VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended April 3, 2021, compared with the periods ended March 28, 2020. Although the request metadata says 2020 Q3, this filing covers Viavi’s fiscal 2021 third quarter. Viavi provides network test, monitoring and assurance solutions and optical security and performance products.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $303.4 million | $256.2 million | $888.0 million | $869.7 million |
| Gross profit / margin | $182.0 million / 60.0% | $146.8 million / 57.3% | $531.5 million / 59.9% | $510.7 million / 58.7% |
| Operating income / margin | $35.9 million / 11.8% | $9.1 million / 3.6% | $109.5 million / 12.3% | $74.8 million / 8.6% |
| Net income (loss) | $11.8 million | $(32.8) million | $48.0 million | $2.0 million |
| Diluted EPS | $0.05 | $(0.14) | $0.21 | $0.01 |
| Operating cash flow | Not separately stated | Not separately stated | $180.7 million | $108.4 million |
For the quarter, revenue grew 18.4% year over year. Higher volume and favorable product mix lifted gross margin; the operating margin also improved. Nine-month revenue rose 2.1%, with stronger OSP revenue offsetting declines in Network Enablement and Service Enablement. Nine-month operating cash flow increased by $72.3 million year over year.
Segments and revenue drivers
- Network Enablement (NE): Q3 revenue increased 16.5% to $190.9 million; nine-month revenue declined 5.6% to $533.9 million. The filing attributes the nine-month decline to COVID-related impacts on customer operations and demand.
- Service Enablement (SE): Q3 revenue fell 12.1% to $20.3 million; nine-month revenue fell 10.2% to $67.5 million, reflecting weakness in Data Center and Growth Assurance products. Q3 gross margin declined to 61.1% from 69.3%.
- Optical Security and Performance Products (OSP): Q3 revenue rose 33.2% to $92.2 million; nine-month revenue rose 25.3% to $286.6 million. Growth in anti-counterfeiting and 3D Sensing products supported higher margins.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $672.2 million at April 3, 2021, versus $539.0 million at June 27, 2020. Cash, cash equivalents and restricted cash totaled $682.0 million; the company also reported $1.6 million of short-term investments.
- Current assets were $1,080.0 million and current liabilities $273.1 million. The company said existing cash and investments should meet liquidity and capital-spending requirements over the next 12 months.
- Long-term debt carrying value was $618.1 million, representing $685.0 million principal of convertible notes due 2023 and 2024, net of discounts and issuance costs. No amounts were drawn on the $300 million revolving credit facility; the company reported compliance with debt covenants.
- Nine-month investing cash use was $24.8 million, including $26.7 million in capital expenditures. Financing cash use was $43.2 million, including $31.1 million of share repurchases and $14.8 million of tax withholding on vested stock awards.
- The company reported a $111.2 million pension-plan underfunding at April 3, 2021.
Material changes, outlook and risks
- Q3 revenue gains in NE and OSP were partly offset by lower SE revenue. OSP’s improved product mix and factory utilization contributed to higher company and segment margins.
- The prior-year quarter included a $31.6 million withholding-tax charge related to repatriation of foreign earnings. This contributed to the prior-year net loss and makes the year-over-year net-income comparison less representative of underlying operating change. Q3 FY2021 income-tax expense was $14.2 million on $26.0 million of pretax income.
- No specific financial guidance for future periods is provided in the supplied filing text. Management said COVID-19’s future financial impact could not be reasonably estimated and could materially affect revenue growth and profitability if disruptions persist.
- Risks highlighted include pandemic-related customer and supplier disruption, shipping and component availability, and possible operational effects at the Pune, India shared-services center. Other risks include competition and pricing pressure, customer concentration, foreign-exchange exposure, trade restrictions, technology transitions such as 5G and virtualization, and product execution and supply-chain challenges.
- Ordinary-course claims are disclosed, along with a U.K. pension-related liability accrued at £6.5 million, or $9.0 million. Standby letters of credit, performance bonds and other claims totaled $9.8 million and were collateralized by restricted cash. The company reported no material change in contractual commitments and no material off-balance-sheet arrangements.
- After quarter-end, Viavi purchased land and a building in Chandler, Arizona, for $14.3 million on April 26, 2021.
- Management concluded disclosure controls and procedures were effective as of April 3, 2021; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether NE and SE demand recovered from pandemic-related weakness, and whether component, logistics or India operating disruptions affected subsequent results.
- Whether OSP growth in anti-counterfeiting and 3D Sensing is sustainable and how product mix may affect margins.
- Convertible-note terms, potential dilution or cash settlement exposure, and the company’s ability to service debt while maintaining liquidity.
- The drivers and sustainability of operating cash-flow growth, capital spending, share repurchases and pension funding needs.
- The resolution and potential cash impact of tax examinations, the U.K. pension matter and other contingencies.