VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 28, 2019; compared with the three months ended September 29, 2018. Amounts are in U.S. dollars and, unless noted, millions. Unaudited.
Business context and results
VIAVI provides network testing, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical products through Optical Security and Performance (OSP). The quarter’s growth was led by NE; SE revenue declined.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $299.8 | $268.5 |
| Gross profit / margin | $174.4 / 58.2% | $150.4 / 56.0% |
| Operating income (loss) | $20.7 | $(1.2) |
| Net income (loss) | $6.8 | $(15.3) |
| Diluted EPS | $0.03 | $(0.07) |
| Cash from operations | $31.3 | $27.6 |
Revenue, margins and year-over-year changes
- Revenue increased 11.7%. Product revenue rose 9.8% to $264.8; service revenue rose 27.7% to $35.0.
- NE revenue increased 20.9% to $198.9, with gross margin improving to 64.4% from 62.6%. Management cited 5G testing, fiber demand associated with 400Gb upgrades, and stronger North American cable-provider spending.
- SE revenue fell 20.2% to $20.9; gross margin declined to 60.3% from 69.8%. The filing attributes the decline to mature product runoff, weaker Growth Assurance demand, delayed customer deals, lower Data Center demand and fixed-cost under-absorption.
- OSP revenue grew 2.8% to $80.0; gross margin increased to 54.1% from 50.6%. 3D Sensing growth was partly offset by lower anti-counterfeiting revenue.
- Consolidated gross margin rose 2.2 percentage points, primarily on higher volume and favorable NE and OSP product mix. R&D increased 20.9% to $51.5; SG&A increased 10.4% to $93.2. Restructuring charges fell to $0.3 from $14.8.
- Interest expense declined to $8.3 from $10.1. Income tax expense was $8.3 versus $5.7; management says taxes primarily reflect certain foreign and state jurisdictions and deferred-tax valuation allowances.
Cash, debt and liquidity
- Cash and cash equivalents were $525.3 at quarter-end; short-term investments were $1.5 and restricted cash was $3.5. Combined cash, investments and restricted cash totaled $530.3, up $3.8 from fiscal year-end.
- Operating cash flow was $31.3; capital expenditures were $7.1; investing activities used $5.9. Financing activities used $7.8, including $7.6 of withholding taxes on vested restricted stock and $1.5 for share repurchases.
- Long-term debt carrying value was $584.3, against $685.0 of principal: $460.0 of 1.00% convertible notes due 2024 and $225.0 of 1.75% notes due 2023. The company reported compliance with debt covenants. Management believes available cash will meet liquidity and capital-spending needs for at least the next 12 months.
- Current assets were $914.2 and current liabilities $282.5. The filing reports $104.8 of underfunding in pension plans; it expected approximately $7.8 of fiscal 2020 pension-related cash outlays.
Outlook, risks and unusual items
- For fiscal 2020, management expects NSE revenue growth, supported by 5G testing and deployment and fiber-to-the-everywhere investment. It expects OSP 3D Sensing growth from wider mobile-device adoption, but says visibility into banknote redesign demand is limited. No specific quarterly or full-year revenue or earnings forecast is provided.
- Management cited macroeconomic uncertainty, foreign-exchange movements, customer concentration, competition and pricing pressure, product mix and buying-pattern variability, industry consolidation, trade policies, and the pace of adoption of 5G and 3D Sensing as risks to performance.
- In October 2019, after quarter-end, wildfires prompted a temporary closure and production stoppage at the Santa Rosa facility. The filing also identifies potential operational disruption from Northern California wildfire and earthquake exposure and planned utility blackouts.
- Other notable items include $1.7 of increased fair value in contingent acquisition earn-out liabilities during the quarter; total contingent consideration fair value was $40.1. The company adopted ASC 842 leases, recording $35.5 of right-of-use assets and $37.0 of lease liabilities, with no material effect on operating results or cash flows.
- A U.K. pension-deed dispute remained accrued at £6.5 million ($8.0). The company also reported $50.4 of unrecognized tax benefits and $3.4 accrued for related interest and penalties. Management believes ordinary-course claims are not expected to have a material adverse effect, but notes outcomes remain uncertain.
- Management estimated annualized gross savings of approximately $24.3 from recent restructuring activity. Disclosure controls were assessed as effective; the filing reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile restructuring accrual disclosures: the financial-statement note reports $7.5 at September 28, 2019, while MD&A states $11.4.
- Assess whether NE growth can offset continued SE weakness, and monitor customer spending and delayed deals in Data Center and Assurance markets.
- Track realization of the stated restructuring savings against ongoing R&D and SG&A investment and acquisition-related costs.
- Review convertible-note maturities, pension funding needs, contingent acquisition payments and tax examination exposures.
- Monitor wildfire-related production interruptions and the effect of foreign exchange, trade policy, competition and customer concentration on results.