VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 30, 2024; comparable periods ended April 1, 2023. Amounts are in millions, except per-share data. The filing describes a challenging business environment, particularly in service-provider and enterprise markets, partly offset by stronger Optical Security and Performance Products (OSP) demand.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Revenue | $246.0 | $247.8 | $748.4 | $842.5 |
| Gross profit / margin | $137.9 / 56.1% | $141.0 / 56.9% | $430.3 / 57.5% | $492.8 / 58.5% |
| Operating income (loss) / margin, GAAP | $(11.9) / (4.8)% | $(2.1) / (0.8)% | $26.5 / 3.5% | $70.6 / 8.4% |
| Net income (loss) | $(24.6) | $(15.4) | $(4.1) | $25.6 |
| Diluted EPS, GAAP | $(0.11) | $(0.07) | $(0.02) | $0.11 |
| Operating margin, non-GAAP | 9.3% | 11.4% | 11.7% | 16.8% |
| Diluted EPS, non-GAAP | $0.06 | $0.08 | $0.25 | $0.45 |
Q3 revenue was nearly flat year over year: product revenue rose 1.0% to $207.3, while service revenue fell 9.2% to $38.7. GAAP SG&A increased 22.8% to $98.2, including costs related to the proposed Spirent acquisition. The Q3 tax provision was $9.0 despite a pretax loss of $15.6; management attributes tax expense primarily to foreign and state jurisdictions and deferred-tax valuation allowances.
Segment trends
- Network Enablement (NE): Q3 revenue was $151.7, essentially unchanged year over year; nine-month revenue declined 14.0% to $457.2, with lower Wireless, Fiber and Access, and Lab and Production volume.
- Service Enablement (SE): Q3 revenue fell 28.7% to $18.1 and gross margin fell to 60.8% from 70.1%, primarily on lower Data Center and Assurance revenue and lower volume.
- Network and Service Enablement (NSE): Q3 operating margin was (1.8)%, versus 1.4% a year earlier; nine-month margin was 0.9%, versus 8.3%.
- OSP: Q3 revenue increased 8.1% to $76.2, mainly on higher anti-counterfeiting and consumer and industrial revenue. Nine-month revenue declined 4.4% to $228.6; nine-month operating margin fell to 36.2% from 38.4%.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $90.2, essentially level with $90.6 a year earlier. Capital expenditures were $15.7; net cash used in investing was $27.2 and financing was $115.3.
- Cash, cash equivalents and restricted cash totaled $463.1 at March 30, 2024, down $52.5 from fiscal year-end. Cash and cash equivalents were $454.2, with $28.4 of short-term investments.
- Debt carrying value was $634.4, comprising $400.0 principal of 3.75% Senior Notes due 2029 and $250.0 principal of 1.625% convertible notes due 2026, net of discounts and issuance costs. The $96.4 of 1.00% convertible notes due 2024 was retired at maturity in March. The company reported compliance with debt covenants.
- No borrowings were outstanding under the $300.0 asset-based revolving facility; available capacity was approximately $147.5, net of specified letters of credit. Management believes liquidity sources are adequate for at least the next 12 months and beyond, while noting factors that could affect liquidity.
- The company repurchased $10.0 of shares during the nine-month period; $224.8 of authorization remained. It made no repurchases in Q3.
Outlook, significant developments and risks
- Q4 FY2024 outlook: Management expects revenue to be flat to slightly higher, with normal seasonal growth constrained by continued conservative customer spending. No numerical revenue range is provided in the filing.
- Spirent proposal: VIAVI announced a proposed acquisition on March 5, 2024, offering 172.5 pence per Spirent share in cash, plus a 2.5 pence special dividend retained by shareholders. Spirent later received a competing offer and withdrew its recommendation of VIAVI’s proposal. The shareholder meetings for VIAVI’s scheme were indefinitely adjourned; completion timing and likelihood were uncertain. Acquisition-related expenses were included in Q3 and nine-month results.
- Restructuring: The fiscal 2023 workforce plan affects approximately 5% of employees and is expected to produce about $25.0 in annualized gross savings. Its first phase was substantially complete; the second, focused mainly on SE, was expected to be substantially complete by fiscal year-end. Estimated remaining cash payments were $0.8.
- Demand and execution risks: Management cited uncertain service-provider spending and infrastructure investment, customer procurement timing, pricing pressure, customer concentration and consolidation, product mix, competition, supply constraints, and variable adoption of 5G and other technologies. Geopolitical tensions and trade restrictions, foreign-exchange movements, and global economic conditions may also affect results.
- Other exposures: Unrecognized tax benefits were $51.1, with $3.4 accrued for tax interest and penalties; timing and outcomes of tax examinations remain uncertain. Pension plans were underfunded by $50.6. Ordinary-course legal claims could have an adverse effect if resolved unfavorably, though management did not expect a material impact based on current information.
- Management reported effective disclosure controls as of March 30, 2024 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether weak service-provider and enterprise demand improves, and whether the Q4 flat-to-slightly-higher revenue outlook is achieved.
- Whether revenue declines and margin pressure in NE and SE stabilize, and whether OSP’s recent quarterly growth persists.
- The status, financing, regulatory conditions and potential costs of the Spirent transaction, including the competing offer and any further changes to the scheme timetable.
- Cash generation, remaining liquidity, debt-service capacity and compliance with facility availability and covenants.
- Execution and realized savings from the restructuring, plus developments in tax examinations, pension funding and other contingencies.