Note 17. Operating Segments

The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Interim Chief Executive Officer, Richard Belluzzo, is the Company’s Chief Operating Decision Maker (“CODM”) pursuant to the guidance. The CODM allocates resources to the segments based on their business prospects, competitive factors, net revenue and operating results.

The Company provides software and hardware platforms and instruments that deliver end-to-end visibility across physical, virtual and hybrid networks. Viavi’s solutions provide intelligence and insight across the network ecosystem to optimize networks and support more profitable, higher-performing networks for our customers. Viavi is also a leader in anti-counterfeiting solutions for currency authentication and high-value optical components and instruments for diverse government and commercial applications.

The Company’s reportable segments are:

(i) Network Enablement (“NE”):

NE provides testing solutions that access the network to perform build out and maintenance tasks. These solutions include instruments and software to design, build, turn-up, certify, troubleshoot, and optimize networks.

(ii) Service Enablement (“SE”):

SE solutions are embedded systems that yield network, service and application performance data. These solutions—including microprobes and software—monitor, collect and analyze network data to reveal the actual customer experience and to identify opportunities for new revenue streams and network optimization.

(iii) Optical Security and Performance Products (“OSP”):

OSP provides innovative optical security solutions, with a strategic focus on serving the anti-counterfeiting market through advanced security pigments, thread substrates and printed features for the currency, pharmaceutical and consumer electronic segments. OSP also provides thin-film coating solutions for 3D sensing applications.

Changes to Segment Reporting

Following the Separation in the first quarter of fiscal 2016, the Company made changes to its segment measures to reflect how the CODM manages the business post-separation as described below.

The CODM manages the Company in two broad business categories: Network and Service Enablement ("NSE") and OSP. NSE operates in two segments, NE and SE, whereas OSP operates as a single segment. The CODM evaluates segment performance of the NSE business based on NE and SE segment gross margin and NSE operating margin as a whole. Operating expenses associated with the NSE business are not allocated to the NE and SE segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on OSP segment operating margin. In addition, prior to the first quarter of fiscal 2016 the Company did not allocate certain corporate-level operating expenses associated with its shared-service function to its segment results. Beginning in the first quarter of fiscal 2016, the Company has allocated these corporate-level operating expenses to its segment results, with the exception of certain non-recurring activities and other items as discussed below.

The Company does not allocate stock-based compensation, acquisition-related charges and amortization of intangibles, restructuring and related charges, non-operating income and expenses, or other non-recurring charges to our segments because Management does not include this information in its measurement of the performance of the operating segments. These items are presented as “Reconciling Items” in the table below.

As a result of the Separation, the Company excluded the results of the Lumentum business which historically consisted of the CCOP segment and the WaveReady product line within the NE segment for all periods presented. Refer to “Note 3. Discontinued Operations” for more information on the Separation. Additionally, the Company’s Video Assurance product line was moved out of its NE segment and into its SE segment during the first quarter of fiscal 2016.

The segment information for all periods presented has been revised to be comparable with the changes in the Company’s segment reporting measures.

Information on reportable segments is as follows (in millions):



	Three Months Ended January 2, 2016
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Total Segment Measures			Corporate Reconciling Items			Consolidated GAAP Measures
Net revenue	$	136.4		$	36.9		$	173.3		$	58.8		$	232.1		$	—		$	232.1

Gross profit	90.6			24.5			115.1			32.8			147.9			(6.1		)	141.8
Gross margin	66.4		%	66.4		%	66.4		%	55.8		%	63.7		%				61.1		%

Operating income (loss)							8.0			22.5			30.5			(21.3		)	9.2
Operating margin							4.6		%	38.3		%	13.1		%				4.0		%



	Three Months Ended December 27, 2014
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Total Segment Measures			Corporate Reconciling Items			Consolidated GAAP Measures
Net revenue	$	129.0		$	46.8		$	175.8		$	50.6		$	226.4		$	—		$	226.4

Gross profit	84.6			32.4			117.0			26.7			143.7			(10.6		)	133.1
Gross margin	65.6		%	69.2		%	66.6		%	52.8		%	63.5		%				58.8		%

