Westell Technologies, Inc.
Q1 2018 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Welcome to the Westell First Quarter Fiscal Year 2018 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 will now turn the call over to Mr. Tom Minichiello, Westell’s Chief Financial Officer. You may begin, sir.

[Tom Minichiello:]

Thank you, Vanessa. Good morning, and welcome to our conference call to discuss the fiscal year 2018 first quarter results for Westell Technologies. The news release we issued yesterday afternoon is posted on our new website, westell.com. On this call I will introduce you to Matt Brady, who joined Westell as President and Chief Executive Officer on July 17. I will then update you on our business and financial results for the quarter, and we’ll conclude by taking 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, 2017 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 results 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 measures. We provided reconciliations to the most comparable GAAP measures in our news release. As I mentioned, Matt Brady joined Westell a little more than three weeks ago. He is an industry veteran with more than 25 years of global sales experience to communication service providers including wireless carriers and multiple system operators or MSOs, both on a direct basis and as well as through public safety system integrators. Matt has a proven track record of enhancing customer relationships, driving revenue growth and improving operations and bottom line results. Matt came to us from the Federal Signal Corporation, where he was Senior Vice President of Safety and Security Systems after starting in that Group as Vice President of Global Sales, prior to that he was Sales Director for Public Safety at Motorola. Matt was the unanimous choice of our Board of Directors to success in growing revenue plus he’s extensive experience in the Public Safety market make him the right leader. At a time when Westell has turned a corner by stabilizing the business and making money and with profitable revenue growth now our number one priority, we are excited to have Matt join us as CEO. So with that it’s my pleasure to introduce you all to Matt Brady.

[Matt Brady:]

Thank you, Tom and good morning everyone. I am Matt Brady, I’m happy and excited to be here as part of the Westell team. I’m happy because there is a great potential at Westell. Westell has a solid reputation for high quality products and solutions, strong customer relationships and have been developed over many years. And a cost and expense structure that is generating positive cash flow, thanks to much hard work by the Westell team and the leadership of Tom Minichiello and my predecessor Kirk Brannock. To them we are most grateful. I’m excited because the next order business is growing revenue profitably and that is our number one mission. We’ve seen some nice revenue traction of late and I believe there are opportunities for us to grow the business. In-building wireless public safety communication is an emerging market for our IBW business that is directly in Westell’s warehouse. And the transition by wireless service providers to centralized radio access networks or CRAN creates new opportunities for our ISMS and CNS businesses. A little bit more about my style. I’m action-oriented and results driven, I like to move fast, hold-people-accountable and succeed as a team. I enjoy interacting with all stakeholders and look forward to meeting you in person and hearing your thoughts about the future of Westell. We have much to do and I’m optimistic that we can grow this business. With that, I’ll now turn the call back over to Tom Minichiello.

[Tom Minichiello:]

