VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2020, three months ended December 28, 2019; six-month results are for the period ended the same date. Fiscal 2020 ends June 27, 2020. Figures are unaudited and in U.S. dollars.
Business context and financial performance
VIAVI supplies network test, monitoring and assurance solutions and optical products. Its segments are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP).
| Metric | Q2 FY2020 | Q2 prior year | Six months FY2020 | Six months prior year |
|---|---|---|---|---|
| Revenue | $313.7 million | $306.9 million | $613.5 million | $575.4 million |
| Gross profit / margin | $189.5 million / 60.4% | $178.0 million / 58.0% | $363.9 million / 59.3% | $328.4 million / 57.1% |
| Operating income | $45.0 million | $32.9 million | $65.7 million | $31.7 million |
| Net income (loss) | $28.0 million | $13.0 million | $34.8 million | $(2.3) million |
| Diluted earnings per share | $0.12 | $0.06 | $0.15 | $(0.01) |
| Operating cash flow | Not separately presented for the quarter | $69.3 million | $69.1 million |
Q2 revenue rose 2.2% year over year; six-month revenue rose 6.6%. Q2 operating margin was 14.3%, versus 10.7% a year earlier; six-month operating margin was 10.7%, versus 5.5%. R&D spending increased 9.6% in Q2 and 15.0% for six months. The six-month comparison also benefited from restructuring benefits of $0.6 million in FY2020 versus $15.1 million of charges in the prior-year period.
Segments and material changes
- NE: Q2 revenue grew 3.8% to $203.0 million; six-month revenue grew 11.6% to $401.9 million. Management cited 5G wireless trends, 400Gb fiber upgrades and DOCSIS 3.1 cable demand. NE gross margin improved in both periods.
- SE: Q2 revenue increased 10.6% to $31.2 million, supported by Growth Assurance and Data Center products. Six-month revenue declined 4.2% to $52.1 million as Mature Assurance products continued to run off. SE gross margin fell to 66.7% in Q2 and 64.1% for six months, from 72.0% and 71.0%, respectively.
- OSP: Q2 revenue declined 4.4% to $79.5 million and six-month revenue declined 0.9% to $159.5 million. Lower anti-counterfeiting demand was partly offset by 3D Sensing growth. Gross margins improved, but Q2 operating income was slightly lower year over year.
Cash, debt and liquidity
- At December 28, 2019, cash and cash equivalents were $551.8 million, short-term investments $1.6 million, and restricted cash $3.5 million. The company reported combined cash, cash equivalents, short-term investments and restricted cash of $556.9 million, up $30.4 million from June 29, 2019.
- Six-month cash flow: $69.3 million provided by operations, $10.7 million used in investing, and $25.3 million used in financing. Financing included $10.7 million of share repurchases and $15.1 million of tax withholding on vested stock awards. Capital expenditures were $13.3 million.
- Long-term debt carrying value was $589.8 million; the notes’ aggregate principal was $685.0 million, comprising $460.0 million of 1.00% convertible notes due 2024 and $225.0 million of 1.75% notes due 2023. The company reported compliance with debt covenants. Cash and cash equivalents were slightly below the debt carrying value.
- Current assets were $954.8 million and current liabilities $261.9 million. Management said existing cash and investments should be sufficient for liquidity and capital spending needs over the next 12 months.
- The company estimated $24.3 million in annualized gross cost savings from restructuring activities initiated in the prior 12 months. A $200 million repurchase authorization runs through September 30, 2021; $189.3 million remained available at quarter-end.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management expects continued investment in R&D and new products, and cautioned that market uncertainty limits visibility into revenue, seasonality and profitability. Identified risks include customer concentration, competition and pricing pressure, product mix and buying-pattern volatility, industry consolidation, trade policies and tariffs, foreign exchange, and changes in adoption of 5G and 3D Sensing.
- In October 2019, wildfires temporarily closed the Santa Rosa facility and stopped production. Northern California facilities are exposed to wildfire, earthquake and planned power-blackout risks.
- The filing identified the emerging coronavirus outbreak in China as a potential operational risk. VIAVI reported closing facilities in China and restricting employee travel in response to government measures and as a safety precaution; prolonged disruption to facilities, suppliers, contract manufacturers or customers could adversely affect results.
- Contingencies include a U.K. pension-deed dispute, with an accrued liability of £6.5 million ($8.5 million), and ordinary-course legal claims. Management said an adverse outcome in claims could have a material impact, although it did not expect existing claims to have such an impact based on its current assessment.
- Unrecognized tax benefits were $50.7 million, with $4.2 million accrued for interest and penalties; examination outcomes and potential adjustments remain uncertain. Pension plans were underfunded by $107.0 million at quarter-end.
- Acquisition earn-out liabilities had a fair value of $34.1 million and depend on acquired businesses achieving specified targets. Their valuation uses significant unobservable inputs.
Important facts for investors to verify
- Whether NE growth continues and offsets SE product run-off and weaker anti-counterfeiting demand in OSP.
- Whether SE gross-margin pressure improves, and whether announced restructuring savings are realized.
- The duration and business impact of China-related health measures, facility closures, and supply-chain disruption.
- Convertible-note principal, potential dilution or cash settlement, and the company’s ability to maintain liquidity while funding operations, pensions and repurchases.
- Developments in the U.K. pension dispute, tax examinations, and acquisition earn-out estimates.