Viavi Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal 2018 first quarter, three months ended September 30, 2017; compared with the three months ended October 1, 2016. The filing is unaudited.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2017 | Prior comparable quarter |
|---|---|---|
| Revenue | $195.2 million | $210.8 million |
| Gross profit / margin | $116.2 million / 59.5% | $125.1 million / 59.3% |
| Operating income | $10.0 million | $10.1 million |
| Net income (loss) | $(4.8) million | $78.0 million |
| Diluted earnings (loss) per share | $(0.02) | $0.33 |
| Operating cash flow | $11.0 million | $14.9 million |
- Product revenue fell 8.7% to $171.9 million; service revenue rose to $23.3 million from $22.5 million.
- Cash and cash equivalents were $792.7 million, short-term investments $430.9 million, and restricted cash $7.5 million at quarter-end. Total current assets were $1.469 billion versus current liabilities of $667.0 million.
- Debt carrying value was $802.1 million: $443.3 million classified as current and $358.8 million long-term. Principal outstanding was $923.5 million across the 0.625% 2033 Notes and 1.00% 2024 Notes. The company reported compliance with debt covenants.
- Cash declined $211.7 million during the quarter. Investing used $57.2 million, including the Trilithic acquisition; financing used $174.6 million, principally for $162.0 million of convertible-debt repurchases. Capital expenditures were $8.4 million; operating cash flow less capital expenditures was $2.6 million.
Changes versus the prior period
- Revenue declined 7.4%, with lower sales in Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). SE fell 20.3%; NE fell 5.7%; OSP fell 2.5%.
- GAAP gross margin edged up from 59.3% to 59.5%. NE gross margin declined to 63.1%, while SE improved to 70.7%; OSP operating margin fell to 40.8% from 41.9%.
- Net results swung from $78.0 million income to a $4.8 million loss. The prior-year quarter included an $81.5 million gain on sale of Lumentum shares; the current quarter did not. Current-quarter interest expense rose to $12.5 million from $9.2 million.
- Cash and investments were used in part to repurchase $146.5 million principal of the 2033 Notes for $162.0 million cash, producing a $3.6 million extinguishment loss. Trilithic was acquired for $55.5 million cash on August 9, 2017.
Outlook, commentary and risks
- Management expected mature Assurance product revenue in SE to continue declining in fiscal 2018. It expected OSP anti-counterfeiting revenue to moderate in the first half of fiscal 2018 and rebound in the second half; 3D-sensing shipments began in Q1, with a larger revenue ramp expected in the second half. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- Management cited demand weakness in NE Lab Instruments, continued runoff of mature SE offerings, and restructuring-related reductions in SE product scope. Strength in cable testing, including DOCSIS 3.1, and 100G Metro demand partly offset NE weakness. Management estimated approximately $44 million in annualized gross savings from restructuring activities initiated in the prior year.
- Key risks include macroeconomic uncertainty, customer concentration and industry consolidation, competitive and pricing pressure, product mix variability, foreign-exchange movements, and reliance on suppliers. Management said existing cash and investments should cover liquidity and capital spending requirements for the next 12 months.
- OSP operations in Santa Rosa were temporarily disrupted by October 2017 Sonoma County wildfires and resumed shortly afterward. The filing identifies wildfire and earthquake exposure to Northern California facilities as risks.
- The company had a $7.6 million accrual related to a disputed U.K. pension deed amendment and was appealing the court decision while pursuing a claim against the law firm involved. Pension plans were underfunded by $107.3 million at quarter-end. Other ordinary-course claims remain subject to uncertainty.
- Management reported disclosure controls were effective at September 30, 2017, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the expected second-half OSP and 3D-sensing revenue ramp materializes, and whether mature SE declines continue.
- How acquisition integration, Trilithic purchase-price finalization, and related costs affect NE results and cash generation.
- Debt repayment and refinancing needs, particularly the 2033 Notes’ upcoming August 2018 holder put right and the amount classified as current.
- Progress in achieving restructuring savings, and any changes to restructuring or lease-exit estimates.
- Operational or financial effects of wildfire disruption, pension obligations, and the pending U.K. pension matter.