Thank you, Matt. Let me begin with a summary of some of the highlights of our fiscal 2018 first quarter earnings release. We’ll start with revenue. In the first quarter, consolidated revenue once again grew on a sequential quarter basis, up 8% to $16.6 million driven by the strong performances of our IBW and CNS business segments. Let me take a moment now to look a little bit deeper at the segment revenue. We’ll start with IBW, were revenue for the first quarter increased to $7 million. This is the highest revenue level for IBW since the quarter ended December 31, 2015. Revenue performance for our active DAS conditioner, the Universal DAS Interface Tray or UDIT continue to excel, reflecting the strong market demand for this unique system among the major wireless service providers and neutral host operators. Also highlighting the quarter for IBW was an increase in sales of our expanded portfolio of products and solutions for in-building mobile communication for public safety, which included both our half-watt and two-watt repeaters and battery backup unit. In addition we increased our sales of passive system components these are devices such as duplexers, filters, combiners and couplers, which are used in in-building wireless installations both commercially and for public safety. Our ISMS business overall have revenue of $4.1 million compared to $4.5 million the quarter before. This quarter, hardware deployments, i.e. our suite of remote units used for on-site processing we’re pushed out by several customers. Also support services revenue decreased with one customer, partially offsetting these factors was increased software revenue as one customer chose to have our Optima management system connect directly to a third-party device in addition to continuing to manage their existing imbedded base every month. On a separate front, during the first quarter we grew revenue in this segment with a major neutral host operator that we just began doing ISMS business with the quarter before. Our CNS segment grew significantly in the quarter by 41% to $5.5 million. Integrated cabinets led the way which included shipments to transit wireless that assist in their ability to deliver increased wireless services in the New York City subway system and to a large rural service provider as part of the Connect America Fund Phase II or CAF-II initiative. In addition sales of power distribution panels were at their highest level since the January to March 2016 quarter driven by new configuration wins that also included CRAN build outs. Moving down to the rest of the operating results for the quarter. We continued for the third consecutive quarter to meet or beat key operating targets, including consolidated gross margin at 40% or greater, it was 40.8% in the quarter and non-GAAP operating expenses at $6 million, which we achieved while continuing to invest in important growth markets like wireless coverage for in-building public safety communications. As a result, our business was profitable again for the third straight quarter. As we reported on a non-GAAP basis an operating profit margin of 4.7%, net income of $800,000 and earnings of $0.05 per share. On an adjusted EBITDA basis which is our non-GAAP operating profit less depreciation expense Westell’s business generated over $1 million of adjusted EBITDA for the second quarter in a row. Turning to our strong balance sheet. During the quarter total cash grew by $1.9 million to $23.7 million at June 30, 2017 compared to $21.8 million at March 31, 2017. This net cash increase comprised a $2.4 million increase in cash generated from operations, which was partially offset by $500,000 of cash used for share repurchases and capital expenditures. The $2.4 million of positive operating cash flow was driven by the positive non-GAAP results and improve the working capital. As mentioned, the $500,000 of cash used included share repurchases. During the quarter under the stock repurchase program authorized by our Board of Directors in May and as part of an open market 10b5-1 plan Westell repurchased 104,155 shares at an average price of $2.96 per share for a total cash outlay of $308,565. I also want to mention that the company is nearing a milestone of sorts. Back in 1997 Westell entered into a sale leaseback arrangement that included a 20 year lease for the entire 174,000 square foot Aurora headquarters facility. Given the company’s much different space requirements in recent years business been a larger than necessary cash drain on the business. Well, this lease finally comes to an end on September 30. And as announced earlier this year, we began on October 1 with a new lease for only the space we currently occupy and require for today’s business. While cash restructuring charges have already eliminated the excess expense starting in the October to December quarter we expect to begin realizing reduced cash outlays of approximately $500,000 per quarter. Before we move onto your questions, let me summarize. We consistently met or beat key operating targets. We continue to grow revenue and generate cash and we have solidified our leadership team with Matt Brady on board as our President and CEO. So with that, we’d now like to open up the call for questions.

[Operator:]

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And we have our first question from Mike Latimore with Northland Capital.

[Mike Latimore:]

Great. Thanks a lot. Yes, very nice quarter guys. On the public safety opportunity I guess one, can you talk a little bit about the type of end customer, type of application that purchase the public safety products in the quarter. And then I guess now you have a pretty extensive history in the public safety market. How do you see kind of Westell’s longer-term opportunity playing out? What kind of channels do you need to get in? What kind of maybe additional products might you like to see?

[Tom Minichiello:]

Hey, good morning Mike this is Tom. I’ll take the first part of your question and then hand it over to Matt to address the second half there. So, the end customers are the buildings and for us it’s the RF integrators who are the ones who architect and design this in-building wireless coverage for public safety. A lot of them do it also for commercial coverage. So our sales, our customers are going to be them or there are many small ones that will sell-through our distribution channel partners. So our revenues will go to distribution and in other cases it will go directly to systems integrators. Probably the larger ones or the more regional ones that are bigger.

