Viavi Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 30, 2019; comparable periods ended March 31, 2018. The filing is for fiscal 2019, notwithstanding the request metadata’s “2018 Q3” label. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Viavi provides network test, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical products through Optical Security and Performance (OSP). Growth in the quarter was led by NE, including the acquired AvComm and Wireless (AW) business and organic fiber-instrument growth. SE and OSP revenue declined year over year in the quarter.
| Metric | Three months ended Mar. 30, 2019 | Three months ended Mar. 31, 2018 | Nine months ended Mar. 30, 2019 | Nine months ended Mar. 31, 2018 |
|---|---|---|---|---|
| Revenue | $265.2 | $218.7 | $840.6 | $615.0 |
| Gross profit / margin | $153.5 / 57.9% | $123.3 / 56.4% | $481.9 / 57.3% | $355.4 / 57.8% |
| Operating income | $7.9 | $0.4 | $39.6 | $14.0 |
| Net loss | $(4.8) | $(10.7) | $(7.1) | $(19.4) |
| Diluted loss per share | $(0.02) | $(0.05) | $(0.03) | $(0.09) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $110.3 | $48.5 |
Financial position and liquidity
- At March 30, 2019, cash and cash equivalents were $502.7 and short-term investments were $27.1, compared with $611.4 and $169.3, respectively, at June 30, 2018. Cash, investments and restricted cash totaled $542.9, down $250.7 from $793.6.
- Current assets were $909.6 and current liabilities $284.7, implying working capital of $624.9. The current portion of long-term debt was zero.
- Long-term debt carrying value was $573.5; principal outstanding was $685.0 ($460.0 of 1.00% notes due 2024 and $225.0 of 1.75% notes due 2023). The carrying amount reflects unamortized discounts and issuance costs. The 0.625% notes due 2033 were fully converted or redeemed during the period. Viavi reported compliance with debt covenants.
- Nine-month investing cash flow was positive $82.0, including $142.2 from investment sales and maturities; capital expenditures were $34.7 and acquisitions, net of cash acquired, used $29.7. Financing activities used $293.6, mainly for $276.9 of 2033-note redemption and conversion.
- Management said existing cash and investments should be sufficient for liquidity and capital-spending needs over the next 12 months.
Changes versus the prior comparable period
- Quarterly revenue rose 21.3%; nine-month revenue rose 36.7%. Growth was concentrated in NE, up 42.7% for the quarter and 50.1% for nine months, partly reflecting the AW acquisition. OSP grew 33.9% over nine months, while SE declined 11.9%.
- Quarterly gross margin improved 1.5 percentage points, while nine-month gross margin slipped 0.5 point. Quarterly operating income improved to $7.9 from $0.4; nine-month operating income increased to $39.6 from $14.0.
- Research and development expense increased 51.7% for the quarter and 50.6% for nine months, primarily due to the AW business and higher bonus accruals. SG&A rose more slowly than revenue, reducing as a share of revenue.
- Operating cash flow increased to $110.3 from $48.5 for the nine-month period. Cash balances fell primarily due to debt redemption and conversion, despite stronger operating cash flow.
Outlook, commentary and risks
- Outlook: Viavi expected continued strength in 5G wireless and fiber supporting the 5G infrastructure build-out for NSE during the remainder of calendar 2019, and typical seasonal strength in 3D Sensing consumer-electronics demand benefiting OSP in the second half of calendar 2019. The filing provides no specific numerical revenue or earnings guidance.
- Restructuring: Nine-month charges were $16.0, including $16.7 recorded for the fiscal 2019 NSE/AW plan, which affected approximately 253 employees. The plan includes transferring some AW manufacturing to a contract manufacturer; related severance payments are expected by the end of fiscal Q4 2020. Management estimated approximately $28.8 of annualized gross cost savings from restructuring activities initiated in the prior 12 months.
- Segment and market pressures: SE faced weaker data-center demand and runoff of mature assurance products. OSP quarterly revenue and margins were affected by lower consumer/industrial demand and under-absorption associated with idled 3D Sensing filter capacity. Management cited macroeconomic uncertainty, pricing pressure, competition, customer concentration, product-mix variability, customer buying patterns and communications-industry consolidation.
- Accounting and unusual items: Adoption of ASC 606 changed the timing of certain bundled software revenue recognition; prior periods were recast. The AW acquisition’s in-process R&D asset was completed and transferred to developed technology in the quarter. RPC Photonics was acquired for approximately $33.4 cash plus potential earn-outs; the fair value of contingent consideration was a Level 3 estimate, subject to material changes as projections and assumptions change.
- Contingencies and exposure: Viavi recorded a $2.4 charge to discontinued operations after an Ontario tax assessment appeal was denied. A U.K. pension-deed dispute had an accrued liability of $7.7. The company also disclosed ordinary-course claims, $53.3 of unrecognized tax benefits, and an underfunded pension position of $99.7. It cautioned that adverse outcomes or changes in estimates could affect future results.
- Management reported effective disclosure controls as of March 30, 2019, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of NE and total revenue growth reflects AW acquisition contributions versus organic growth, and whether the stated 5G and fiber demand outlook materializes.
- Whether SE demand and OSP 3D Sensing utilization recover, and the effect on segment margins and consolidated gross margin.
- Progress against the estimated $28.8 annualized restructuring savings, associated cash costs, and the timing and execution of the AW manufacturing transfer.
- Debt repayment, conversion and refinancing terms, and the relationship between the $685.0 principal balance and $573.5 carrying value.
- Potential changes in the RPC earn-out valuation and the outcomes of the U.K. pension, Ontario tax, and other legal or tax matters.
- The effects of ASC 606 on revenue timing and comparability; the filing notes that reported period results may not indicate future performance.