Westell Technologies, Inc.
Q3 2020 Earnings Call Transcript

Published: 6 Feb 2020

[Operator:]

Welcome to Westell Fiscal Year 2020 Third Quarter Earnings Call. My name is Sylvia 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 is being recorded.I would now turn the call over to Jeniffer Jaynes, Westell's Interim Chief Financial Officer. Jennifer, you may begin.

[Jeniffer Jaynes:]

Thank you, Sylvia. Good morning, and welcome to our conference call to discuss the fiscal year 2020 third 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 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, that we present non-GAAP financial information in our news releases because we believe that 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.Our results for the quarter exceeded our expectations as we begin to show traction with our turnaround plans. Getting to profitability is critical to us and while we reported a net loss for the fiscal third quarter, we delivered significant improvement over the previous quarter. We saw positive revenue gains in our strategic product areas during the quarter. We also made significant progress in reducing our expenses during the quarter and ended the quarter with a higher cash balance. The Westell team is strategically aligned and is working hard to deliver growth and profitability as soon as possible. We made good progress on those goals last quarter.Looking at specifics from our third quarter, overall revenue was down about $400,000 compared to the second quarter. There were five less shipping days in the third quarter and customers typically purchase and install less equipment during the holiday season. The bump we sometimes see in the end of budget year spending by large customers was also smaller this year, as some customers appear to be cautious with their spending.Even with those factors, revenue for public safety and fiber products increased over the previous quarter, and we expanded our customer base for site management products.Gross margin improved to 38.8% compared to Q2 where margins were pressured by a significant $1.3 million charge for excess and obsolete inventory. Our operations team implemented new supply chain processes during the third quarter, which should improve our inventory management and cash flow going forward.In addition, we've been working hard to reduce our expenses. On the last earnings call, we discussed bringing down non-GAAP quarterly expenses to under $4.4 million. In Q3, non-GAAP expenses came in substantially better at $3.7 million. All of Westell's departments contributed by reducing their expenses.Margin and expense improvement reduced our non-GAAP net loss to $850,000 in Q3, a large improvement over Q2.On another positive note, we ended the quarter with more cash than the previous quarter, $22 million versus $21.7 million in Q2. While Q3 started to turn the quarter for operating results, we know we need to grow profitable revenue. That is our highest priority going forward. Our revenue growth will come from new products and expanding our customer base. We continue to drive our revenue expansion strategy in three key product areas

[Jeniffer Jaynes:]

Thank you, Tim.I will provide some key financial highlights on our quarterly results beginning with revenue. For the third quarter of fiscal 2020 ended December 31, 2019, total revenue was $7.2 million compared with $7.6 million in the quarter ended September 30, 2019, as revenue decreased slightly across all three segments.Our IBW segment produced our highest public safety revenue to-date and increased revenue from commercial repeaters. Those increases were more than offset by lower revenue from DAS conditioners and RF system components.As Tim mentioned, within public safety, we received our first revenue from the new battery backup unit that was introduced during the quarter.In the ISM segment, higher deployment services and support agreement revenue was more than offset by lower sales of remote monitoring units and Optima software. Also during the quarter, the balance of deferred revenue increased as we completed the annual renewals for some larger service agreements.For the CNS segment, increased revenue from fiber connectivity connect solutions, and integrated cabinets 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 38.8% in Q3, up from 20.9% in Q2 when a significant charge of $1.3 million for excess and obsolete inventory depressed gross margins. There were no significant E&O charges in Q3.GAAP operating expenses were $4.4 million in Q3 down from $5.3 million in Q2, primarily as a result of the restructuring we announced last quarter and other cost saving measures.On a non-GAAP basis, operating expenses in Q3 were $3.7 million down from $4.8 million in Q2. Near term, we expect non-GAAP operating expenses to be in the range of $3.8 million to $4.2 million.GAAP net loss in Q3 was $1.5 million or $0.10 per share an improvement from a $3.6 million net loss or $0.23 per share in Q2.Non-GAAP net loss in Q3 improved to $850,000 or $0.05 per share compared to a loss of $3.1 million or $0.20 per share in Q2.Turning to the balance sheet. On December 31, 2019, our cash totaled $22 million, up from $21.7 million at September 30. The $300,000 increase in cash during the quarter was driven by managing expenses and improved working capital.Looking forward, you should note that we expect to pay the second $1 million associated with our public safety licensing agreement this quarter, assuming all conditions are met.At this time, we open the call to your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions].And our first question comes from Jansen from Ultra Capital.

