VIAVI Solutions Inc. — Form 10-Q Summary
Business context and reporting period
Viavi provides network test, monitoring and assurance solutions, as well as optical security and performance products. This report covers the 13 weeks ended October 2, 2021 (fiscal 2022 Q1); the comparable prior-year quarter ended October 3, 2020 was 14 weeks, limiting direct comparability.
Financial results and liquidity
| Metric | Quarter ended Oct. 2, 2021 | Prior comparable quarter |
|---|---|---|
| Revenue | $326.8 million | $284.7 million |
| Gross profit / margin | $195.0 million / 59.7% | $169.4 million / 59.5% |
| Operating income | $46.9 million | $31.3 million |
| Net income (loss) | $(54.8) million | $19.7 million |
| Diluted earnings (loss) per share | $(0.24) | $0.08 |
| Operating cash flow | $53.4 million | $63.9 million |
Revenue increased 14.8%, led by Network Enablement (NE), up 26.4%; Service Enablement (SE) grew 7.5%, while Optical Security and Performance Products (OSP) declined 2.3%. Product revenue rose 16.6% and service revenue rose 2.4%. The reported net loss primarily reflects an $85.9 million loss on settlement of convertible notes; excluding that item, operating income increased year over year.
Cash, cash equivalents and restricted cash totaled $926.7 million at quarter-end, up $218.3 million from fiscal year-end. Cash and cash equivalents were $915.6 million; short-term investments were $1.6 million. Total debt carrying value was $800.7 million, all long-term at quarter-end, versus $680.7 million at July 3, 2021. The company had no borrowings outstanding under its $300 million revolving credit facility and reported compliance with debt covenants. Capital expenditures were $15.7 million.
Material changes versus prior period
- NE revenue growth and higher volume improved NE gross margin to 64.8% from 63.8%. NSE operating margin rose to 13.5% from 7.2%, primarily on increased revenue volume.
- SE gross margin declined to 63.9% from 66.8%, largely due to unfavorable product mix. OSP gross margin fell to 57.7% from 60.3%, mainly due to unfavorable manufacturing variances; OSP operating margin declined to 44.1% from 46.7%.
- On September 29, 2021, Viavi issued $400 million of 3.75% senior notes due 2029. It also settled $275 million principal amount of 2023 and 2024 convertible notes for $196.5 million cash and 10.6 million shares, recording the $85.9 million loss.
- Viavi adopted convertible-instrument accounting guidance retrospectively, changing prior-period debt and equity classification and increasing prior-year reported net income by $5.4 million for the comparable quarter.
Outlook, commentary and risks
- Management said 5G wireless, fiber and 3D sensing are expected to remain growth drivers in fiscal 2022. No numerical revenue or earnings guidance is provided in this filing.
- Management expects higher supply-chain, manufacturing, logistics and procurement costs driven by inflation to continue through the remainder of fiscal 2022. It reported extended lead times and component shortages, while stating these factors had not materially affected fiscal 2022 results to date.
- COVID-19, supply disruptions, inflation, vaccine mandates and logistics constraints could affect operations, customer demand and costs. The company said the future financial impact of the pandemic cannot be reasonably estimated.
- Other risks include customer concentration and pricing pressure, product mix and seasonality, competition, trade restrictions, foreign exchange exposure, technology adoption, and the ability to execute product development and supply-chain plans.
- Unrecognized tax benefits were $59.2 million, with $4.1 million accrued for interest and penalties. The company also disclosed ordinary-course litigation and a U.K. pension-related matter; an accrued pension liability for that matter was £7.0 million ($9.5 million). Management cautioned an unfavorable outcome in claims could have a material effect.
- Subsequent to quarter-end, Viavi repurchased approximately 2.8 million shares for approximately $45 million under its 2021 repurchase plan. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue growth reflects underlying demand versus the difference between the 13-week current quarter and 14-week prior-year quarter.
- The company’s progress in managing supply constraints, inflationary costs and product delivery lead times, and any effect on margins.
- Cash generation and capital allocation after the convertible-note settlement, 2029 note issuance and subsequent share repurchases.
- Remaining convertible-note obligations, future maturity and conversion terms, and the impact of potential dilution.
- Developments in the disclosed tax positions, pension matter and other legal contingencies.