[Matt Brady:]

And Mike this is Matt Brady as a follow-up, nice to me you. I mean, we still go after some of the major property management providers as well who manage a lot of these properties across the country. I think like Tom said, there is hundreds of really solid public safety system integrators in the country. And then there’s thousands below that. And we have a plan to regularly kind of attack them on a regional basis, have luncheon learns show our product portfolio and get them excited about selling, installing and optimizing the product portfolio in those buildings as Tom mentioned. And then we also have a really good distribution channel both domestically and internationally that will allow us to go those large distis and sell the products into those buildings both through the system integrators and through the distis or through the property management building owners.

[Mike Latimore:]

Great. And then gross margin on IBW looks pretty good in the quarter. Is that kind of a good run rate or was there some – maybe was there any of this front?

[Tom Minichiello:]

Yes. So Mike on IBW, it is a pretty good run rate what we did this quarter. If you notice from quarter-to-quarter on that business we’ve been high 30s, $40 million just slightly over $40 million, but it’s been pretty consistent in the $41 million to $43 million. And we did I think $43 million this quarter. So you’re likely to continue to see that. One of the benefits that we’re seeing now is when we moved the manufacturing or the entire manufacturing from beginning to end our piece before that was the assembly and test portion. But that’s now with the contract manufacturer and we’re seeing some of the cost benefits of that. So, $42 million, $43 million is a good proxy for that business.

[Mike Latimore:]

Got it. Any 10% customers in the quarter?

[Tom Minichiello:]

Yes. Mike, in fact we had three customers that were 10% of our revenue or greater in the quarter. And let me just add a little bit of color to that. We had a fourth one just below that at 9% and then we had a fifth customer who is in the high single digits, again, not too far away from the 10%. So all together we had good half of our revenue with five customers. Three of them were carriers, one was a distributor and the other one was a neutral host operator.

[Mike Latimore:]

Got it. And then on the UDIT, it sound like that was pretty strong. I guess what’s your sort of longer-term view on that front? Like I thought, the thought was maybe – that functionality might be absorbed into the broader DAS system itself.

[Tom Minichiello:]

So Mike, we’re seeing real strength with that product, it’s got some unique differentiators that the customers are liking. We have a customer who was not a large customer of that product in prior years that is using it extensively not just in large venues but also in medium sized venues as well. We’ve got our existing customer base for that product that continues to have a capacity and expansion needs and needs to add to existing DAS’s. And there’s also some neutral host operators that have liked it and are using it more and more. So we see it – I mean, it’s been a strong revenue producer for us for several quarters. I mean, it was always good, it’s gotten better and we see continued strength going forward.

[Mike Latimore:]

Okay. Great, thank you.

[Operator:]

Thank you. [Operator Instructions] And we have our next question from Todd Brady with Oppenheimer.

[Todd Brady:]

Good morning. Tom, can you walk us through what OpEx looks like over the next two to three quarters versus the changes that you’ve outlined in previous quarters.

[Tom Minichiello:]

Yes, absolutely. Good morning, Todd. We’ve been pretty consistent the last three quarters at $5.9 million, $5.9 million and $6 million the last three quarters in a row on our non-GAAP OpEx. Our target is $6 million as we’ve mentioned on numerous previous calls and that’s what it’s going to continue to be as far as we can tell at this stage. R&D is $2 million to $2.3 million of that and the rest of it is the SG&A. And I think, we’ll be pretty consistent with that going forward.

[Todd Brady:]

Okay. And what was headcount at the end of the quarter?

[Tom Minichiello:]

123 full-time employees.

[Todd Brady:]

And that’s versus what 12 months ago.

[Tom Minichiello:]

Versus 12 months ago it was in excess of 200.

[Todd Brady:]

Thank you.

[Operator:]

Thank you. I am standing-by for further questions. [Operator Instructions] And we have a follow-up question from Mike Latimore with Northland Capital.