Operating income (loss)							2.0			17.1			19.1			(40.3		)	(21.2		)
Operating margin							1.1		%	33.8		%	8.4		%				(9.4		)%



	Three Months Ended
	January 2, 2016			December 27, 2014
Corporate reconciling items impacting gross profit:
Total segment gross profit	$	147.9		$	143.7
Stock-based compensation	(1.4		)	(1.0		)
Amortization of intangibles	(4.6		)	(9.2		)
Other charges related to non-recurring activities	(0.1		)	(0.4		)
GAAP gross profit	$	141.8		133.1

Corporate reconciling items impacting operating income (loss):
Total segment operating income	$	30.5		$	19.1
Stock-based compensation	(8.9		)	(10.5		)
Amortization of intangibles	(8.3		)	(14.1		)
Other charges related to non-recurring activities (1)	(2.7		)	(6.6		)
Restructuring and related charges	(1.4		)	(9.1		)
GAAP operating income (loss) from continuing operations	$	9.2		$	(21.2	)

(1) During the three months ended January 2, 2016, other charges related to non-recurring activities primarily consisted of incremental expenses related to post-separation activities such as site consolidations, reorganizations, insourcing or outsourcing of activities. During the three months ended December 27, 2014, other charges related to non-recurring activities primarily consisted of incremental expenses related to Viavi-specific activities to complete the separation such as professional fees and additional personnel and related costs.



	Six Months Ended January 2, 2016
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Total Segment Measures			Corporate Reconciling Items			Consolidated GAAP Measures
Net revenue	$	254.0		$	84.8		$	338.8		$	123.0		$	461.8		$	—		$	461.8

Gross profit	166.3			57.9			224.2			69.8			294.0			(11.7		)	282.3
Gross margin	65.5		%	68.3		%	66.2		%	56.7		%	63.7		%				61.1		%

Operating income (loss)							10.4			48.8			59.2			(52.9		)	6.3
Operating margin							3.1		%	39.7		%	12.8		%				1.4		%



	Six Months Ended December 27, 2014
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Total Segment Measures			Corporate Reconciling Items			Consolidated GAAP Measures
Net revenue	$	250.5		$	97.3		$	347.8		$	93.9		$	441.7		$	—		$	441.7

Gross profit	164.8			67.4			232.2			49.8			282.0			(20.0		)	262.0
Gross margin	65.8		%	69.3		%	66.8		%	53.0		%	63.8		%				59.3		%

Operating income (loss)							0.7			31.4			32.1			(65.7		)	(33.6		)
Operating margin							0.2		%	33.4		%	7.3		%				(7.6		)%



	Six Months Ended
	January 2, 2016			December 27, 2014
Corporate reconciling items impacting gross profit:
Total segment gross profit	$	294.0		$	282.0
Stock-based compensation	(2.6		)	(2.0		)
Amortization of intangibles	(8.9		)	(17.3		)
Other charges related to non-recurring activities	(0.2		)	(0.7		)
GAAP gross profit	$	282.3		262.0

Corporate reconciling items impacting operating income (loss):
Total segment operating income	$	59.2		$	32.1
Stock-based compensation	(24.9		)	(21.0		)
Amortization of intangibles	(16.4		)	(27.2		)
Other charges related to non-recurring activities (1)	(9.8		)	(7.3		)
Restructuring and related charges	(1.8		)	(10.2		)
GAAP operating income (loss) from continuing operations	$	6.3		$	(33.6	)

(1) During the six months ended January 2, 2016, other charges related to non-recurring activities primarily consisted of a) incremental expenses of $5.6 million related to post-separation activities such as site consolidations, reorganizations, insourcing or outsourcing of activities and b) $3.5 million of non-recurring incremental severance and related costs upon the exit of a key executive. During the six months ended December 27, 2014, other charges related to non-recurring activities primarily consisted of incremental expenses related to Viavi-specific activities to complete the separation, such as professional fees and additional personnel and related costs.