Financial Performance Overview for VIAVI Solutions Inc.

VIAVI Solutions Inc. is a global provider of network test, monitoring and assurance solutions as well as light management technologies. The company operates three main business segments: Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP).

In fiscal year 2024, VIAVI faced a challenging business environment, particularly in the North American service provider and enterprise customer markets. Demand for the company’s Field Instruments remained at a “maintenance” level due to the absence of major network build-outs and upgrades by major wireless network providers. Additionally, demand for NE products was impacted by reduced research and development (R&D) and capital expenditures by wireless network equipment manufacturers in response to 5G deployment cutbacks by wireless operators.

Financial Highlights

• Net revenue of $1.0 billion, down 9.6% year-over-year
• GAAP operating margin of 2.1%, down 530 basis points year-over-year
• Non-GAAP operating margin of 11.5%, down 410 basis points year-over-year
• GAAP diluted EPS of $(0.12), down $0.23 or 209.1% year-over-year
• Non-GAAP diluted EPS of $0.33, down $0.22 or 40.0% year-over-year

The decline in net revenue was primarily due to conservative spending by service providers and network equipment manufacturers (NEMs). VIAVI’s GAAP and non-GAAP operating margins decreased due to the revenue decline, partially offset by lower operating expenses. GAAP and non-GAAP earnings per share (EPS) also decreased year-over-year due to the lower revenue.

In fiscal 2024, VIAVI generated $116.4 million in operating cash flow and deployed $19.5 million or 1.9% of revenue towards capital expenditures. The company also retired its 2024 Senior Convertible Notes upon maturity and repurchased 2.3 million shares of common stock for $20.0 million.

Segment Performance

The table below summarizes the performance of VIAVI’s three business segments:

Segment	Net Revenue	Gross Profit	Gross Margin
Network Enablement (NE)	$615.7 million	$382.3 million	62.1%
Service Enablement (SE)	$86.3 million	$57.3 million	66.4%
Optical Security and Performance (OSP)	$298.4 million	$154.9 million	51.9%

NE net revenue decreased 12.9% year-over-year due to lower volume in Fiber and Access, Wireless and Lab and Production, partially offset by higher AvComm revenue. NE gross margin declined 1.2 percentage points to 62.1%.

SE net revenue decreased 8.2% primarily due to lower Assurance and Data Center revenue. SE gross margin decreased 0.2 percentage points to 66.4%.

OSP net revenue decreased 2.1% driven by lower anti-counterfeiting and government revenues, partially offset by higher consumer and industrial revenue. OSP gross margin decreased 0.1 percentage point to 51.9%.

Liquidity and Capital Resources

VIAVI believes its existing liquidity, including operating cash flows, credit facility capacity, and access to capital markets, will continue to be adequate to meet its liquidity needs over the next twelve months and beyond. However, the company noted several factors that could positively or negatively impact its liquidity position, including global economic conditions, changes in working capital, increased capital expenditures, customer payment patterns, and potential investments or acquisitions.

As of June 29, 2024, VIAVI had $481.8 million in cash, cash equivalents and restricted cash. The company also had $153.3 million in available borrowing capacity under its $300 million senior secured asset-based revolving credit facility. During fiscal 2024, VIAVI generated $116.4 million in operating cash flow and used $21.6 million in investing activities, primarily for capital expenditures. The company used $125.7 million in financing activities, including $96.4 million to retire the 2024 Senior Convertible Notes and $20.0 million for share repurchases.

VIAVI also has significant contractual obligations, including $400 million in 3.75% Senior Notes due 2029, $250 million in 1.625% Senior Convertible Notes due 2026, and $101.1 million in purchase obligations. The company’s pension and post-retirement benefit payments are expected to total $53.7 million over the next several years.

Outlook and Strategic Priorities

Looking ahead to fiscal 2025, VIAVI expects the conservative spending environment to persist through the end of calendar 2024, with a gradual demand recovery in the first half of calendar 2025. The company’s long-term focus remains on executing its strategic priorities to drive revenue and earnings growth, capture market share, and continue optimizing its capital structure.

VIAVI’s key strategic priorities include:

1. Defending and consolidating leadership in core business segments
2. Investing in secular trends to drive growth and expand Total Addressable Market (TAM)
3. Extending VIAVI technologies and platforms into adjacent markets and applications
4. Continuing productivity improvements in Operations, R&D and Selling, General and Administrative (SG&A)

Strengths and Weaknesses

Strengths:

• Diversified portfolio of network solutions and optical technology products and services
• Leading market positions in core business segments
• Ongoing focus on operational efficiency and cost optimization
• Strong liquidity position and access to capital markets

Weaknesses:

• Exposure to volatility in service provider and enterprise customer markets
• Reliance on a limited number of suppliers and contract manufacturers
• Declining revenue and profitability in recent fiscal years
• Competitive pressures, particularly from Asia-based competitors

Outlook and Risks

VIAVI’s financial results and long-term growth will continue to be driven by revenue growth, non-GAAP operating income, non-GAAP operating margin, non-GAAP diluted EPS, and cash flow from operations. The company faces several industry and market risks and uncertainties, including:

• Uncertainty around the timing of customer procurement decisions on infrastructure maintenance, upgrades, and new investments
• Uncertainty about the speed of adoption of 5G technology at a commercially viable scale
• Pricing pressures due to a highly concentrated customer base and increasing competition
• Product mix variability and fluctuations in customer buying patterns
• Ongoing industry consolidation and its impact on VIAVI’s customer base
• The impact of global trade policies, tariffs, and sanctions
• Regulatory or economic developments and technology challenges that could slow the adoption of 5G, 3D sensing, and other emerging technologies

Despite these challenges, VIAVI remains positive on its long-term growth drivers and is focused on executing its strategic priorities to drive shareholder value over the long term.