Westell Technologies, Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Nov 2019

[Operator:]

Welcome to the Westell Fiscal Year 2020 Second Quarter Earnings Call. My name is Vanessa, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session [Operator Instructions] Please note that this conference call is being recorded.I would now like to turn the call over to Jeniffer Jaynes, Westell's Interim Chief Financial Officer. Jennifer you may begin.

[Jeniffer Jaynes:]

Thank you, Vanessa. Good morning, and welcome to our conference call to discuss the fiscal year 2020 second quarter results for Westell Technologies. The news release we issued yesterday afternoon is posted on our website, westell.com.On this call, Tim Duitsman, Westell's President and Chief Executive Officer will begin with a discussion of our business and growth initiatives. I will then update you on our financial results for the quarter, and we'll conclude by taking your questions.Before we begin, please note that our presentation and discussion contain forward-looking statements about future results, performance or achievements, financial and otherwise. Words such as should, believe, expect, trend and similar expressions are intended to identify such forward-looking statements. These statements reflect management's current expectations, estimates and assumptions.These forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Westell's actual results, performance or achievements to differ materially from those discussed.A description of risk factors that may affect our future results is provided in the company's SEC filings, including Form 10-K, for the fiscal year ended March 31, 2019 under the section, Risk Factors.The forward-looking statements made in this presentation are being made as of the date and time of this conference call. Westell disclaims any obligation to update or revise any forward-looking statements based on new information, future events or other factors.Please also note, we present non-GAAP financial information in our news releases because we believe non-GAAP measures provide meaningful supplemental information to both management and investors. The non-GAAP information reflects the company's core ongoing operating performance and facilitates comparisons across reporting periods.Our discussion of results today will include non-GAAP financial measures. We've provided reconciliations to the most comparable GAAP measures in our news release.I will now turn the call over to Tim.

[Tim Duitsman:]

