VIAVI Solutions Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 29, 2019 (52 weeks), compared primarily with the year ended June 30, 2018. Although the request metadata says “2018 Q4,” this filing is the FY2019 annual report; it also includes quarterly data. Amounts are in U.S. dollars.
Business context
VIAVI supplies network test, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical security and performance products through OSP. Key markets include communications networks, 5G and fiber deployment, anti-counterfeiting, and 3D-sensing optics. FY2019 included contributions from the acquired Cobham AvComm and Wireless business (AW), RPC Photonics, and 3Z Telecom; results are therefore not purely organic.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $1,130.3 million | $875.7 million |
| Gross profit / gross margin | $651.4 million / 57.6% | $488.4 million / 55.8% |
| Operating income | $67.4 million | $1.9 million |
| Net income (loss) | $5.4 million | $(48.6) million |
| Diluted earnings (loss) per share | $0.02 | $(0.21) |
| Cash provided by operating activities | $138.8 million | $66.0 million |
- Revenue rose 29.1%. NE revenue increased 36.9% to $737.8 million, OSP rose 32.6% to $289.1 million, and SE declined 12.7% to $103.4 million.
- Operating improvement reflected higher volume, favorable NE mix, cost management and lower SG&A as a share of revenue. FY2019 included $15.4 million of restructuring charges and $72.5 million of acquired-intangible amortization.
- Net income was modest despite improved operating income: the company recorded $31.5 million of income-tax expense, partly reflecting valuation allowances and foreign taxes. FY2018’s net loss also reflected a weak operating result.
- Cash and cash equivalents, short-term investments and short-term restricted cash totaled $526.5 million at year-end, down from $788.0 million. Working capital was $632.8 million, versus $877.3 million.
- Cash used in financing was $300.4 million, primarily from $276.9 million to redeem the 2033 convertible notes. Investing activities provided $80.6 million, including net investment maturities and sales, offset by acquisitions and $45.0 million of capital expenditures. Operating cash flow less capital expenditures was approximately $93.8 million.
- Debt at year-end comprised $225 million principal of 1.75% convertible notes due 2023 and $460 million principal of 1.00% notes due 2024; balance-sheet carrying value was $578.8 million after discounts and issuance costs. The company reported covenant compliance and believes existing cash and investments can meet requirements for the next 12 months.
Material changes, outlook and risks
- NE benefited from AW acquisition revenue, 5G-related demand and organic fiber growth; some cable revenue eased from the prior-year DOCSIS 3.1 upgrade peak. SE declined as data-center demand weakened and mature assurance support contracts ran off. OSP growth reflected banknote redesign demand and increased 3D-sensing products.
- Management expected FY2020 NSE revenue to increase, supported by 5G testing and deployment and fiber-to-the-everywhere activity. It expected 3D-sensing revenue to rise, while noting limited visibility for anti-counterfeiting revenue and no anticipated uptick until calendar 2020. No specific consolidated FY2020 revenue or earnings guidance is provided in the supplied filing text.
- Restructuring actions affected approximately 240 employees, mainly to integrate AW and shift some manufacturing to a contract manufacturer. FY2019 restructuring charges were $15.4 million; management estimated approximately $24.4 million of annualized gross savings from recent restructuring activities.
- Key risks include variable telecom and cable capital spending, uncertain 5G and 3D-sensing adoption, pricing and competitive pressure, supply constraints, acquisition integration, and execution or product-quality issues. OSP relies materially on SICPA, which represented 14.3% of FY2019 revenue; SICPA is also the exclusive marketing and sales partner for certain anti-counterfeiting pigments.
- Other exposures include international operations and foreign exchange, U.S.–China tariffs and trade uncertainty, customer concentration, potential goodwill or asset impairment, litigation and environmental obligations. A U.K. pension-related liability of about $8.3 million was accrued; management also disclosed an ongoing claim against the law firm involved.
- The company adopted ASC 606 retrospectively in FY2019, recasting prior periods; this changed the timing of some bundled software revenue recognition. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of FY2019’s 29.1% revenue growth came from acquisitions versus organic growth, particularly for NE and OSP.
- Whether FY2020 5G, fiber and 3D-sensing demand develops as management expected, and whether OSP gross-margin pressure from product mix persists.
- Cash conversion, working-capital needs and the impact of acquisition spending, restructuring and convertible-note obligations on liquidity.
- SICPA relationship and minimum-purchase commitments, customer concentration, and the timing and durability of banknote redesign programs.
- Potential dilution or cash requirements under the 2023 and 2024 convertible notes, and the assumptions supporting acquisition earn-outs of up to $63.0 million.
- Tax expense and deferred-tax valuation allowances, including the company’s ability to use substantial tax-loss carryforwards subject to ownership-change limitations.