Note 18. Operating Segments and Geographic Information

The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer, Oleg Khaykin, 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 is a global provider of network test, monitoring and assurance solutions to communications service providers, enterprises and their ecosystems. Our solutions deliver end-to-end visibility across physical, virtual and hybrid networks, enabling customers to optimize connectivity, quality of experience and profitability. Viavi is also a leader in high performance thin film optical coatings, providing light management solutions to anti-counterfeiting, consumer and industrial, government and healthcare and other markets.

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, software and services to design, build, activate, certify, troubleshoot and optimize networks. The company also offers a range of product support and professional services such as repair, calibration, software support and technical assistance for our products

(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-core operating and non-operating activities as discussed below.

The Company does not allocate stock-based compensation, acquisition-related charges, amortization of intangibles, restructuring and related charges, impairment of goodwill, non-operating income and expenses, or other non-core operating and non-recurring charges to its 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. Additionally, the Company does not specifically identify and allocate all assets by operating segment.

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):



	Year Ended July 2, 2016
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Total Segment Measures			Reconciling Items			Consolidated GAAP Measures
Net revenue	$	504.6		$	153.6		$	658.2		$	248.1		$	906.3		$	—		$	906.3

Gross profit	329.7			99.4			429.1			143.1			572.2			(22.5		)	549.7
Gross margin	65.3		%	64.7		%	65.2		%	57.7		%	63.1		%				60.7		%

Operating (loss) income							12.7			102.9			115.6			(199.9		)	(84.3		)
Operating margin							1.9		%	41.5		%	12.8		%				(9.3		)%


	Year Ended June 27, 2015
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Total Segment Measures			Reconciling Items			Consolidated GAAP Measures
Net revenue	$	506.8		$	174.3		$	681.1		$	192.8		$	873.9		$	—		$	873.9

Gross profit	333.9			119.2			453.1			104.3			557.4			(37.3		)	520.1
Gross margin	65.9		%	68.4		%	66.5		%	54.1		%	63.8		%				59.5		%

Operating income (loss)							(0.1		)	68.1			68.0			(143.8		)	(75.8		)
Operating margin							—		%	35.3		%	7.8		%				(8.7		)%

	Year Ended June 28, 2014
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Total Segment Measures			Reconciling Items			Consolidated GAAP Measures
Net revenue	$	570.1		$	156.0		$	726.1		$	200.8		$	926.9		$	—		$	926.9

Gross profit	371.0			95.4			466.4			100.7			567.1			(39.3		)	527.8
Gross margin	65.1		%	61.2		%	64.2		%	50.1		%	61.2		%				56.9		%

Operating income (loss)							(0.2		)	63.8			63.6			(119.2		)	(55.6		)
Operating margin							—		%	31.8		%	6.9		%				(6.0		)%



	Years Ended
	July 2, 2016			June 27, 2015			June 28, 2014
Corporate reconciling items impacting gross profit:
Total segment gross profit	$	572.2		$	557.4		$	567.1
Stock-based compensation	(4.8		)	(4.2		)	(4.3		)
Amortization of intangibles	(17.3		)	(31.9		)	(34.1		)
Other charges unrelated to core operating performance	(0.4		)	(1.2		)	(0.9		)
GAAP gross profit	$	549.7		$	520.1		$	527.8

Corporate reconciling items impacting operating income (loss):
Total segment operating income	$	115.6		$	68.0		$	63.6
Stock-based compensation	(42.4		)	(47.5		)	(44.7		)
Amortization of intangibles	(31.9		)	(51.4		)	(49.6		)
Impairment of goodwill	(91.4		)	—			—
Other charges unrelated to core operating performance (1)(2)	(23.7		)	(18.1		)	(3.6		)
Restructuring and related charges	(10.5		)	(26.8		)	(21.3		)
GAAP operating income (loss) from continuing operations	$	(84.3	)	$	(75.8	)	$	(55.6	)


(1)	During the year ended July 2, 2016 other charges unrelated to core operating performance primarily consisted of (a) an $8.4 million charge related to a litigation ruling impacting our U.K. pension obligation, (b) $5.0 million of Viavi-specific charges related to the Separation and (c) $3.5 million of non-recurring incremental severance and related costs upon the exit of a key executive.


(2)	During the year ended June 27, 2015, other charges unrelated to core operating performance primarily consisted of $9.8 million of Viavi-specific charges related to the Separation and $3.6 million IPR&D impairment charge for an ongoing project related to the fiscal 2014 acquisition of Trendium as discussed in “Note 10. Acquired Developed Technology and Other Intangibles.”

The Company operates primarily in three geographic regions: Americas, Asia-Pacific, and Europe, Middle East and Africa (“EMEA”). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue (dollars in millions):



	Years Ended
	July 2, 2016				June 27, 2015				June 28, 2014
Americas:
United States	$	396.6	43.8	%	$	424.3	48.5	%	$	448.6	48.4	%
Other Americas	66.0		7.3	%	$	62.5	7.2	%	$	58.8	6.3	%
Total Americas	$	462.6	51.1	%	$	486.8	55.7	%	$	507.4	54.7	%

Asia-Pacific	$	166.3	18.3	%	$	144.5	16.5	%	$	140.9	15.2	%

EMEA:
Switzerland	$	135.6	15.0	%	$	97.7	11.2	%	$	98.0	10.6	%
Other EMEA	141.8		15.6	%	144.9		16.6	%	180.6		19.5	%
Total EMEA	$	277.4	30.6	%	$	242.6	27.8	%	$	278.6	30.1	%

Total net revenue	$	906.3	100.0	%	$	873.9	100.0	%	$	926.9	100.0	%

Following the separation from Lumentum, one customer served by our OSP segment and one customer served by our NE and SE segments generated more than 10% of Viavi net revenue from continuing operations during fiscal 2016, 2015 and 2014 as summarized below (in millions):



	Years Ended
	July 2, 2016		June 27, 2015		June 28, 2014
Customer A - OSP Customer	$	190.1	$	143.0	$	118.2
Customer B - NE and SE Customer	*		*		106.6

*Customer represented less than 10% of consolidated net revenue in the specified fiscal year.

Property, plant and equipment, net were identified based on the operations in the corresponding geographic areas (in millions):



	Years Ended
	July 2, 2016		June 27, 2015
United States	$	85.6	$	91.8
Other Americas	4.3		5.8
China	27.3		32.1
Other Asia-Pacific	4.8		6.9
Germany	7.9		8.5
Other EMEA	3.1		4.1
Total property, plant and equipment, net	$	133.0	$	149.2