, you’re in the right ballpark.

Robert Young

Okay, thanks. I’ll pass it on.

Philippe Morin

Thank you.

Operator

And our next question comes from Richard Tse.

Richard Tse

Yes, thank you. Just talk about the funnel on the SASS side. I’m just kind of curious, it wasn’t clear in terms of you guys have the capacity now to sort of fulfill all that demand?

Philippe Morin

Yes. On the SASS side, Richard, it’s phenomenally software solutions, right? And then we have…

Richard Tse

Yes.

Philippe Morin

…sometimes professional services to do the integration and customization. So, on both cases, I mean, again, shipping software, that’s not an issue. And then on the capability to do the software integration customization, we have absolutely the capacity to do that and no challenges there, no issue there.

Richard Tse

Okay. So, you don’t have to be onsite to actually deploy that. Okay.

Philippe Morin

And even in – but even in some cases, Richard, even in some cases where you have to be onsite, again, most of our customers have people onsite. So, obviously, you need to be careful. It’ll take a bit more time, but most of the time, we don’t need to be onsite. And if we do, we do have that capability to do all those as well.

Richard Tse

Okay, thanks. And then, there’s a lot of questions on sort of the cost structure. Is this sort of come about in a different way? If you kind of look at the OpEx cost structure, what proportion of your total OpEx is considered fixed costs?

Pierre Plamondon

Let me answer. So, I would say that most of our OpEx costs are fixed. The variable costs will be mostly the commission for same traveling, trade shows, some marketing, okay? But most of the costs are federal. So, if we want to reduce cost, we need to reduce the payment costs through various means. In Canada, we have some program that has been announced by the federal government. We have to look if we cannot play on that or not, and so I have to say that, this is mostly fixed costs on the OpEx unfortunately.

Richard Tse

Okay. Yes, I just sort of, obviously, all companies rightly so want to keep the headcount in place, I would probably consider that partly variable to some extent. But…

Pierre Plamondon

Yes.

Richard Tse

…tough decisions, obviously. With respect to like the receivables, obviously, seems like things are going pretty well so far, but have there been any kind of discussions with your current base in terms of them thinking about maybe deferring payments and how you’re thinking about the receivables here going forward?

Pierre Plamondon

With our customers?

Richard Tse

Yes.

Pierre Plamondon

Yes. So far so good, the customer continued to pay within their terms. We’ll see going forward with the state of the business in each country if we may have some issue for collecting on two time, but most of our customer are a large company with usually some good cash balance. So, I don’t expect to have a huge high DSO increase in Q3 and Q4, maybe we would have some here and there some customers taking a little bit more time to pay us, but I don’t expect too much trouble so far.

Richard Tse

Okay, great. Okay, thank you.

Philippe Morin

Thank you, Richard.

Operator

And our next question is from Daniel Chan.

Daniel Chan

Hi. Good afternoon, guys. I just want to make sure I understand the market dynamics here. So is it safe to say that your February quarter revenue was white, because you had supply constraints, given the China shutdown, but demand was still strong and that’s why you had a good book-to-bill. But come March, especially like mid-March, you saw demand kind of take a fall out a little bit, and that’s why you’re seeing that the bookings have slowed a little bit. Is that the fair summary of what’s going on?

Philippe Morin

No, what – and maybe I’ll say in a different twist. For the – for our Q2, the bookings were – was strong, solid and mainly showed by a 15% growth on our T&M side, which was driven by, what I mentioned earlier, 100 gig, 400 gig and so on. And then the stronger book-to-bill ratio looks better because of the supplier challenges we had in China, which allowed us to effectively only ship $55 million.

Since the COVID virus impacting now other regions in China, as we hit other countries in Europe and in the U.S., we have seen that – the – our – the booking rate is not as fast as if you compare last year to this year. And it’s mainly due to the COVID crisis that obviously our customers are trying to navigate through working from home, navigate through the situations and the lockdown and that – and that’s caused, I guess, what I would call the bookings rate to not be as high as stronger than it was for the same period last year, which I don’t think anybody is surprised by that.

Daniel Chan

Yes. Okay, that’s helpful. Thanks for that. You made some commentary around – uncertainty around 5G deployments. Just wondering whether you’re having the same kind of discussions around virtualization of networks?

Philippe Morin

I think the virtualization of the networks is continuing, Daniel, I don’t think there’s any change there, because the – our customers are – I started that trend. They’re going to continuing to do it and provide them with CapEx and OpEx reductions. And that to me is continuing, and we’re seeing that with our SASS portfolio. We mainly sell now our solutions with our probes are all virtualized all in containers. And so that trend is going to continue. I don’t think it’s actually going to slowdown.

Daniel Chan

Okay, great. Thank you.

Operator

At this time, there are no further questions. I’ll hand things back to the CEO, Philippe Morin for any additional or closing remarks.

Philippe Morin

So thank you, again. So just a few key takeaways before we conclude this call today. So again, first EXFO reported solid bookings $73 million in our second quarter. And as we just mentioned, almost 50% year-on-year increase in orders for our T&M business.

Second, all our full sites are fully operational and our staff is committed to help by global network operators and web scale companies to succeed during this challenging time.

And third, we launched a highly differentiated solution, Nova Adaptive Service Assurance. It does leverage machine learning to provide mobile operators to get better visible. We believe that our EXFO [ph] solution, both on T&M and our SaaS will be essential in the upcoming months, as our customers are challenged with this increased demand and then as well coping with reduced staff.

And then finally, we do have to suspend our quarterly and annual guidance due to uncertainty surrounding the breadth and duration of the coronavirus pandemic. At this point, this concludes our 2020 – second quarter 2020 conference call. On behalf of the entire EXFO team, I thank you for joining today and then please stay safe. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference. We would like to thank you all for your participation today. You may now disconnect.

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