Thank you, Jeniffer and good morning, everyone. Before I begin, I want to say a few words about Jeniffer, our interim CFO. Jeniffer is a CPA with a blend of public and non-public accounting experience with increasing responsibilities. She began her career as an auditor with Arthur Andersen and has been in senior finance roles at Westell for more than 16 years. Jeniffer understands the business well and has consistently shown good judgment, organizational skills and accounting expertise.I have complete confidence that Jeniffer and our accounting team can handle matters while we look to secure a permanent CFO. We are actively evaluating CFO candidates. I will keep you updated as the process continues.As this is my first opportunity to speak with most of you as Westell's President and CEO, I want to share my perspective on the actions we're taking to turn the company around and return to revenue growth and profitability. But first, a little bit about me.Joining the Westell, Board of Directors in June of this year was a homecoming for me. I previously worked at Westell for 10 years leading teams that successfully rolled out new products, run company revenue and profitability. At one point, I served as Vice President and General Manager of what was then our Telco Access Products business. We developed many new products that helped grow that business. I have many good memories of working at Westell and that history played a large part in my decision to rejoin the Westell team.After my first tenure at Westell, I served in similar executive leadership roles at Intermatic and most recently Klein Tools where we developed a new corporate strategy centered on growing the company through new product sales. At Klein Tools, my team rolled out many new products that led to significant revenue and profit growth over the last 10 years. Klein Tools is now known in the tool industry for their new product innovation and has won many new product awards.The time I spent with the Westell Board of Directors over the summer, helped bring me up to speed quickly. When I accepted the President and CEO role in August, I was familiar with the challenges we face. I chose to accept the CEO role because of my high regard for the Westell brand and its people. I also like the opportunities for our new products in public safety, fiber connectivity and remote monitoring.In addition, I believe my experience in successfully delivering innovative new products is well suited to helping Westell -- return Westell to healthy growth and profitability.As you have seen we have work to do. Westell's second quarter results continued the recent downward trend. Despite continuing growth in public safety, revenue declined broadly across our legacy product lines and profitability followed. Since I joined the company in September, we have been working hard to turn this trend around. The entire management team is urgently working on increasing revenue, reducing expenses and expanding our customer base.Over the last two months we took direct actions to improve our results by reducing our operating expenses. This included a significant restructuring in October that covered the entire company. As a result we expect to bring down non-GAAP quarterly operating expenses to under $4.4 million for the near term.We are committed to building revenue and a key to that is sharpening our focus to bring the right new products to market in a timely fashion. I want to touch on a few of those efforts. Westell is devoting more resources to our In-Building Wireless business and in particular to IBW's public safety offerings.Public safety is a promising business, driven by strong market demand as an expanding number of local jurisdictions are requiring public safety coverage in commercial buildings. We're addressing that demand with the successful introduction of our new family of Class A repeaters and a new licensing agreement that provides greater control of our manufacturing lead times, inventory and costs.We expect to begin shipping product to customers under this new license agreement in our fiscal fourth quarter. In addition, this new agreement affords us the opportunity to expand our public safety product offerings. As part of this refocusing effort, we are deemphasizing our activities related to OnGo and the CBRS market. We are looking at large investments and field trials, inventory and additional sales and engineering personnel. The CBRS market is increasingly accredited with large competitors, product margins are eroding, and large rollouts are delayed into the second half of calendar 2020. We moved those resources to other IBW projects with better payback.We are excited about the opportunities our intelligent site management business and the opportunity provided by the accelerating deployment of 5G wireless. The engineering team is developing a new monitoring product specifically designed for small cell fixed wireless sites. We are also expanding the ISM business into adjacent markets.As one example, we continue to recognize revenue for our custom solution that enables remote monitoring of backup generators at a large national retailer, a deployment that kicked off in June. On the Communication Network Solutions side, we continue to develop new fiber connectivity solution products. These new CNS products deliver quick and easy fiber deployments with reliable connections for 5G, broadband and the Internet of Things.Last quarter, the company discussed a belowground vault solution. Our two lead customers for that solution decided not to roll out a belowground network at this time. Since the projects were delayed, we put the product on hold and moved those development resources to other fiber connectivity solutions that we expect to deliver near-term revenue.In summary, we are beginning to turn the company around and drive revenue growth and profitability by developing new products for In-Building Wireless, fiber connectivity and intelligent site monitoring bringing on new customers to expand Westell's customer base and managing our expenses, while we invest in the most promising new product areas.With that said, let me now turn the call back to Jennifer.

[Jeniffer Jaynes:]

Thank you, Tim. I will provide some key financial highlights on our quarterly results beginning with revenue. For the fiscal second quarter ended September 30, 2019, total revenue was $7.6 million, compared with $9 million in the first fiscal quarter ended June 30, 2019, as revenue decreased across all three segments.Our IBW segment produced our highest public safety revenue to-date and increased revenue from active DAS conditioners, but those increases were more than offset by lower revenue from commercial repeaters, passive DAS conditioners and RF system components. Within public safety, customers continue to embrace our newly released Class A repeaters.In the ISM segment, higher Optima software and support agreement revenue was more than offset by lower sales of remote monitoring units. For the CNS segment, increased revenue from T1 network interface units was more than offset by lower revenue across the remainder of the [Technical Difficulty]

[Operator:]

Please stand by while we reconnect our presenters. Thank you for standing by. Our speakers have rejoined.

[Jeniffer Jaynes:]

