VIAVI Solutions Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter ended January 2, 2021; comparisons are with the quarter ended December 28, 2019. The six-month period also ended January 2, 2021. Amounts are in millions except per-share data.
Business context
Viavi provides network testing, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical products through Optical Security and Performance Products (OSP). The quarter’s results reflect COVID-19-related pressure on NE and SE, partly offset by OSP growth.
Key financial metrics
| Metric | Three months ended Jan. 2, 2021 | Prior-year quarter | Six months ended Jan. 2, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $299.9 | $313.7 | $584.6 | $613.5 |
| Gross profit / margin | $180.1 / 60.1% | $189.5 / 60.4% | $349.5 / 59.8% | $363.9 / 59.3% |
| Operating income | $42.3 | $45.0 | $73.6 | $65.7 |
| Net income | $21.9 | $28.0 | $36.2 | $34.8 |
| Diluted EPS | $0.09 | $0.12 | $0.16 | $0.15 |
| Operating cash flow | Not separately provided for the quarter | $132.6 | $69.3 |
- Quarterly revenue declined 4.4%; product revenue fell 7.0% to $262.1, while service revenue rose 18.9% to $37.8. Six-month revenue declined 4.7%.
- Quarterly operating income decreased despite lower operating expenses; six-month operating income increased. Six-month operating cash flow rose substantially year over year.
- At January 2, cash and cash equivalents were $644.2, total current assets $1,046.4 and current liabilities $263.6. The company reported $648.8 of cash, short-term investments and short-term restricted cash in aggregate.
- Debt carrying value was $612.4, comprising convertible notes; no borrowings were outstanding under the $300 million revolving facility. The company reported compliance with debt covenants.
- Six-month investing cash use was $18.0, including $18.5 of capital expenditures. Financing cash use was $35.6, including $23.8 of share repurchases and $11.8 of withholding taxes on vested stock awards.
Material changes and segment performance
- Quarterly NE revenue fell 10.9% to $180.9 and SE revenue fell 17.3% to $25.8. Management attributed declines to COVID-19 impacts on customer operations, shipments and demand, including field and lab instruments and SE products.
- OSP revenue rose 17.2% to $93.2, supported by anti-counterfeiting and 3D Sensing products. For the six months, OSP revenue increased 21.9% to $194.4.
- Quarterly NE gross margin declined to 62.6% from 66.4%; OSP gross margin increased to 62.7% from 54.8%. Consolidated gross margin was nearly flat year over year.
- Quarterly SG&A fell 7.9% to $79.5, primarily on lower sales commissions, travel and entertainment costs. Six-month SG&A fell 10.4%.
- Quarterly net income declined while six-month net income increased. The quarterly tax provision increased to $12.5 from $9.9; management cited foreign and state taxes and changes in valuation allowances.
Outlook, risks and contingencies
- No specific financial guidance is included in the provided filing text. Management said it could not reasonably estimate COVID-19’s ultimate future effects; a prolonged disruption could materially hurt revenue growth and profitability. Management believes existing cash and investments should cover liquidity and capital spending needs for the next 12 months.
- Risks include renewed COVID-19 restrictions and variants, supply-chain and shipping disruption, weaker customer spending, competitive and pricing pressures, customer concentration, product mix, and uncertain adoption of 5G and other technologies. Management also cited foreign exchange, trade measures and tariffs, and international operating risks.
- Pension plans were underfunded by $117.6 at January 2, 2021. The company expects approximately $10.5 of fiscal 2021 pension cash outlays and had incurred $3.1 by the reporting date.
- A UK pension-related matter remained accrued at £6.5 million ($8.8 million); the company is pursuing a deed rectification claim and a claim against the law firm involved. Other ordinary-course legal matters were described as uncertain; management did not expect them to have a material adverse effect, but noted an unfavorable outcome could be material.
- Unrecognized tax benefits were $48.4, with $3.9 accrued for interest and penalties. The company said the timing and outcome of tax examinations are uncertain.
- The CFO resigned effective November 20, 2020; an interim CFO was appointed and a successor search commenced. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether NE and SE demand and margins recover as COVID-19 restrictions, customer operations and supply conditions evolve.
- Whether OSP growth, particularly in 3D Sensing and anti-counterfeiting, is sustained and offsets weakness in network businesses.
- Cash-flow durability, capital spending needs, and the company’s ability to service or refinance $685.0 million principal amount of convertible notes as maturities approach.
- Developments in pension funding, the UK pension dispute, tax examinations and other legal contingencies.
- Effects of CFO transition, share repurchases, and any changes in management’s outlook or the risks described in the filing.