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Delayed Nasdaq  -  04:00 2022-12-02 pm EST
11.15 USD   -1.85%
12/02Is the job report good or bad news?
12/02Stifel Initiates Viavi With Hold rating, Sets $12 Price Target
12/02Analyst recommendations: Blackstone, BT Group, Ecolab, GSK, Sainsbury...
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Fitch Affirms Viavi's IDR at 'BB'; Outlook Stable

09/23/2022 | 07:29am EST

Fitch Ratings has affirmed the Long-Term Issuer Default Rating of Viavi Solutions Inc. (VIAVI) at 'BB'.

Fitch has also affirmed VIAVI's senior unsecured notes at 'BB'/'RR4'. The Rating Outlook is Stable.

The Rating and Outlook reflect VIAVI's leadership position in wireless and wireline test and measurement sub-sectors that benefit from secular trends. In addition, relative to peers, the company's anti-counterfeiting pigments business reduces cyclicality. Under Fitch's base case, VIAVI's credit protection metrics may test Fitch's positive rating sensitivities. However, Fitch believes rating upside is not warranted as the continued commitment to a gross leverage target of below 3.5x is suggestive of potential for future leveraging transactions.

Key Rating Drivers

Strong Market Position: VIAVI is a top five provider in the test and measurement space and enjoys leading market positions in wireline cable, access, metro and transport, fiber, wireless RAN-to-core, as well as land-mobile and military radio, navigation, communication and transponders. Additionally, VIAVI is a leader in anti-counterfeiting pigment materials as well as 3D sensing optical filters and diffusers used in mobile phones.

Industry Trends Spur Demand: VIAVI benefits from exposure to both development and field deployment of wireless and wireline communication technologies. Increased fiber deployment in homes, data centers and wireless backhaul increases demand for VIAVI's test and measurement offerings applicable to client manufacturing operations and its network management solutions, while development of 800 Gbit/s and 1.6 Tbit/s ethernet speeds support demand for module prototype and lab-test solutions.

Similarly, transition to 5G wireless has benefited VIAVI through relationships with service providers that provide demand growth as their networks are built out, while 6G development supports deeper engagement with key wireless equipment providers.

Finally, the company's 3D sensing offering for mobile phone applications has grown in the iOS ecosystem and the potential for eventual adoption within android-based phones may significantly expand market potential. Growth from ADAS automotive applications should also support demand for VIAVI's optical filters and diffusers.

Diversification Outweighs Customer Concentration: VIAVI's revenue composition includes about 70% from the network and service enablement segment (NSE), inclusive of core test and measurement and network optimization, and approximately 30% attributed to the highly entrenched optical security and performance products (OSP) segment, which primarily provides the anti-counterfeiting pigments needed for physical currency.

This secondary source of revenue helped to offset demand declines in the NSE segment during the pandemic. For FY21 NSE segment revenue declined by 1.4%, while the OSP segment increased by 25.8%, resulting in overall VIAVI revenue rising by 5.5%. The counter cyclicality of the anti-counterfeiting business is driven by fiscal and monetary stimulus support programs that drive bank note growth during times of macroeconomic stress.

While the government's large stimulus response to the pandemic cannot be assumed for typical economic downturns, the fundamental countercyclical nature of the anti-counterfeiting business can be relied upon to provide some offset to any economic driven demand fall off in wireless and wireline end-markets. Fitch views this diversification benefit as partially offsetting the customer concentration associated with the anti-counterfeiting business. SICPA Holding SA Company (SICPA) generated 14% of VIAVI's net revenue in FY22 and the partners maintain a strategic alliance, to market the anti-counterfeiting pigments developed and manufactured by VIAVI to monetary authorities globally.

Improved Operating Leverage: Since VIAVI (formerly JDS Uniphase) separated from Lumentum Holdings, Inc. in 2015, the company has made meaningful progress in driving operating leverage in its business, increasing its non-GAAP operating margin from 13% in FY16 to 22% in FY22. Management achieved this through focused investments in growth areas (fiber, 5G and 3D sensing), divestitures of non-core businesses, increased operating efficiency through significant restructuring, and leveraging service provider networks and channel partners for distribution.

Additionally, increased scale (FY16 revenue of $900 million has grown to $1.3 billion in FY22) has yielded meaningful operating leverage, and has contributed to management's recently updated target model seeking to achieve growth of 4%-6% per annum and operating margins of 23.5%-25.5% by FY25. Under Fitch's growth and margin assumptions, which are conservative relative to management's, VIAVI's operating EBITDA margin is expected to be sustained over 25%, versus an average of about 20% over the last five years.

Conservative Financial Policy: VIAVI maintains an explicit gross leverage target of below 3.5x. Since the time of Fitch's initial ratings in 2021, VIAVI's gross leverage has remained modestly above 2.0x, well below the company's stated upper threshold and testing Fitch's positive sensitivity of 2.0x. The current leverage posture provides meaningful headroom to accommodate investment, end market cyclicality, and acquisitions, of which VIAVI has completed $660 million tuck-ins since 2017.

Absent leveraging transactions and under conservative growth and margin assumptions, Fitch sees VIAVI's credit metrics remaining above positive rating sensitivities over the medium term. Positive rating momentum could be warranted as the company completes its capital structure transition from convertible notes to traditional high-yield unsecured debt and commits to a firmer leverage target. However, Fitch believes the company's maintenance of its current financial policy at its recent analyst day in September of 2022 is indicative of the desire to maintain the flexibility provided by the current rating to execute on growth, profitability and balance sheet strategies over the longer term.