Sorry for the technical difficulties. I will begin my presentation at the top from the hand off from Tim. I will provide you with some key highlights of our quarterly results beginning with revenue. For the fiscal second quarter ended September 30, 2019 total revenue was $7.6 million, compared with $9 million in the first fiscal quarter ended June 30, 2019 as revenue decreased across all three segments.Our IBW segment produced our highest public safety revenue to-date and increased revenue from active DAS conditioners but those increases were more than offset by lower revenue from commercial, repeaters passive DAS conditioners and RF system components. Within public safety, customers continue to embrace our newly released Class A repeaters.The ISM segment higher Optima software and support agreement revenue was more than offset by lower sales of remote monitoring units. For the CNS segment, increased revenue from T1 network interface units was more than offset by lower revenue across the remainder of the segment.Looking at the rest of the operating results. Consolidated gross margin was 20.9% in Q2 compared with 36.1% in Q1. The lower margin in Q2 reflects significant charges for the quarter's excess and obsolete inventory amounting to $1.3 million. Excess and obsolete inventory costs were also high in each of the two preceding quarters. This was unusual as it reflected rapid changes in some product technologies and unexpected shifts in customer demand.We believe the estimates and assumptions underlying our inventory provision are reasonable, and we expect to see lower E&O charges moving forward. Excluding the E&O costs, gross margin would have been 38.5% in Q2 and 43.2% in Q1. The remaining pressure on Q2's margin is primarily the negative effect of fixed cost absorption because of lower revenue. We have addressed some of these fixed costs with our October restructuring.GAAP operating expenses were $5.3 million in Q2, down from $5.6 million in Q1. On a non-GAAP basis, operating expenses in Q2 were $4.8 million, down from $5 million in Q1.As Tim already mentioned, once the full impact of the restructuring actions that were completed in October, flow through the financial statement we expect to reduce non-GAAP operating expenses to less than $4.4 million per quarter for the near-term. The lower operating expense in Q2 was more than offset by the lower revenue and gross profit, which resulted in a GAAP operating loss of $3.7 million, compared with $2.3 million in Q1. Our non-GAAP operating loss in Q2 was $3.2 million compared with $1.8 million in the prior quarter.GAAP net loss in Q2 was $3.6 million, or $0.23 per share compared with $2.2 million or $0.14 per share in Q1. Non-GAAP net loss in Q2 was $3.1 million or $0.20 per share compared with $1.6 million or $0.10 per share in Q1.Turning to the balance sheet. On September 30, 2019, our cash totaled $21.7 million compared with $24.1 million at June 30. The $2.4 million in cash used during the quarter was a result of the operating loss adjusted for non-cash items and in the initial $1 million payment associated with the licensing agreement for the public safety products.At this time, we will open the call to your questions.

[Operator:]

Thank you. We will now begin our question-and-answer session. [Operator Instructions] We have our first question from Marc Silk with Silk Investments.

[Marc Silk:]

Thanks for taking my questions. I have quite a few here. So I've been with stock for about four years now and as I'm watching the stock down 20% right now, at $0.98, this isn't part of my questions, but it's just so frustrating because, I just hear this like every time a new CEO and you're the fourth CEO in the last few years and now we're at $0.98 and we're going to probably have to another reverse stock split, which will be the second time in four years, it's just unheard of.So you understand my skepticism where this is so frustrating. And I'll give you a great point, okay? You're a small company and you have some very interesting products which I want to get into. But the problem is, you just talked about this underground -- the fiber. And now a client decided to push it out for a few quarters. You can't continue to be a company by itself, because telco is a very tough area. Its long sales cycles. And that's -- so let me get to some questions. All right. So on October 2018, you announced the restructuring to save cash and focus on three areas for new product growth, okay? So let's talk about public safety. What makes the Westell product unique?

[Tim Duitsman:]

Hi, Mr. Silk. This is Tim Duitsman.

[Marc Silk:]

Hi, Tim.

[Tim Duitsman:]

What we're working on right now and continue to work on to make it unique is work on our durability, reliability and the ease of installing that product. Right now, we are in an OEM relationship and we're shipping that product, with the licensing agreement that we signed will allow us to bring that product in next year and work with that product at our subcontractor.So the advantages we have right now is our sales team does some great design work with our integrators and we've got several people learning that market and driving it forward. We also will have a BBU unit which will bring us up to UL 2524 in the second quarter of next year.

[Marc Silk:]

So on these type of things, how long is the sales cycle for these products?

[Tim Duitsman:]

It varies. The quote cycle -- it depends on when they build the building and when they ask for the quote. So we can ask for a quote and sometimes it'll be turned around in less than a month and other times, it's a much larger innovation or a new building and that takes six to nine months. Our pipeline of quotes is growing rapidly.

[Marc Silk:]

On your fiber deployment, what kind of opportunities do you see out there?

[Tim Duitsman:]

We got several going. Right now, the most promising one is to help Tier 2-level customers attach to their 5G installations. So, we're working on boxes that easily allow them to quickly and reliably attach to a 5G radio. So, it's a custom cable and a custom box. And those prototypes will be going out within a month.

