VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 1, 2023, compared with periods ended April 2, 2022. The supplied metadata says “2022 Q3,” but the filing covers fiscal 2023 Q3.
Business context and financial results
Viavi provides network test, monitoring and assurance solutions, along with optical security and performance products. Figures below are in U.S. dollars; amounts are in millions except per-share data.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $247.8 | $315.5 | $842.5 | $957.1 |
| Gross profit / margin | $141.0 / 56.9% | $186.9 / 59.2% | $492.8 / 58.5% | $572.4 / 59.8% |
| Operating income (loss) | $(2.1) | $40.8 | $70.6 | $137.0 |
| Net income (loss) | $(15.4) | $19.2 | $25.6 | $(1.0) |
| Diluted GAAP EPS | $(0.07) | $0.08 | $0.11 | $0.00 |
| Operating cash flow | Not separately stated | Not separately stated | $90.6 | $104.5 |
- Q3 revenue fell 21.5% year over year; product revenue declined 25.6%, while service revenue grew 7.3%. GAAP operating margin was (0.8)%, versus 12.9% a year earlier. Non-GAAP operating margin was 11.4%, versus 21.5%; non-GAAP diluted EPS was $0.08, versus $0.22.
- For the nine months, revenue declined 12.0%, GAAP operating income fell to $70.6 million from $137.0 million, and non-GAAP diluted EPS was $0.45 versus $0.73.
- Q3 segment revenue: Network Enablement (NE) $149.6 million, down 26.8%; Service Enablement (SE) $27.7 million, up 4.5%; Optical Security and Performance Products (OSP) $70.5 million, down 16.8%. NE weakness reflected lower volumes; OSP faced softer anti-counterfeiting and consumer/industrial demand.
Cash, debt and liquidity
- At April 1, 2023, cash and cash equivalents were $580.6 million; current assets were $1,003.0 million and current liabilities $412.6 million.
- Debt carrying value was $792.1 million: $164.2 million short term and $627.9 million long term. The company reported compliance with debt covenants. No borrowings were outstanding under its asset-based revolver; available capacity was approximately $169.4 million.
- Nine-month operating cash flow was $90.6 million; capital expenditures were $43.7 million, implying approximately $46.9 million of operating cash flow less capital expenditures. Investing activities used $105.3 million, including $64.4 million for acquisitions. Financing activities provided $29.3 million.
- Cash, cash equivalents and restricted cash rose $20.4 million during the nine months to $593.2 million. Share repurchases totaled $73.9 million in cash during the period.
Material changes and notable items
- Revenue and margins weakened materially, led by NE; Q3 gross margin declined 2.3 percentage points year over year. OSP gross margin also declined, partly due to unfavorable manufacturing variances and startup costs at the Chandler facility.
- In March 2023, Viavi issued $250 million of 1.625% convertible notes due 2026, including an exchange of $127.5 million principal of 2024 notes for $132.0 million principal of the new notes and a $118.0 million cash issuance. The modification generated a $2.2 million loss.
- A February 2023 restructuring plan is expected to affect about 5% of the global workforce. The company recorded $10.2 million in charges and expects approximately $25 million of annual savings; completion was anticipated by fiscal year-end.
- Nine-month results included a $6.7 million gain from reversal of a U.K. pension liability following a favorable court decision, and a $0.6 million non-cash impairment charge on developed technology.
- Jackson Labs Technologies was acquired in October 2022. The filing reports approximately $49.9 million paid at closing and contingent consideration of up to $117.0 million, subject to targets over three years.
Outlook, risks and contingencies
- Management expected macroeconomic headwinds and end-market demand volatility to persist in the near term; the filing provides no numerical revenue or EPS guidance. It cited long-term opportunities in 5G wireless, fiber, 3D sensing and resilient PNT.
- Management reported constrained demand and inflationary pressure, particularly weaker service-provider and network-equipment spending affecting NE and softer anti-counterfeiting demand affecting OSP.
- Risks include customer spending and concentration, pricing and competition, supply-chain and component constraints, foreign exchange, geopolitical tensions and trade restrictions, cybersecurity, and the pace of adoption of emerging technologies. Russia-related export restrictions had led Viavi to suspend regional transactions.
- Ordinary-course legal claims remain subject to uncertainty. The company had $51.1 million of unrecognized tax benefits and $2.8 million accrued for tax interest and penalties; the timing and outcome of tax examinations are uncertain. Standby letters of credit were $11.8 million and performance bonds and other claims were $0.7 million.
- Management stated that existing liquidity and funding sources were expected to meet needs over the next 12 months and beyond, while noting that demand, working capital, capital markets, acquisitions and debt obligations could affect liquidity.
Important facts for investors to verify
- Whether the sharp NE and OSP revenue declines and lower margins persist, and whether management’s demand outlook improves.
- Progress, cash costs and realized annual savings from the workforce restructuring plan.
- Debt maturities, conversion or refinancing terms, interest costs, and the continuing availability of revolver capacity.
- Acquisition earn-out exposure, including the Jackson Labs contingent consideration, and the performance assumptions underlying those obligations.
- Whether operating cash flow can sustain capital spending, repurchases and debt service amid weaker earnings and working-capital movements.