VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 29, 2018; comparisons are with the three months ended September 30, 2017. Amounts are in U.S. dollars unless stated otherwise. The interim financial statements are unaudited.
Business context and results
VIAVI supplies network test, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and precision optical products through Optical Security and Performance (OSP). Results include the acquired AvComm and Wireless Test and Measurement business, acquired in March 2018, which was not included in the prior-year quarter.
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $268.5 million | $190.9 million | Up 40.6% |
| Gross profit / margin | $150.4 million / 56.0% | $112.7 million / 59.0% | Margin down 3.0 percentage points |
| Operating income (loss) | $(1.2) million | $6.7 million | Down $7.9 million |
| Net loss | $(15.3) million | $(7.6) million | Loss widened |
| Diluted loss per share | $(0.07) | $(0.03) | Loss per share widened |
| Cash from operations | $27.6 million | $11.0 million | Up $16.6 million |
Revenue growth reflected NE revenue of $164.5 million, up 47.4%, and OSP revenue of $77.8 million, up 43.0%; SE revenue was $26.2 million, up 5.2%. Management attributed NE growth largely to acquired wireless products and organic growth in lab fiber instruments, partly offset by weaker North American service-provider spending. OSP growth benefited from 3D Sensing filters and banknote redesign demand. Product revenue rose 46.0%; service revenue rose 6.2%.
Gross margin fell primarily because of lower NE and OSP margins and increased acquired-intangible amortization. OSP gross margin declined to 50.6% from 57.7%, partly due to 3D Sensing product mix; NE margin was 62.6% versus 63.0%. Operating results included $14.8 million of restructuring charges and $19.2 million of acquired-intangible amortization. Income tax expense was $5.7 million despite a pretax loss of $9.6 million.
Liquidity, debt and balance sheet
- At September 29, 2018, cash and cash equivalents were $600.7 million, short-term investments $51.7 million, and restricted cash $7.2 million. Management reported combined cash, short-term investments and restricted cash of $665.0 million, down $128.6 million from June 30, 2018.
- Operating cash flow was $27.6 million; investing activities provided $107.0 million, mainly from $117.5 million of investment sales and maturities; financing activities used $138.4 million, primarily for debt repurchases. Capital expenditures were $12.1 million.
- Reported debt carrying value was $705.8 million, including $142.7 million current and $563.1 million long-term. The company was in compliance with debt covenants. It repurchased $134.3 million principal of its 0.625% convertible notes during the quarter.
- After quarter-end, holders converted $112.0 million principal of the remaining 2033 Notes and received $111.8 million cash plus 231,795 shares; VIAVI redeemed the remaining $30.7 million principal. No 2033 Notes remained outstanding after the October 10, 2018 transactions.
- Current assets were $1,026.2 million and current liabilities $429.6 million at quarter-end. Total assets were $1,888.8 million and stockholders’ equity $709.6 million.
Management said existing cash and investments should be sufficient for liquidity and capital spending needs over the next 12 months, while noting exposure to working-capital movements, market and foreign-exchange volatility, acquisitions, pension funding and financing terms.
Changes, outlook and risks
- Revenue grew 40.6%, but gross margin contracted and GAAP operating results moved from income to a loss. The quarter included $14.5 million of charges for a new restructuring plan affecting approximately 240 employees, chiefly to integrate and consolidate the acquired AW business. VIAVI estimated about $34 million in annualized gross savings from restructuring actions initiated during the prior 12 months; these are estimates, excluding one-time charges.
- VIAVI adopted ASC 606 revenue recognition retrospectively. The standard principally changes the timing of revenue for certain bundled software arrangements. The prior-year comparison was recast: Q1 FY2018 revenue changed from $195.2 million as reported to $190.9 million, and net loss from $4.8 million to $7.6 million. The filing states there was no cash-flow impact from adoption.
- Management expected fiscal 2019 NSE revenue to benefit from 5G testing and deployment and Fiber-to-the-Home deployment. It expected OSP anti-counterfeiting revenue to rise in the first half and moderate in the second half, and 3D Sensing revenue to surge in the first half before declining in line with smartphone seasonality. These statements are outlook, not guaranteed results.
- Risks highlighted include uncertain customer demand and buying patterns, customer concentration, competition and pricing pressure, product mix, industry consolidation, U.S. dollar strength, and seasonality. Management also noted the potential impact of unfavorable market conditions on investment liquidity and value.
- The company reported a $7.7 million accrued liability related to a U.K. pension-deed dispute and continues a claim against the law firm involved. It said ordinary-course claims are not currently expected to have a material adverse effect, but outcomes remain uncertain. Pension plans were underfunded by $104.9 million; management estimated fiscal 2019 pension cash outlays of about $7.8 million.
- A subsequent acquisition of RPC Photonics closed October 30, 2018, for $30 million cash plus up to $53 million in performance-based earn-outs, subject to adjustments. Purchase-price allocation was still being determined.
Important facts for investors to verify
- How much revenue growth and future margin performance are attributable to acquired businesses versus organic demand, particularly in NE and OSP.
- Whether the forecast restructuring savings are realized and how integration costs, amortization and restructuring charges affect GAAP profitability.
- The cash and share consequences of the 2033 Notes’ post-quarter conversion and redemption, and the resulting debt maturity profile.
- Whether 3D Sensing, anti-counterfeiting, 5G and Fiber-to-the-Home demand follow management’s timing and seasonality expectations.
- Potential changes in tax estimates, including the Tax Cuts and Jobs Act repatriation calculation, and developments in the U.K. pension dispute and pension funding obligations.