[Unidentified Analyst:]

Hey guys, hey Tim. Just a question about whether the board has reconsidered a buyback given there's some signs of a turnaround and also you guys are still trading 20% below cash, no debt, any thoughts there? Thank you.

[Jeniffer Jaynes:]

This is Jenny. Thank you for your question. As we've mentioned in the past, any type of buyback program is really a board decision. Well, the management team believes we're in a position to turn the company around and feel that we'd like to continue to grow the company and turn it around. It really is a board decision. So thank you.

[Unidentified Analyst:]

That's why I asked whether the board has considered a buyback.

[Tim Duitsman:]

We've considered, this is Tim, John. The board has considered all options to increase shareholder value. And that's one of the things we're talking about.

[Operator:]

Our following question comes from Harry Sawyers [ph] from Sawyers Family Office.

[Unidentified Analyst:]

Yes, thanks for the earnings call. First, I want to congratulate you on the strong quarter. That actually was one of my questions regarding the buyback. But in any case, can you provide any guidance of the cash burn going forward beyond sometime in fiscal 2021?

[Tim Duitsman:]

Yes, Harry, cash -- going into next quarter, cash will be affected by a few things. Jeniffer mentioned $1 million licensing payment that may go out this quarter. We will also have prototyping and product demonstration expenses during the quarter that may increase our cash burn a little bit. But these are investments that are good and grow the business and should lead to new revenues down the road.

[Unidentified Analyst:]

Thank you. And would you please describe for me what you view as Westell's strongest competitive advantage?

[Tim Duitsman:]

I think our biggest competitive advantage and the way that we've changed over the last month is getting very close to our customers and understanding their needs, and then rapidly pulling together solutions that meet their full needs.So for example in public safety, we're working on ways to make it very easy to install those products and carry all the products that an installer would need and do their designs for them. So we become a very easy custom company to do business with.

[Unidentified Analyst:]

Right. And of course, looking at the quarter-on-quarter gross margin increases across all of your business lines that took me by surprise when I read your press release yesterday. What do you attribute that to?

[Tim Duitsman:]

Most of that comes from the E&O expense we took last quarter. We did have a significant E&O expense of $1.3 million last quarter, and that was across all the product lines. So that's the quarter-over-quarter difference.

[Unidentified Analyst:]

Do you view this as still an improvement?

[Tim Duitsman:]

Yes, we’re definitely watching our margins going forward.

[Operator:]

I'm sorry. Our following question comes from Steve Busch from Everglades Resources.

[Steve Busch:]

Hi, Tim and Jeniffer, thanks for taking my call. So, I'm amazed that anyone thinks that exceeding $7 million to $7.2 million was exceeding expectations. And I hate to think what expectations were; I just don't see how going down in revenue is exceeding expectations. So my question really revolves around you got this employee base, you're in a highly competitive field. What's going to attract and retain employees when you've had 15 years of stock destruction and can't really pay them in options because their options are worthless?

[Tim Duitsman:]

Thanks, that’s a long question, Steve. I think we have a good; we already have a good team here. I think it's just been an issue of focusing and focusing on the right products and working with our end customers in the right way to grow revenue.And earlier, your comment about exceeding expectations that had more to do with our bottom line non-GAAP results and our expense reductions obviously going forward and if we need to focus on growing our profitable revenue.