[Marc Silk:]

And then, what -- and in the same question, what makes you -- what makes the Westell product unique?

[Tim Duitsman:]

I think working -- what's different about us is, we're working with the end customers to learn their needs and then designing a product specifically for them. So, it's not a generic product. It fits exactly the way that they're deploying that product and it fits their needs in the market. And then, we rapidly turn around a prototype for them.

[Marc Silk:]

Which again sounds like pretty long sales cycle, am I incorrect on that?

[Tim Duitsman:]

On that one, it's a much shorter sales cycle. They're putting those radios out there right now and the installers are having a difficult time. And in some cases, the cables are getting broken and they want a solution quickly to help that.

[Marc Silk:]

In regards to remote monitoring, what areas are you focusing on? And what opportunities do you see out there?

[Tim Duitsman:]

The main one we're focusing on is the 5G deployment, the small new 5G radio and small cell sites, developing a new product for that. We have one in trial right now and then, we're also developing a new smaller version that can be used. So, we also have effort in international. And then in domestic, we're looking at trying to expand into different customer markets with utilities and remote generation monitoring.

[Marc Silk:]

And again, what makes you guys unique in this?

[Tim Duitsman:]

Its -- our actual monitoring products that fit out on the end are pretty high level and can do quite a bit. They manage -- you can manage things. You can put in Ethernet connections. You can monitor power. There's quite a few things that that does and brings the data back to the user. So, those are pretty useful to us. And we're at a larger scale than most of our competitors and the quality is very high.

[Marc Silk:]

Okay, that's encouraging. But the sales cycle again, another six to 12 months type of scenario?

[Tim Duitsman:]

Well, we're in the field trial right now on the power generator solution, so that depends on how quickly the customer decides to roll that out. Some of the other products, it is a little lumpy and it does take longer on the big bids. And then, the new smaller monitoring is probably nine months away.

[Marc Silk:]

All right. So you mentioned that you'll take a restructuring charge of $200,000 to save $1.7 million annually. But last quarter alone, the cash was reduced by $2.3 million. Can you see how this is a company that is unsustainable on its own with continued cash depletion, long sales cycles at the mercy of your customers, continued shrinking the business? And now the cash continues to go lower and I've been investing in cashless companies for 30-plus years it becomes more challenging to sell to the large customers, you sell to as they need to make sure you will be able to support them going forward. But over the negative trend this company has been in for numerous years getting new business as a sell entity is going to become harder and harder not easier over the next few years. Would you like to comment on that?

[Tim Duitsman:]

There were a lot of questions in there. But let me get to the base of it. I think the problem -- our largest problem is getting back to growing revenue. This current revenue trend is not acceptable and we need to grow our revenue while watching our expenses. And the way we're going to do that is through new products.We've realigned our resources and the products that are most likely to yield significant revenue, public safety, fiber connectivity, and integrate site -- integrated site monitoring. We did put some projects aside, but those had a longer payback or were less likely to be successful. And we have to get back to cash flow breakeven and that's what the management team is working towards.

[Marc Silk:]

What kind of timeframe are we talking here, a year?

[Tim Duitsman:]

We're talking later in the 2021 fiscal year.

[Marc Silk:]