[Mike Latimore:]

Hi, there. On the IMS – or ISMS business, you talked about maybe a little more stock for purchase here, connecting the third-party devices. Is that with a – who was the end customer there? I guess, is that like a Tier 1 service provider, smaller service providers?

[Tom Minichiello:]

It’s a service provider, Mike, and it was a bit of a – sort of a special unique request. I don’t know if we’re going to see more of that. We just started in the one instance. It’s good, because we are able to sell more software licenses, and that’s high-margin revenue. We like that. And then, the customer is continuing to use the software and continuing to expand their monitoring reach with the Optima that talks straight to our remote, and they continue to use remotes, they continue to, also, buy services from us. So it’s a unique situation. At this point, we see it as a onetime thing. But you know, you never know.

[Mike Latimore:]

And then, can you elaborate a little more on the CRAN opportunity you’re seeing? Which products? Which type of customer? How material might that get this year?

[Tom Minichiello:]

Well, it’s helping us already, even though this is fairly new, but this is a wave that we see going forward in the network, partially getting ready for 5G, and partially it’s just more efficient for carriers to design the network that way. And where it helps us, Mike, is in the CNS business, initially with our power products and cabinets. We haven’t sold many cabinets into this network architecture yet, but that’s a possibility, a strong possibility. And then there more opportunities to remotely monitor the equipment as you move into this type of a network architecture. So we are seeing small sales of our ISM remotes so far. But those are where, in our product portfolio, where we’re going to see the benefit of this new architecture.

[Mike Latimore:]

And then just lastly, I mean, it sounds like the goal is kind of profitable growth. I know you guys typically don’t give sort of specific guidance. But do you think you’ll – is there a good chance you can grow your top line this year?

[Tom Minichiello:]

Well, as you know, Mike, we don’t – we do not give guidance specifically and quantitatively, but I, we like where we are right now, and we are six weeks into a quarter, almost half way through, and there’s still seven weeks to go this quarter. So we’ll see how it ends up. But our number one priority in this business, to drive shareholder value, is to grow revenue. We’ve done a nice job, I believe, with costs. Our margins are holding at or above our target. Our OpEx is at our target, and we continue to manage that regularly. We’re generating cash. Again, the biggest driver of increasing shareholder value right now, with where we are and where we’re positioned, is growing revenue.

[Mike Latimore:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Brent Morrison with Zuma Capital Management.

[Brent Morrison:]

Good morning, guys.

[Matt Brady:]

Hey, Brent. How are you doing?

[Brent Morrison:]

Verizon here, maybe starting in the fourth quarter into 2018, where do you see opportunities that the company is in position now?

[Matt Brady:]

Well, I think, we do see the strong marquee customers that we already have and continue to serve, and I think we’re going to continue to get additional sales out of them on a go-forward basis. The public safety sales, both direct and indirect, are good markets for us. We’re going to be very disciplined and look at some certain international markets, where we’re going to attack them and get sales with very low cost. And just to pop on what Tom said, we’ll be very disciplined to get profitable growth, both domestic and internationally.

[Brent Morrison:]

Specifically, with products, you guys offer repeaters, you offer that – you introduced the two-watt repeater components. What other areas of the network do you think you guys could expand into?

[Matt Brady:]

Well, I do think we like the power business and the ability to monitor, so growing some of the other monitoring space with ISMS product portfolio is something we’re going to attack domestically. And again, the cabinet business, there’s other customers, there is MSO customers, there is other wireless carriers that we’re going after right now. So we see some growth with the monitoring and the power.

[Brent Morrison:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] And it seems we have no further questions at this time. I will now turn the call over to Matt Brady for closing remarks.

[Matt Brady:]

So I wanted to thank everyone for joining us today. We’re pleased about the progress made, but we are far from done. We are continuing to step up our focus on growing our top line and executing our growth initiatives. We look forward to speaking with you again in the future. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating. You may now disconnect.