Westell Technologies, Inc.
Q1 2017 Earnings Call Transcript

Published: 11 Aug 2016

[Operator:]

Good morning and welcome to the Westell first quarter fiscal year 2017 earnings call. My name is Katie and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call is being recorded. I’ll now turn the call over to Tom Minichiello, Westell’s Chief Financial Officer. Please go ahead, sir.

[Tom Minichiello:]

Thank you, Katie. Good morning and welcome to our conference call to discuss the fiscal year 2017 first quarter results for Westell Technologies. The news release we issued last night is posted on our website, Westell.com. On this call, Tom Gruenwald, Westell’s Chief Executive Officer, will begin with a discussion of our business and strategy. I will then update you on our 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 the 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, 2016 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. With that, I’ll turn the call over to Tom Gruenwald.

[Tom Gruenwald:]

Thank you, Tom, and good morning everyone. While we got together as recently as two weeks ago, we’re grateful today to have this opportunity to talk with you about Westell’s performance and prospects. Consistent with the news we gave you in July, our revenue for the first quarter of fiscal 2017 amounted to $14.8 million. As I said at the event time, first quarter results reflected an unusual confluence of events, including a general slowdown in carrier spending, a strike-related work stoppage at our largest customer as well as a slower than planned deployment of our equipment by another large customer. Last time we were together, we also discussed our $11 million expense reduction plan. The net result is that we have significantly accelerated our path to profitability by positioning Westell to break even or potentially show positive results at a quarterly revenue in the $20 million range. We’re well along in the execution of this plan and continue to analyze our operations to find even additional savings opportunities. The impact of these efforts will show up starting partially this quarter 2Q 2017 and more fully in the next, with the full impact before the end of FY17. At the same time, our turnaround momentum that we achieved over the past year has not been dampened. As you know, we embarked on a 3-point turnaround plan called fix, build and expand. In the fix space, our objectives included increasing customer engagement, coverage and diversity, enhancing supply chain effectiveness and improving and streamlining processes around product marketing and R&D. we’ve achieved tangible results, most notably improving gross margins from the low 30% range in FY15 to the high 30% range in FY16, and to the 40% range in 1Q17, which is where our 1Q gross margin would have been if not for one time charges. On the customer facing side, we’ve added new customers and began to see traction in Latin America, which is a new geographic opportunity for us. We’ve also made good progress with neutral host operators and integrators in the in-building wireless space. Channel partners were another good story. Over the past year, we’ve improved internal processes to make it easier for our channel partners to do business with Westell. At the same time, we centralized a number of functions that were previously performed in different parts of the company. That change enables us to present a consistent face to our channel partners while reducing overall expenses. Now we’re taking a more collaborative approach where we actively work closely together with our channel partners to develop new market opportunities. On the product side, we’ve made progress in all three segments. In IBW, we’ve introduced a number of new repeaters, including repeaters for the public safety market. As I mentioned earlier, repeaters grow the increase in our IBW revenue during 1Q. In addition, we’re introducing several new high performance antennas that we expect to add to our IBW revenue picture going forward. Our IBW product development is delivering the kind of high quality, reliable products that enable our customers to satisfy new public safety requirements. In ISMS, we’ve continued to help service providers by adding new features and functionality to our intelligent monitoring solutions. These solutions enable our customers to monitor an ever increasing set of devices and run their operations more economically and securely. These advances allow us to play more significantly in the Internet of Things or IOT space, which as you know is growing very rapidly. Communication Network Solutions or CNS is the new term that encompasses our outside plant in Cell Site Optimization Solutions. We’ve talked previously about our efforts to help customers address rural broadband initiatives associated with Phase 2 of the Connect America Fund or CAF2. That remains an opportunity for integrating cabinet business. Cell Site Optimization is addressed by our tower mounted amplifiers, which were enhanced with significant new feature capabilities earlier this year, including new frequency bands and new lightweight configurations that will lower the carrier’s tower rental expenses. In short, we’re doing the right things for the future of Westell. First, focusing our products and solutions on the initiatives that are important to our customers, such as public safety, rural broadband and asset monitoring. Second, addressing our cost structure to accelerate our path to profitability and cash generation. Third, continuing to expand our customer base among service providers, integrators, neutral host operators and channel partners, both domestically and in select international markets. Having said that, I’ll turn the call over to our CFO, Tom Minichiello.