All right. One more thing -- or actually a few things because there's not many people who ask questions on this. So, I just want to reach out to the recipients of the Penny Trust as well shareholders. On August 11th, 2016, Cove Street Capital who had a large position in Westell was trying to help all the shareholders increase the value of the company by filing a 13D.A publicly stated, "We are writing to call for an end to this charade before any more new growth or second-chance opportunities burn more cash and further destroy value. Just about any unbiased observer would conclude that the company should immediately hire a credible third-party investment banker and put the company up for sale in order to salvage what lemonade can be salvaged. Our expensive research suggests there are legitimate willing buyers who can provide scale to Westell's minute product line."And this is the addition. Cove mentioned that there were four CEO changes while they own the stock for several years previous to the filing thus Penny ignored the playing. Now, fast forward to today, more than three years since Cove tried to help, they are out of the stock. And now the stock has been cut in half while the S&P 500 has gone up 50%. So, if your Uncle Buzz was not so close-minded instead of you losing half your inheritance, you would have received a premium for your shares which at that time were trading at a $2.70 range. And then even if you put the money in S&P 500 fund with the proceeds of the sale your rest mistake would have been more than tripled from where the stock price is today.In addition we have gone through three more CEOs. So, I am pleading with you when you have Thanksgiving dinner with Uncle Buzz, you can say we did it your way, but now have -- we still the cash in the balance sheet and relevant products and the expanding 5G environment too small to compete to get our brand to profitability.Why don't we explore selling the company before it is too late and Penny's creation will be part of something bigger and you finally do the right thing for the Family Trust and the long-suffering shareholders?So, again, the things you're saying are great, but it's the same thing over and over again. And I just want Buzz to do the right thing because what he's doing is, it's just self-gratification to be part of a Board. And listen I get it, my dad developed a cash fits all strategy and he passed away last year. Now, it's my goal to keep that going.But at what expense? If it's not working out, then you just move on. This has not worked out. Cove tried to help and then you just gave them the Heisman. This is just -- again it's just on and on and on. And I don't care if -- I have a huge position in the stock. I don't care if I hurt the stock price. But you've got to do the right thing. Tim, you're a great guy and that's fine and this is your first bite at the apple of the CEO, so now we have to break in another new CEO. It's not just right.Please do the right thing. I just -- I hate being in a position where I have no say and my only say is to sell my shares or file a 13D, but obviously that didn't work. So listen, good luck. But Buzz, do the right thing. And the Penny Trust, you got to put pressure on your uncle because this is going to go to zero.

[Operator:]

Thank you so much. We will proceed to our next question. It comes from Daniel Tonner [ph] who is a shareholder.

[Unidentified Shareholder:]

Good morning, Tim, I think Mr. Silk covered most of my questions. I'll ask if you can just expound a little bit more on the fiber access below-grade product. I heard that it's been delayed put out a couple of quarters. But is that something that will be generating revenue down the road? And can you give a little insight into its possibility and quantify the approximate potential revenue that a product like that can generate?

[Tim Duitsman:]

Well Mr. Tonner, what happened with the product was we were working with two lead customers and the first customer lost their funding for the program. And the second customer ran into approval problems with the municipality where they were planning the rollout. The municipality didn't want to approve underground digging in so many locations. So when we looked at it, it makes it a much more difficult project to deploy. And we will continue to see if there is interest in it, but right now I'd say, it's unlikely that it'll have revenue in the next couple of years.

[Unidentified Shareholder:]

I see. Okay.

[Tim Duitsman:]

The municipalities are having problems with digging that many holes throughout an area, because they have to go out and inspect them and look at them and so on.

[Unidentified Shareholder:]

Did I understand you to say that management's goal now is to reach a breakeven level of operation at the end of fiscal 2021, which would be -- I hope that's about 1.5 years 1.25 years out?

[Tim Duitsman:]

A little over a year.

[Unidentified Shareholder:]

Okay. So we'll -- the expectation is we'll be burning cash for another year or so. Is that correct?

[Tim Duitsman:]

We're trying to reduce that burn rate and get there as fast as we can. But right now, the plan looks like we can get there in the third or fourth quarter of next fiscal year.

[Unidentified Shareholder:]

Got it. Okay. All right. Thank you very much.

[Operator:]

Thank you, sir. I see we have no further questions in queue at this time. I will turn the call over to Tim Duitsman for closing remarks.

[Tim Duitsman:]

I thank all of you for joining us today. As mentioned previously, we have much to do to turn the business around and drive up shareholder value. Top line revenue growth is our highest priority. We are developing new public safety, fiber connectivity and remote monitoring products. We are also expanding to new customers particularly in the IBW and ISM product areas. We will manage our expenses and strategically invest in the most promising new product areas. We look forward to speaking with you again.

[Operator:]

Thank you, ladies and gentlemen. This concludes our conference. We thank you for your participation. You may now disconnect.