Business context and reporting period
Viavi Solutions Inc. filed this Form 10-Q for the quarter ended April 2, 2016 (fiscal 2016 Q3), not 2015 Q3 as stated in the request metadata. The company’s continuing businesses are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). Lumentum was spun off on August 1, 2015; its historical results are presented as discontinued operations.
Key financial results
| Metric | Three months ended Apr. 2, 2016 | Comparable prior period | Nine months ended Apr. 2, 2016 | Comparable prior period |
|---|---|---|---|---|
| Revenue | $220.4 million | $212.4 million | $682.2 million | $654.1 million |
| Gross profit / margin | $131.3 million / 59.6% | $127.0 million / 59.8% | $413.6 million / 60.6% | $389.0 million / 59.5% |
| Operating income (loss) | $7.2 million | $(23.2) million | $13.5 million | $(56.8) million |
| Continuing operations, net | $27.4 million | $(35.8) million | $17.1 million | $(99.3) million |
| Net income (loss), including discontinued operations | $32.4 million | $(13.2) million | $(28.3) million | $(48.0) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $35.0 million | $34.5 million |
Quarterly revenue rose 3.8%; nine-month revenue rose 4.3%. Product revenue increased, while service revenue declined. Quarterly diluted EPS was $0.14, versus $(0.06); nine-month diluted EPS was $(0.12), versus $(0.21).
Segment performance
- Q3 NE revenue was $123.1 million, down 0.8%; gross margin was 65.6%, versus 67.0%.
- Q3 SE revenue was $35.2 million, down 11.8%; gross margin fell to 56.3% from 70.7%, reflecting weaker mature Assurance offerings, product mix, and timing of customer acceptances.
- Q3 OSP revenue was $62.1 million, up 28.3%, and operating margin improved to 42.4% from 35.7%, supported by currency anti-counterfeiting demand, favorable mix, and higher factory utilization.
Liquidity, debt, and cash flow
- At April 2, 2016, cash and cash equivalents were $437.1 million, short-term investments $555.8 million, and restricted cash $12.1 million—$1.005 billion combined.
- Current assets were $1.244 billion and current liabilities $233.5 million. The filing states management expected existing cash and investments to meet liquidity and capital spending needs over the next 12 months.
- Long-term debt had a $581.5 million carrying value against $650 million principal: 0.625% senior convertible notes due 2033. The company reported compliance with debt covenants and no short-term debt.
- Nine-month investing cash flow was $204.9 million, substantially reflecting investment sales and maturities; financing cash flow was $(143.9) million, including $137.0 million contributed to Lumentum and a $40.0 million share repurchase.
- Capital expenditures were $26.6 million for the nine months, versus $68.7 million in the prior comparable period.
Material changes, outlook, and risks
- Q3 earnings included a $39.8 million gain on sale of investments, primarily from selling 2.5 million retained Lumentum shares. This materially boosted pretax income; the company still reported $7.2 million operating income.
- The nine-month continuing-operations improvement reflected lower operating expenses and reduced restructuring and intangible amortization charges. Nine-month total net loss nevertheless included a $45.4 million loss from discontinued operations, including separation-related and tax items.
- Management cited approximately $17 million of annualized gross savings from restructuring, with some savings intended for R&D reinvestment. It expected continued decline in mature SE Assurance revenue and noted that demand, pricing, customer mix, foreign exchange, and industry consolidation create visibility and earnings volatility. No specific revenue or earnings guidance was provided.
- After quarter-end, management approved a China R&D consolidation and planned Beijing center closure, anticipating $5–$7 million of restructuring charges, mostly in fiscal Q4 2016.
- Other exposures include an $88.5 million pension underfunding, a $244.3 million retained Lumentum equity position, foreign-exchange and investment-market risks, and ordinary-course litigation. Management said disclosed risk factors had not materially changed.
Most important facts for investors to verify
- How much of reported earnings and equity value depends on the Lumentum share sale and retained investment, rather than recurring operations.
- Whether OSP’s unusually strong currency-related demand persists and whether SE can stabilize mature Assurance revenue and margins.
- Whether restructuring savings are realized without impairing product development, and whether the additional $5–$7 million charge is incurred as expected.
- The cash, tax, and other obligations remaining under the Lumentum separation agreements, and the company’s ability to manage its pension and convertible-debt commitments.