[Steve Busch:]

Okay, well. So I guess and it's not towards you. But we've heard the same story for I don't know how many CEOs now for 15 years. So the question becomes the board considers all its options, we're trading well below cash per share right with no debt. We're not buying back stock, which is whatever. I don't think that's the right move. But the question is, had the board considered just resigning and letting someone else come into news what they're doing because Bernstein and the rest of the board have done absolutely nothing for 15 years, except for having the stock $200, it makes no sense. So I don't think the board considers many options. I really don't think there is a board. And if I was employees, I'd be considering some sort of walk out until the board resigns or merges the two classes and so I don't think the board considers all that options.

[Tim Duitsman:]

Let's get back to your question, which is the board is investing always to increase shareholder value and the management team here, our number one priority is to grow revenue. And that's -- that's obvious at this point. We've limited our expenses, we need to grow revenue.

[Steve Busch:]

But we've been hearing that for 10-plus-years, I don't understand what changes –

[Tim Duitsman:]

I can't say what happened in the past, Steve. I can only talk about what we're doing going forward.

[Steve Busch:]

And what are your top estimates or what you think revenues could be within the next year?

[Tim Duitsman:]

We're not making -- we're obviously focused on growing the company, but we're not giving a forward outlook on revenue.

[Steve Busch:]

Okay. So I hope you do well. But I'm telling you that the board needs to go and that's my statement. Thank you. Have a good day.

[Tim Duitsman:]

Okay, thank you, Steve.

[Operator:]

Our following question comes from Marc Silk from Silk Investment Advisors.

[Marc Silk:]

Hi, Tim. Thanks for taking my question. Let's see -- it's funny, Steve my first question was when you said exceeding expectations I just -- I didn't even know what your expectations were would have looked like. But let's move on. The two first guys that I want to talk about the share buyback normally when the stock trades below cash, I would be on board with that. I just think that people need to realize that, you have burn cash for a long time. When you're dealing with what's up?

[Tim Duitsman:]

Mark, let me just for everybody, I think we talk about questions.

[Marc Silk:]

Yes, well this is a very important question because they talk about share buyback and I just wanted to say that, you should not be buying back shares because cash is one of your most biggest assets right now. So my -- all right, so it shouldn't even be pushed, okay. So would you say the expectation to getting to profitability is based on the growth of your 5G business?

[Tim Duitsman:]

Well we're actually focusing on three areas. 5G is one of our growth areas, and that would be fiber and cabinets are both going into 5G along with integrated site monitoring. We obviously need growth across the board to increase our revenues. And we've got public safety too.

[Marc Silk:]

Right, right but if public safety does well, you still need the 5G, considering you just said two of these three businesses are focused on. Okay. So having said --

[Tim Duitsman:]

We're focused on all three.

[Marc Silk:]

Okay, I'll touch that; I love to see all three move up. But without a doubt, if two out of three are focused on 5G, then you would -- would the answer be yes that to get to profitability is really based on the growth of 5G business and I understand that.

[Tim Duitsman:]

It's actually not just 5G Mark, part of it's 5G, but also in that same area there's a lot of rural broadband going in right now. And they're talking about expanding another $20 billion in spend there. So it's -- and that isn't necessarily 5G that's also wireless radios going into deliver rural broadband and fiber. So that's a whole another area that we can grow into.

[Marc Silk:]

Okay, because what and I appreciate that because I've been listened a few conference calls and like the CEO of Ericsson is basically saying how 5G is actually slowing down in many countries, CEO of Xilinx in the conference call basically is laying off people because they're seeing 5G slowdown in many areas. So I just wanted to -- so do you think even if 5G is not taking off as much as possible, do you think broadband is something that -- I'm just trying to understand that profitability that you could still do well, even if that's not the case, because the broadband could take over the 5G, does that make sense?

[Tim Duitsman:]

Rural broadband delivery there's portions of the country with poor broadband, and delivering rural broadband to those people is very important. And then in addition, public safety is going to grow.

[Marc Silk:]

Okay that clarifies the question. And then the last thing so basically, Tim, I'm sure you understand as a publicly traded CEO now for two quarters, I think you would agree that the movement of the stock is based on supply and demand and what gets you there is profitability, correct?