[Tom Minichiello:]

Thank, you. Tom. Let me provide additional color on the financial performance for the quarter. We reported a consolidated GAAP net loss for the first quarter of $7.8 million or $0.13 per share, compared with a net loss in the same quarter last year of $3.9 million or $0.06 per share and a net loss in the prior quarter of $5.1 million or $0.08 per share. While the lower 1Q17 revenue was the primary contributor to the unfavorable comparisons to both the year ago quarter and the prior quarter, the 1Q17 GAAP results were also adversely affected by $2.6 million of one time charges related to continuing development of ClearLink DAS. These one-time items included a $1.4 million charge to cost of goods sold for purchase commitments and inventory write-offs, negatively impacting the GAAP gross margin, and a $1.2 million charge to operating expenses for the write-off of fixed assets. On a non-GAAP basis, net loss for the first quarter was $3.6 million or $0.06 per share, compared to a net loss in the same quarter last year of $2 million or $0.03 per share and a net loss in the prior quarter of $2.6 million or $0.04 per share. The lower 1Q17 revenue was the primary contributor to the unfavorable comparisons of non-GAAP earnings to both the year ago quarter and the prior quarter. However, this was partially offset by a very healthy gross margin and significantly lower operating expenses. Speaking of gross margin, our consolidated non-GAAP gross margin in the first quarter was 40.5%, up from 39.3% in the same quarter last year and an improvement compared with 38.1% in the prior quarter. Despite the lower volume of business this quarter, a much more favorable product mix and ongoing cost improvements enabled us to generate the 40.5% non-GAAP gross margin, which was the best in any quarter since the third quarter of fiscal 2017, which ended December 31, 2013. Turning to operating expenses, consolidated non-GAAP OpEx was $9.6 million this quarter compared to $10.7 million last quarter. Lower non-GAAP operating expenses were due primarily to headcount reductions in connection with the restructuring plan announced in February. Also, lower sales incentive and other variable compensation expenses contributed to the lower non-GAAP OpEx, as well as the tightening of expenses in the marketing and G&A areas. Moving to the balance sheet, we used $4.4 million of cash in the first quarter, bringing our total cash and short term investments to $25.3 million at June 30, 2016 and no debt. Cash used in the quarter as driven primarily by the net loss, partly offset by favorable working capital. Now let’s take a deeper look at the first quarter segment results. Revenue for the IBW segment was $6.1 million in the first quarter, lower by 33% compared with the year-ago quarter, but up 5% compared with the prior quarter. The year-over-year decreases was due primarily to lower sales of DAS conditioners, while the sequential increase was due primarily to higher sales of repeaters. IBW segment gross profit, excluding one-time charges, was $2.4 million and gross margin was 39% compared with $4 million and 4% last year and up from $2.1 million and 36% in the prior quarter. The unfavorable year-over-year comparison was due largely to the lower revenue, while the sequential improvement was due primarily to a more favorable mix. Revenue for the ISMS segment was $4.1 million in the first quarter, lower by 9% and 21% compared to the year-ago quarter and the prior quarter, respectively. The year-over-year decrease was driven by lower services revenue, while the sequential decrease was driven largely by lower sales of ISM remote units. ISMS gross profit was $2 million and gross margin was 49% compared with $2.2 million and 49% last year and $2.8 million and 54% in the prior quarter. While gross profit and gross margin were generally consistent compared with the same quarter last year, the sequential quarter decrease was due primarily to the lower revenue. Revenue for the CNS segment was $4.6 million in the fourth quarter, lower by 43% and 53% compared with the year-ago quarter and the prior quarter respectively. The year-over-year decrease was due to lower sales across the CNS segment, with tower mount and amplifiers representing the most significant decline. On a sequential basis, the largest contributor to lower CNS revenue was the drop in sales of integrated cabinets. CNS segment gross profit was $1.6 million and gross margin was 34%, compared with $2.2 million and 28% last year and $3 million and 31% in the prior quarter. The lower gross profit amounts when compared to both periods were attributable to the lower 1Q17 revenue. The much improved gross margins when compared to both periods were primarily due to a more favorable product mix. As Tom Gruenwald mentioned at the top of this call, a number of external events adversely affected fiscal first quarter revenue. At the same time, however, we continue to make progress by increasing gross margin and reducing operating expenses, all with the goal of accelerating our path to cash generation and profitability. With that, I’d like to now open up the call for your questions.

