Viavi Solutions Inc. — Form 10-Q Summary
Business context and reporting period
The quarter ended January 2, 2016 was Viavi’s second quarter of fiscal 2016. Comparisons are with the three and six months ended December 27, 2014; the current six-month period includes an extra fiscal week. Viavi completed the distribution of approximately 80.1% of Lumentum on August 1, 2015 and presents that business as discontinued operations. Unless noted, results below are for continuing operations.
Viavi’s continuing businesses are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP), serving network testing and monitoring, anti-counterfeiting, and optical-product markets.
Key financial metrics
| Metric | Three months ended Jan. 2, 2016 | Six months ended Jan. 2, 2016 |
|---|---|---|
| Revenue | $232.1 million, up 2.5% | $461.8 million, up 4.6% |
| Gross profit / margin | $141.8 million / 61.1%, versus 58.8% | $282.3 million / 61.1%, versus 59.3% |
| Operating income (loss) | $9.2 million, versus $(21.2) million | $6.3 million, versus $(33.6) million |
| Income (loss) from continuing operations | $3.3 million, versus $(37.7) million | $(10.3) million, versus $(63.5) million |
| Net income (loss), including discontinued operations | $6.3 million, versus $(25.1) million | $(60.7) million, versus $(34.8) million |
| Operating cash flow | Not separately presented | $(1.3) million, versus $57.4 million provided |
Quarterly product revenue rose 6.3% to $208.4 million, while service revenue declined 22.0% to $23.7 million. For the six months, product revenue was $408.6 million and service revenue was $53.2 million. The company reported total net income per share of $0.03 for the quarter and a net loss per share of $0.26 for the six months.
Quarterly segment revenue was NE $136.4 million, SE $36.9 million, and OSP $58.8 million. NE revenue increased 5.7%, SE declined 21.2%, and OSP increased 16.2%. Segment operating margins were 4.6% for Network and Service Enablement combined and 38.3% for OSP.
At January 2, 2016, cash and cash equivalents were $329.0 million, short-term investments $585.5 million, and restricted cash $11.5 million. The combined balance was $926.0 million, including Viavi’s $257.5 million Lumentum shareholding. Current assets were $1,199.5 million and current liabilities $264.3 million. Long-term debt carrying value was $574.8 million, against $650.0 million principal on 0.625% convertible notes due 2033. Viavi reported compliance with debt covenants and no short-term debt.
Six-month investing cash flow was $134.4 million provided, and financing cash flow was $141.4 million used. The latter included $136.7 million contributed to Lumentum, partly offset by $35.8 million from the sale of Lumentum preferred shares, and a $40.0 million share repurchase. The filing states that existing cash and investments are expected to cover liquidity and capital spending requirements for the next 12 months.
Material changes and management commentary
- Continuing-operations revenue and operating results improved year over year, with lower operating expenses and higher gross margin. Management attributed margin improvement partly to lower acquired-technology amortization and favorable OSP product mix.
- OSP growth was driven mainly by higher bank-note volumes; NE benefited from Lab and Wireline demand, including 100G deployments. SE weakness reflected declining support-contract renewals for mature Assurance offerings.
- Management estimated approximately $27 million in annualized gross savings from restructuring activities, excluding one-time charges, with some savings intended for reinvestment in R&D and new products.
- The quarter included a new restructuring plan affecting approximately 50 employees and a $3.0 million charge, partly offset by benefits from adjustments to earlier plans. Total restructuring accrual was $15.3 million at quarter-end.
- Six-month net loss included a $50.4 million loss from discontinued operations, including separation-related tax effects. The quarter’s $3.0 million discontinued-operations income primarily reflected separation costs offset by a tax benefit. Historical Lumentum results are not necessarily indicative of Lumentum as a standalone company.
- Viavi retained 11.7 million Lumentum shares. Their $157.2 million unrealized gain contributed to other comprehensive income; the investment’s reported fair value was $257.5 million. A 5% or 10% stock-price decline would reduce fair value by approximately $12.9 million or $25.7 million, respectively.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management noted limited visibility and possible quarter-to-quarter variability from customer buying patterns, product mix, pricing pressure, competition, customer concentration and consolidation, currency movements, and economic uncertainty in Europe, Russia, and Brazil. It also warned that the Lumentum separation could disrupt customer and business-partner relationships. The company does not hedge all foreign-exchange exposure.
Other items to monitor include an $87.4 million pension underfunding, $37.0 million of unrecognized tax benefits, and ordinary-course legal claims for which management says an adverse outcome could potentially have a material effect. The filing reports no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether OSP’s bank-note-driven demand is sustained and whether SE support-contract renewals stabilize.
- How much of reported liquidity is readily available apart from the volatile Lumentum equity investment.
- Whether restructuring savings are realized as planned without impairing R&D, product development, or revenue.
- The cash-flow and tax consequences of the Lumentum separation, including remaining obligations and potential tax exposures.
- The convertible notes’ $650.0 million principal, conversion terms, and eventual refinancing or settlement implications.