[Tim Duitsman:]

Yes, we're focused on profitable revenue growth.

[Marc Silk:]

Right, right. So just one thing and I just think that the problem is the stock appreciation will be muted because we'll keep investor demand suppressed and this is because I have talked to a lot of people that I've been trying to get into Westell it's a dual class stock. So as a majority voting block has historically has not had the best interest of shareholders because all you have to do is look back at the filings in August 2016, yes?

[Tim Duitsman:]

Is that in the form of a question or?

[Marc Silk:]

Yes, yes, I think that -- I think what you need to do is have a serious talk with the board and figure out a way that to work through the dual class shares because what happens is, it's keeping people out of the stock. So you could be profitable. But there's still a lot of people that are going to look at the past history and say, listen this Board is not doing their -- finish their responsibility. It's important; I'm not bashing the board. I mean, what's done is done. I mean, the coal thing was -- it was unjust, but it affects the stock price. And I hope that some you can figure out some way to make this happen, because if one person is controlling the votes, it's just not fair. And this --

[Tim Duitsman:]

We got to turn this into a form of a question, please.

[Marc Silk:]

Okay. Can the board show us a plan, here's a question. Can the board show us a plan to basically move the stock from dual class to single class, if you're Jeff Bezos or these guys? That's one thing but the stock is really underperformed, and it would be -- it would show good faith to the shareholders and probably get more people interested in the stock. So the question is can the board devise a plan that can show that they're planning on making this a one, one interesting stock? Yes or no?

[Tim Duitsman:]

Marc, the board continues to review all the options, okay. And we'll take that under consideration.

[Marc Silk:]

I'm just trying to have stock go up as you do. Okay. Thank you, Tim. Good luck.

[Tim Duitsman:]

Thank you, Marc.

[Operator:]

Our next question comes from Mark Spiegel from Stanphyl Capital.

[Mark Spiegel:]

Hi, before I ask my question, I'll just say one sentence that I echo what Marc Silk just said. We have about 4.9% of the company ourselves and there's no way in hell a lot of people will buy this no matter how good your performance is. If there's that dual class stock out there. So this guy is the Chairman is just shooting himself in the foot with this kind of stupidity. Okay, I'll move on to my question, well before I do my question, yes, Trump earlier this week said he's going to spend $20 billion on Rural Digital Opportunity Fund and the Democrats actually stood up and applauded that, which tells me it's going to get done. So hopefully you guys, hopefully you guys can make some money there. My question how much if any of your supply chain goes through China and how could this affect you?

[Tim Duitsman:]

We're investigating that right now. It's a small part of our business. It'll affect probably less than 10% of our business right now. We're closely watching the spread of the coronavirus. We did talk to our factories that are there and currently they're saying, they're going to open next week, which is only a week later than Chinese New Year when they were going to open. If they open next week, we think will hit about a one to three week delay in shipments to those parts. It's a developing thing, so it may change. So as a contingency plan, we're quoting U.S. suppliers for those parts if that situation in China continues and the plants are closed, but I think we'll make it up during the quarter, if they ship in the next one to three weeks.

[Mark Spiegel:]

Okay. So there's nothing that you get from China that you can't get elsewhere?

[Tim Duitsman:]

The main thing we're looking at right now is cabinets. I will say, I don't know what other ramifications it might have. There might be some parts that we haven't even heard of yet that we can't get. But that's the main thing that we’ve heard about and true for a lot of companies.

[Operator:]

No further questions.

[Tim Duitsman:]

All right. Thank you for joining us today. As I mentioned previously, we're working hard to turn the business around and drive up shareholder value. Top-line profitable revenue growth is our highest priority with our focus on developing new public safety, fiber connectivity, and remote monitoring products. In addition, we are targeting new customers, particularly in the IBW and ISM product areas. We also will continue to manage our expenses, while strategically investing in the most promising new product areas. We look forward to speaking with you again.

[Operator:]

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.