[Operator:]

[Operator instructions] Our first question comes from Mark Silk from Silk Investment Advisors. Please go ahead, sir.

[Mark Silk:]

Hi guys. Thanks for taking my question. So before I decide to add to my position, I have been a long term holder, your stock is low dollar and I just don’t like when companies try to manipulate the price so they’re not delisted. I’d rather wait it out, so my question to you is, are you going to do a reverse cost split? Are you going to just wait for the company to turn around and hope that price will take care of itself?

[Tom Minichiello:]

Good morning, Mark. This is Tom Minichiello. We’re willing to consider all the options and this is something that we’ll be engaged with with our board and make a determination on what to do. Of course the first and better option would be to earn our way out. We do have some time and when the time comes, if we have to make some other choices, we’ll do that in consultation with our board.

[Mark Silk:]

Okay. My two cents is its more semantics. And so I’d rather you wait it out because again reverse cost splits rarely work out. On the other note, your cash balance, obviously it’s been coming down. I like to look at cash rich companies. Do you think that your cash will be sustainable before you break even or you might need to raise more money down the line?

[Tom Minichiello:]

We think it will be sustainable. We had a call a couple of weeks ago reviewing our expense reduction plan of $11 million. We intend to execute that and that’s going to go a long way towards stabilizing our cash position.

[Mark Silk:]

Okay. Thank you for taking my questions.

[Operator:]

Our next question comes from Mike Latimore from Northland Securities. Please go ahead.

[Nick Altmann:]

Thanks. Hey, this is Nick Altmann on for Mike. Thanks for taking my questions. In terms of order momentum, which product area do you guys seem to be benefiting from most? And then I guess staying on the same page, is that momentum coming from current or new customers?

[Tom Gruenwald:]

I’ll take that question. Thanks. Based on order momentum to date in this quarter, first of all we see a strong to moderate revenue rebound in 2Q versus 1Q. That’s coming from primarily IBW and our ISM area. So those two areas seem to be doing reasonably well in terms of order momentum.

[Nick Altmann:]

Okay, thanks. And then does it seem like the strike related delays are behind you? And then if so, is there some catch up spending activity in the future?

[Tom Gruenwald:]

Certainly the strike is over and the air -- where we go to find out how that’s really going is some of our large distributors who work closely with the carriers. And last we checked, they saw things picking up, but they had not returned yet to previous levels. I honestly don’t know if there will be catch up spending. I think if there is, it will take place over time.

[Nick Altmann:]

Okay, thanks. And then in terms of customer concentration, you guys have any customers over 10%? And then if you could provide us with the name of that customer that would be great.

[Tom Minichiello:]

Hey Nick, this is Tom M here. We had two customers over 10% in the quarter. We also had a third customer that was just under that mark. We also don’t disclose the names of the customers on the call here, but we did have two over and one just at around 9%.

[Nick Altmann:]

And then for those two customers over 10%, were they marginally over 10% or not?

[Tom Minichiello:]

No. they were well over 10%.

[Nick Altmann:]

Okay. Thank you.

[Operator:]

[Operator instructions] And it looks like we have no further questions at this time. I’ll now turn the call back to Tom Minichiello for closing remarks.

[Tom Minichiello:]

Okay. Thank you everyone for joining us today and we look forward to speaking with you again. Thanks.

[Operator:]

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