VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended October 1, 2022. Comparisons are with the three months ended October 2, 2021 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Viavi supplies network test, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical security and performance products through OSP. Quarterly revenue declined 5.1% year over year to $310.2 million, reflecting lower product sales partly offset by growth in services.
| Metric | Q1 FY2023 | Comparison / change |
|---|---|---|
| Product revenue | $267.7 million | Down 7.4% |
| Service revenue | $42.5 million | Up 12.7% |
| Gross profit / margin | $184.8 million / 59.6% | $195.0 million / 59.7% |
| Operating income / GAAP margin | $49.8 million / 16.1% | $46.9 million / 14.4% |
| Net income (loss) | $32.6 million | Prior period loss of $54.8 million |
| GAAP diluted EPS | $0.14 | Prior period loss of $0.24 per share |
| Non-GAAP operating margin | 21.7% | Down from 22.7% |
| Non-GAAP diluted EPS | $0.23 | Down from $0.24 |
Segments and material changes
- NE: Revenue fell 4.9% to $194.9 million, mainly on lower Field Instruments and Wireless volumes. Gross margin was 64.4%, versus 64.8%.
- SE: Revenue rose 4.3% to $24.0 million, primarily reflecting recent acquisitions; gross margin improved to 66.7% from 63.9%.
- OSP: Revenue declined 7.7% to $91.3 million, driven by lower consumer, industrial and anti-counterfeiting volumes. Gross margin fell to 56.7% from 57.7%, with lower revenue and unfavorable manufacturing variances cited.
- GAAP operating income increased despite lower sales, while non-GAAP operating margin and EPS declined. The year-over-year GAAP net-income comparison also reflects the prior-year $85.9 million loss on convertible-note settlements.
Cash flow, balance sheet and capital allocation
- Operating cash flow was $26.6 million, down from $53.4 million. The company cited working-capital uses, including lower accrued payroll and taxes payable and reduced deferred revenue.
- Investing cash outflow was $29.7 million, including $14.8 million of capital expenditures and $15.5 million for acquisitions. Financing cash outflow was $26.8 million, including $18.7 million of share repurchases and $11.1 million of tax withholding on vested stock awards.
- Cash and cash equivalents were $512.6 million at quarter-end, compared with $559.9 million at July 2, 2022. Cash, cash equivalents and restricted cash totaled $525.0 million, down $47.8 million during the quarter.
- Debt carrying value was $684.9 million: $68.0 million short-term and $616.9 million long-term. The company reported compliance with debt covenants. Its $300 million asset-based revolver had no borrowings and approximately $177.7 million of available capacity.
- In September, the board authorized a new stock repurchase plan of up to $300 million, effective October 1, replacing the expired $200 million plan. The quarter’s $18.7 million repurchases were under the prior plan.
- Quarter-end current assets were $950.8 million and current liabilities were $333.2 million. Pension plans were underfunded by approximately $54 million; plan assets had fallen about 13.8% since July 2, 2022.
Outlook, risks and unusual items
- Management expects macroeconomic headwinds and end-market demand volatility to persist in the near term. It gave no specific financial guidance in the provided filing text.
- Management cited long-term growth drivers in 5G wireless, fiber, 3D sensing and resilient positioning, navigation and timing (PNT). Priorities include defending core businesses, investing in secular trends and adjacent markets, and improving productivity.
- Risks highlighted include inflation and higher raw-material, shipping and energy costs; supply-chain and component constraints; foreign-exchange exposure; customer concentration and pricing pressure; competition; and uncertain adoption of 5G and other emerging technologies. COVID-19 disruption and geopolitical tensions, including Russia-Ukraine and China-Taiwan risks, could affect demand, supply and operations. Viavi suspended transactions in Russia in February 2022; regional sales were described as not material to consolidated revenue or net income.
- A favorable U.K. court decision removed a pension-related obligation, and Viavi reversed a £5.7 million ($6.7 million) accrued liability, recording a gain that reduced SG&A expense. This benefited current-period results and operating cash flow reconciliation.
- On October 4, 2022, after quarter-end, Viavi acquired Jackson Labs Technologies for $53.0 million net of cash acquired, subject to working-capital adjustments, with up to $117.0 million of additional earn-outs tied predominantly to revenue targets. Purchase accounting was not yet complete.
- Other matters to monitor include $50.0 million of unrecognized tax benefits and ordinary-course legal claims. Management said it could not estimate the full range of possible tax examination adjustments; it did not expect gross unrecognized tax benefits to change materially over the next 12 months.
Most important facts for investors to verify
- Whether revenue and demand stabilize in NE and OSP, and whether SE growth continues.
- Whether margin performance improves, particularly given lower non-GAAP margin and cost, mix and manufacturing pressures.
- Whether operating cash flow recovers after working-capital outflows and how cash is allocated among acquisitions, debt obligations and the new repurchase plan.
- The timing and funding of the $68.1 million principal amount of 2023 convertible notes, due June 2023, and the remaining convertible-note and 2029-note obligations.
- Jackson Labs’ earn-out exposure and integration, the pension funding outlook, and developments in tax examinations and other contingencies.