Why Is Viavi Solutions (VIAV) Down 10.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Viavi Solutions (VIAV). Shares have lost about 10.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Viavi Solutions due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Viavi Beats Q2 Earnings Estimates on Record Revenues

Viavi reported impressive second-quarter fiscal 2020 (ended Dec 28, 2019) results, wherein the bottom line and the top line surpassed the respective Zacks Consensus Estimate, and increased year over year. The San Jose, CA-based company delivered record revenues, non-GAAP operating margin and non-GAAP earnings per share.

Net Income

On a GAAP basis, net income from continuing operations increased to $28 million or 12 cents per share from $15.4 million or 7 cents per share in the year-ago quarter, supported by higher operating income.

For the December quarter, non-GAAP net income came in at $55.6 million or 23 cents per share compared with $50.9 million or 22 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 4 cents.

Revenues

Quarterly total net revenues grew 2.2% year over year to $313.7 million and exceeded the company’s guided range of $292 million to $312 million. Both NSE (Network and Service Enablement) and OSP (Optical Security and Performance Products) business segments delivered strong performance. The top line surpassed the consensus estimate of $303 million.

By segments, revenues from Network Enablement were up 3.8% from the year-ago quarter to $203 million, driven by strong performance in Fiber, Wireless and Cable products. Service Enablement revenues increased 10.6% to $31.2 million led by strength in the company’s Data Center products from improved market conditions and execution. Viavi’s Growth Assurance products saw year-over-year growth, which more than offset the anticipated revenue runoff in its Mature Assurance products.

NSE’s gross margin was 66.4%, up 110 basis points (bps) year over year. Its operating margin of 16% increased 130 bps from year-ago level, reflecting gross margin improvement and favorable operating leverage. This exceeded the guided range of 12% to 14% and also registered a new NSE record.

OSP revenues reduced 4.4% year over year to $79.5 million due to decline in the core OSP business partly offset by growth in 3D sensing from increased demand. The figure, however, reached the high end of the guided range of $76 million to $80 million.

OSP’s gross margin of 54.8% expanded 460 bps owing to efficiencies and higher absorption of manufacturing overhead. Operating margin of 38.2% exceeded the guided range, and grew 80 bps year over year, reflecting higher gross margin partly offset by increased investments in growth areas.

Region wise, Viavi generated 37.2% of total net revenues from the Americas, 36% from the Asia-Pacific and 26.8% from EMEA (Europe, Middle East and Africa).

Other Details

Overall non-GAAP gross profit improved to $199.2 million from $187.8 million with respective margins of 63.5% and 61.2%. Non-GAAP operating income was $67.9 million compared with $63.9 million in the prior-year quarter with respective margins of 21.6% and 20.8%. Non-GAAP operating margin exceeded management’s guided range of 18% to 20%.

Cash Flow & Liquidity

During the fiscal second quarter, Viavi generated $38 million of cash from operations. As of Dec 28, 2019, the company had $551.8 million in cash and equivalents with $589.8 million of long-term debt.

The company repurchased nearly $9.2 million worth of shares at an average cost of $13.93 per share in the quarter. Of the $200 million authorized share buyback program, announced in September 2019, Viavi has repurchased $10.7 million worth of shares to date.

Fiscal Q3 Outlook

For third-quarter fiscal 2020, Viavi projects net revenues of $278 million (+/- $10 million). Revenues for NSE and OSP segments are expected to be $212 million (+/- $8 million) and $66 million (+/- $2 million), respectively. While non-GAAP operating margin is estimated to be 15.5% (+/- 1%), non-GAAP earnings per share are expected between 13 cents and 15 cents.

The company expects 5G Wireless field deployment (starting in late calendar 2020), increased penetration of 3D Sensing applications in mobile devices, and fiber network densification to drive business growth.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -11.77% due to these changes.

VGM Scores

At this time, Viavi Solutions has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Viavi Solutions has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.