Derivation Summary

VIAVI's ratings reflect its market leadership as a test and measurement provider in certain segments of the communications end market, as well as complimentary positions in anti-counterfeiting pigment materials and 3D sensing optical filters. The company is a competitor of peer Keysight Technologies, Inc. (BBB/Stable), which enjoys larger overall revenue scale approaching $5 billion versus $1.3 billion for the FYE period ending July 2, 2022 and higher operating EBITDA margins above 30% compared with mid 20s.

Additionally, post the note offering executed at the time of Fitch's initial ratings, VIAVI has maintained a fairly conservative capitalization, as evidenced by 2.2x total debt with equity credit to operating EBITDA leverage for FY22, compared with peer Keysight, where leverage for the FY22 is expected to close at 1.1x. VIAVI targets gross leverage not to exceed 3.5x, while Keysight targets 2.0x on average.

Peer Coherent Corp. (fka II-VI Incorporated; BB/Stable), is a competitor of VIAVI's optical security and performance products segment, which produces optical filters used in 3D sensing. Beyond optical filters, Coherent's product portfolio bears less in common with VIAVI. The former also enjoys greater revenue scale than VIAVI at $3.1 billion, but operating EBITDA margins are roughly in line in the mid 20's. Coherent's gross leverage is elevated above 4.0x due to recent acquisitions that will see revenue scale to in excess of $5.0 billion, with the opportunity to improve the combined entity's margin to more than 26%.

Fitch believes a 'BB' IDR is warranted as the company's market leadership position, strong secular gross drivers, diversification and operating improvements are weighed against financial policies, potential for leveraging transactions elevated leverage and operating metrics relative to peers.

No country-ceiling, parent/subsidiary or operating environment aspects affect the rating.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer

Revenue growth of 1% in FY23 due to reduced service provider spend partially offset by countercyclicality of OSP segment, and mid-single digit growth per annum thereafter due to demand from 5G infrastructure buildout, fiber upgrade cycle, as well as testing and development of 6G wireless and 800 gigabit/1.6 terabit ethernet;

Maintenance of a 25% margin, with modest improvement over the next two to three years, reflecting fairly stable NSE gross margins, modestly declining OSP margins and improved operating leverage with growth;

Capex normalizing to 4%-5% of revenue due to completion of new Arizona facility;

Repurchase of remaining 2023 convertible notes and refinancing of 2024 convertible notes with upsized issuance;

Opportunistic share repurchases in fulfillment of $300 million authorization, absent material M&A transactions;

M&A incremental to the rating case and any corresponding leverage to be considered within the context of a financial policy that gross leverage shall not exceed 3.5x and will be brought back to 3.5x or below within 12-18 months of a leveraging transaction.


Factors that could, individually or collectively, lead to positive rating action/upgrade:

Total debt with equity credit to operating EBITDA sustained below 2.5x;

Sustained organic growth approaching mid-single digits;

Adoption of a more conservative leverage target.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Total debt with equity credit to operating EBITDA sustained above 3.5x;

FCF margin approaching neutral;

Organic growth approaching breakeven;

Shift to a more aggressive financial policy.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

VIAVI had $560 million in cash and cash equivalents, excluding $1 million of short-term investments and $4 million of restricted cash at July 2, 2022. The company also had access to an undrawn $300 million ABL revolving credit facility, which matures on Dec. 30, 2026. Liquidity is also supported by Fitch's expectation that VIAVI will generate in excess of approximately $400 million in aggregate FCF through FY24, more than sufficient to address upcoming maturities over the ratings horizon.

Issuer Profile

VIAVI is a provider of network test, monitoring and assurance solutions as well as optical solutions for hard currency anti-counterfeiting pigments and 3D sensing.

Summary of Financial Adjustments

Fitch made standard financial adjustments as described in the applicable ratings criteria.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.


The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2022 Electronic News Publishing, source ENP Newswire

12/02Is the job report good or bad news?
12/02Stifel Initiates Viavi With Hold rating, Sets $12 Price Target
12/02Analyst recommendations: Blackstone, BT Group, Ecolab, GSK, Sain..
11/30Insider Sell: Viavi Solutions
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11/29Insider Sell: Viavi Solutions
11/25Viavi Solutions Inc. : Change in Directors or Principal Officers (form 8-K)
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Analyst Recommendations on VIAVI SOLUTIONS INC.
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Financials (USD)
Sales 2023 1 140 M - -
Net income 2023 133 M - -
Net Debt 2023 285 M - -
P/E ratio 2023 30,1x
Yield 2023 -
Capitalization 2 524 M 2 524 M -
EV / Sales 2023 2,46x
EV / Sales 2024 2,34x
Nbr of Employees 3 600
Free-Float 98,8%
Duration : Period :
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Technical analysis trends VIAVI SOLUTIONS INC.
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Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 10
Last Close Price 11,15 $
Average target price 14,36 $
Spread / Average Target 28,8%
EPS Revisions
Managers and Directors
Oleg Khaykin President, Chief Executive Officer & Director
Hendrikus Petrus Cornelis Derksen Chief Financial Officer & Executive Vice President
Richard E. Belluzzo Chairman
Ralph Rondinone Senior Vice President-Global Operations & Services
Masood A. Jabbar Independent Director
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