Viavi Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 3, 2015, compared with the three months ended September 27, 2014. The current quarter had 14 weeks versus 13 weeks in the prior-year quarter. Results reflect the August 1, 2015 separation of Lumentum; its business is presented as discontinued operations.
Business context and key financial metrics
Following the separation, Viavi’s continuing businesses are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). Unless otherwise indicated, amounts are in millions of dollars.
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $229.7 | $215.3 |
| Gross profit / margin | $140.5 / 61.2% | $128.9 / 59.9% |
| Operating loss | $(2.9) | $(12.4) |
| Continuing-operations net loss | $(13.6) | $(25.8) |
| Net loss, including discontinued operations | $(67.0) | $(9.7) |
| Diluted loss per share | $(0.28) | $(0.04) |
| Cash from operating activities | $(0.3) | $40.8 |
Revenue comprised product revenue of $200.2 and service revenue of $29.5. OSP revenue was $64.2, up 48.3%; NE revenue was $117.6, down 3.2%; and SE revenue was $47.9, down 5.1%. NE and SE together reported $2.4 of operating income and a 1.5% operating margin; OSP reported $26.3 of operating income and a 41.0% margin.
At October 3, 2015, Viavi had cash and cash equivalents of $350.0, short-term investments of $541.9, and restricted cash of $11.2. Long-term debt carrying value was $568.2, representing $650.0 principal of 0.625% convertible notes due 2033. Current assets were $1,166.9 and current liabilities $282.9. Cash and investments including restricted cash totaled $903.1; management stated existing balances and investments should meet liquidity and capital-spending needs for the next 12 months. Capital expenditures were $14.2, making operating cash flow less capital expenditures approximately $(14.5).
Material changes and unusual items
- Revenue increased 6.7%, primarily from OSP’s anti-counterfeiting currency products and higher banknote printing volumes. The filing notes the extra week in the current quarter, so reported growth is not strictly like-for-like.
- Gross margin rose 1.3 percentage points, helped by lower acquired-technology amortization and favorable OSP product mix. Cost reductions and restructuring also helped improve operating results.
- The total net loss included a $53.4 loss from discontinued operations in the statement of operations. The note reports a $53.7 Lumentum discontinued-operations loss, partly offset by $0.3 of income from the previously sold hologram business. Lumentum’s loss included a $35.0 tax provision and $14.0 of separation-related transaction and advisory costs.
- Viavi distributed approximately 80.1% of Lumentum and retained approximately 19.9%, or 11.7 million shares. The retained stake was valued at $184.3 at quarter-end; an $81.7 unrealized investment gain was recorded in other comprehensive income.
- Cash flow included $136.7 contributed to Lumentum and $35.8 proceeds from selling Lumentum preferred stock. Investing cash inflow of $110.0 primarily reflected investment maturities and sales, not operating cash generation.
- Reported continuing-operations tax expense was $0.8 despite a pre-tax loss; the filing cites valuation allowances, intraperiod tax allocation, and other tax effects. Unrecognized tax benefits were $36.9.
Outlook, commentary, and risks
No specific revenue or earnings guidance is provided. Management expects continued investment in R&D and new products, ongoing attention to SG&A reduction, and approximately $38 million in annualized gross cost savings from restructuring activities initiated over the prior 12 months, with some savings reinvested in R&D.
Management cautioned that revenue, margins, and profitability may remain variable. Risks cited include pricing pressure and competition, customer concentration, product mix and buying-pattern volatility, industry consolidation, economic uncertainty in Europe, Russia, and Brazil, foreign-exchange movements, and possible disruption to customer and partner relationships following the separation. Other exposures include the market value of the retained Lumentum shares, investment-market risks, pension funding needs, restructuring lease assumptions, and uncertain legal claims. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- How post-separation revenue, margins, and costs trend across NE, SE, and OSP, accounting for the extra week in this quarter.
- The financial and tax consequences of the Lumentum separation, including the retained shareholding, separation commitments, and any further costs or reimbursements.
- Whether operating cash flow recovers after separation-related working-capital movements and cash contributions to Lumentum.
- The convertible notes’ terms and potential dilution or cash settlement implications; the filing says the company was compliant with debt covenants.
- The assumptions behind tax valuation allowances, restructuring savings and lease recoveries, and pension obligations.