Viavi Solutions Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2023, ended December 31, 2022. Comparisons are to the three and six months ended January 1, 2022. Amounts are in millions, except per-share data. The financial statements are unaudited.
Business context and performance
Viavi provides network testing, monitoring and assurance solutions, and optical technologies. Its reportable segments are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). Management reported constrained demand, currency headwinds and inflationary pressures during the quarter.
| Metric | Three months ended Dec. 31, 2022 | Prior-year quarter | Six months ended Dec. 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $284.5 | $314.8 | $594.7 | $641.6 |
| Gross profit | $167.0 | $190.5 | $351.8 | $385.5 |
| Gross margin | 58.7% | 60.5% | 59.2% | 60.1% |
| Operating income | $22.9 | $49.3 | $72.7 | $96.2 |
| GAAP operating margin | 8.0% | 15.7% | 12.2% | 15.0% |
| Net income (loss) | $8.4 | $34.6 | $41.0 | $(20.2) |
| Diluted GAAP EPS | $0.04 | $0.14 | $0.18 | $(0.09) |
Quarterly non-GAAP operating margin was 16.2%, versus 23.3% a year earlier; non-GAAP diluted EPS was $0.14, versus $0.24. These are non-GAAP measures and exclude items including stock compensation, acquired-intangible amortization and certain other charges or benefits.
Material changes versus prior periods
- Quarterly revenue fell 9.6%; product revenue declined 12.9%, while service revenue rose 15.0% to $43.0.
- NE revenue declined 16.2% to $179.7, primarily from lower Field Instruments, Wireless, and Lab & Production volumes. SE revenue fell 8.1% to $27.4. OSP revenue increased 9.6% to $77.4, driven primarily by anti-counterfeiting and consumer and industrial volumes.
- Lower volumes and unfavorable product mix pressured NE and SE results. OSP gross margin also declined, reflecting unfavorable manufacturing variances and startup costs at the Chandler facility.
- Six-month GAAP net income improved from a $20.2 loss to $41.0 income. The prior-year period included a $92.3 convertible-note settlement loss; no such loss was recorded in the current period.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $72.8, compared with $75.6 a year earlier. Capital expenditures were $32.9; investing cash outflow totaled $95.9, including $64.4 for acquisitions. Financing cash outflow was $52.7, including $43.9 of share repurchases.
- Cash, cash equivalents and restricted cash totaled $496.9 at December 31, down $75.9 from fiscal year-end. Cash and cash equivalents alone were $484.1.
- Carrying debt was $685.2: $68.0 short-term and $617.2 long-term. The debt includes $68.1 principal of 1.75% convertible notes due June 2023, $223.9 principal of 1.00% convertible notes due March 2024, and $400.0 principal of 3.75% senior notes due October 2029. The company reported compliance with debt covenants.
- The $300.0 asset-based revolving facility had no borrowings and approximately $169.6 of available borrowing capacity. Management believes available liquidity and funding sources are adequate for needs over the next 12 months and beyond.
- Current assets were $911.9 and current liabilities $328.7. Inventory increased to $120.3 from $110.1 at fiscal year-end.
Outlook, risks and unusual items
- Management expects macroeconomic headwinds and end-market demand volatility to persist in the near term; the filing provides no numerical revenue or earnings guidance. It remains positive on long-term opportunities in 5G Wireless, Fiber, 3D Sensing and resilient position, navigation and timing (PNT).
- Risks cited include uncertain demand, pricing and product-mix pressure, customer concentration and industry consolidation, component shortages and supply-chain constraints, inflation and foreign-exchange exposure, geopolitical tensions and trade restrictions, and potential effects of COVID-19 and China’s reopening.
- On October 5, 2022, Viavi acquired Jackson Labs Technologies, a PNT solutions provider. The preliminary purchase-price allocation included $79.3 of consideration, including $49.9 paid in cash at closing and contingent consideration of up to $117.0 based on targets over three years. The filing recorded $29.4 of contingent consideration additions during the six months; the fair-value liability was $33.2 at quarter-end.
- A favorable September 2022 court decision eliminated a U.K. pension-benefit obligation and produced a $6.7 gain, reducing SG&A in the first fiscal quarter.
- After quarter-end, on February 1, 2023, the company approved a workforce reduction affecting approximately 5% of employees, with estimated charges of approximately $15. It expects substantial completion by fiscal year-end.
- Unrecognized tax benefits were $50.3, with $2.6 accrued for interest and penalties; the timing and outcome of tax examinations remain uncertain. Pension plans were underfunded by $58.4, with a separate $0.4 non-pension post-retirement liability.
- The company suspended transactions in Russia in February 2022. It stated that regional sales were not material, while warning that geopolitical developments, sanctions, supply disruption and cyber risks could affect future results.
Key facts for investors to verify
- Whether NE and SE demand stabilizes and whether lower volume and mix continue to weigh on margins.
- Cash generation, working-capital trends, and the actual borrowing capacity available under the asset-based facility.
- Repayment, conversion or refinancing plans for the $68.1 of 2023 convertible-note principal and the $223.9 due in 2024.
- Jackson Labs’ performance against earn-out targets and the eventual contingent consideration paid.
- Timing and costs of the announced restructuring, and whether expected operational benefits materialize.
- Potential changes in tax exposures, pension funding requirements, and outcomes of ordinary-course legal matters.