VIAVI Solutions Inc. — Form 10-K Summary
Reporting period: Fiscal year ended July 1, 2023, compared principally with fiscal 2022 ended July 2, 2022. The request labels the period “2022 Q4,” but this filing is the fiscal 2023 annual report; it also provides selected quarterly results, including the quarter ended July 1, 2023.
Business context
VIAVI supplies network test, monitoring and assurance products and services through Network Enablement (NE) and Service Enablement (SE), and optical security and performance products through OSP. Markets include communications service providers, network equipment makers, hyperscalers, government and avionics customers, as well as anti-counterfeiting and optical sensing applications.
Financial performance and liquidity
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Revenue | $1,106.1 million | $1,292.4 million |
| Gross margin | 57.8% | 59.8% |
| GAAP operating income / margin | $82.4 million / 7.4% | $185.0 million / 14.3% |
| GAAP net income | $25.5 million | $15.5 million |
| GAAP diluted EPS | $0.11 | $0.07 |
| Non-GAAP operating margin | 15.6% | 22.2% |
| Non-GAAP diluted EPS | $0.55 | $0.95 |
| Cash from operating activities | $114.1 million | $178.1 million |
Revenue declined 14.4% year over year. Product revenue fell 17.6% to $936.1 million, while service revenue rose 8.3% to $170.0 million. Management attributed the overall decline mainly to lower NE and OSP volumes. GAAP net income and EPS increased from FY 2022, which included a $101.8 million loss on convertible-note settlements; operating income and non-GAAP EPS fell substantially. Capital expenditures were $51.1 million; operating cash flow less capital expenditures was approximately $63.0 million.
Segment revenue: NE was $697.5 million, down 17.5%; SE was $103.7 million, up 0.4%; and OSP was $304.9 million, down 11.2%. NE and OSP operating conditions weakened, while SE revenue was broadly flat. OSP gross margin declined to 52.0% from 56.4%, partly due to lower volumes and startup costs at the new Arizona facility. NSE operating margin declined to 7.6% from 15.6%.
Quarterly context: In the quarter ended July 1, 2023, revenue was $263.6 million versus $335.3 million in the quarter ended July 2, 2022; reported net loss was $0.1 million versus net income of $16.5 million.
Liquidity and debt: At July 1, 2023, cash and cash equivalents were $506.5 million, short-term investments $14.6 million, and restricted cash $4.5 million (combined cash and restricted cash was $515.6 million). The company had $96.2 million of short-term debt and $629.5 million of long-term debt on its balance sheet. It reported no borrowings under its $300 million asset-based revolver and approximately $172.5 million of available capacity, net of standby letters of credit. The $96.4 million principal amount of 1.00% convertible notes was due in March 2024; other principal obligations included $250 million of 1.625% convertible notes due 2026 and $400 million of 3.75% notes due 2029. Debt covenants were reported in compliance.
Material changes, outlook and unusual items
- Management described constrained demand, inflationary pressures, and weaker CSP and NEM spending as FY 2023 headwinds. OSP also faced lower anti-counterfeiting demand as currency printing normalized from pandemic-era levels.
- For FY 2024, management emphasized strategic execution and long-term opportunities in 5G wireless, fiber, 3D sensing and resilient positioning, navigation and timing. The filing does not provide a clear numeric revenue or earnings guidance range.
- A workforce restructuring plan affecting approximately 5% of employees generated $12.1 million of FY 2023 charges. Management estimated approximately $28 million in annualized gross savings, with about $6 million of cash payments expected in FY 2024.
- The company acquired Jackson Labs Technologies and other businesses/assets; management reported $72.3 million deployed toward acquisitions. Jackson Labs consideration included contingent payments of up to $117 million tied to operational and revenue targets.
- VIAVI exchanged $127.5 million principal amount of 2024 convertible notes for $132 million principal amount of 2026 notes and issued an additional $118 million of 2026 notes for cash. It also retired the remaining 2023 notes at maturity.
- A favorable court decision on a U.K. pension matter led to a $6.7 million gain in FY 2023. The German pension plans remained underfunded by $55.0 million; the U.K. plan was fully funded.
- Tax expense was $35.2 million. The U.S. valuation allowance on deferred tax assets increased by $30.7 million; substantial NOLs and tax-credit carryforwards remain subject to realization and ownership-change limitations.
Key risks and contingencies
- Customer concentration is material: SICPA generated $157.7 million, or more than 10% of FY 2023 revenue. A material reduction in SICPA business or loss of the relationship could adversely affect OSP.
- Demand, product mix, pricing pressure, industry consolidation, technology transitions and customer purchasing timing may create revenue and margin volatility. The filing specifically flags uncertain CSP/NEM spending and adoption of 5G and other emerging technologies.
- Supply-chain and manufacturing risks include reliance on limited-source components and contract manufacturers, yield and quality challenges, and trade restrictions or geopolitical tensions, particularly involving China and Taiwan.
- Debt service and the 2024 note maturity require monitoring; convertible-note terms may also create dilution or cash-payment exposure. The company states liquidity should be adequate, but this depends partly on operating cash flow and market access.
- Routine legal claims are disclosed; management did not expect their resolution to have a material adverse impact, while noting outcomes remain uncertain. The filing also identifies tax audits and unrecognized tax benefits.
Important facts for investors to verify
- Whether demand and margins stabilize after the FY 2023 declines, particularly in NE and OSP, and whether service revenue growth continues.
- Progress against the restructuring plan, including realized savings, implementation costs and potential operational or talent impacts.
- Funding or refinancing plans for the $96.4 million 2024 convertible-note maturity and the terms and potential dilution of outstanding convertible notes.
- SICPA revenue concentration and the trajectory of anti-counterfeiting demand; also the performance and contingent-payment outcomes of acquisitions.
- Future operating cash flow, working-capital needs and use of cash for capital expenditure, acquisitions and share repurchases; FY 2023 share repurchases totaled $83.9 million.
- The recoverability of deferred tax assets and NOLs, and developments in tax examinations, pension obligations and other contingencies.