Westell Technologies, Inc.
Q1 2016 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Good morning, and welcome to the First Quarter Fiscal Year 2016 Earnings Conference Call. My name is Andrea, and I will be your conference operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call is being recorded. I will now turn the call over to Tom Minichiello, Westell's Chief Financial Officer. Tom, you may begin.

[Tom Minichiello:]

Thank you, Andrea. Good morning, and welcome to our conference call to discuss the fiscal year 2016 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 the 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 contains 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, 2015, 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 performance and facilitates comparisons across reporting period. Our discussion of results today will include non-GAAP financial measures. We have provided reconciliations to the most comparable GAAP measures in our news release. I will now turn the call over to Tom Gruenwald.

[Tom Gruenwald:]

Thank you, Tom and good morning, everyone. Today, I'll share my views on the quarter and our business overall. Then I'll hand it back off to Tom to review the details of our first quarter financial performance. I want to begin with our improved financial results. Revenue for the first quarter was $21.6 million, both our IBW and our CSG segments achieved sequential growth. In addition, we achieved a consolidated non-GAAP gross margin of 39.3%, the highest since the December 2013 quarter. Now let me talk about our business segments. IB another growth quarter with 28% sequential revenue growth and a 44.1% gross margin. Our active DAS Conditioner, the universal DAS interface tray or unit that we introduced a year ago achieved its second consecutive quarter of record sales. We also announced clearly DAS and advanced in-building distributed antenna system which enhances the performance of high speed mobile services such as LTE and provides outstanding coverage with superior data rates in a variety of venues. CSG also had a better quarter as it posted an 8% revenue growth and gross margin of 35.4%. This was led by improved revenue for our intelligent site management product where we're seeing large international opportunities. We also saw the highest level of sales of our power distribution products since the June quarter last year. In addition, sales of power amounted amplifiers remained strong again this quarter. As I've said before, we are focused on achieving operational excellence to enable Westell to grow profitably and significantly. This includes the following four items; expense sales capability and market reach, improved gross margins greater than 40%, reserve cash and work towards breakeven, and build an exceptional leadership team. Turning to our market development activities, when we reported our fourth quarter of fiscal 2015 in May, I stressed that sales is a key component of our drive for operational excellence and pointed to our hiring of Chuck Bernstein as Senior VP of Worldwide Sales and our expansion of sales focus to international markets. While Chuck is still in the process of putting his team on the field, this focus is paying off. During the first quarter, we brought on Board two significant new customers; one in the US and one in Latin America. These new relationships support the important goals of diversifying our customer base and expanding internationally and we look forward to more similar news in the coming quarters. In addition, we ended the first quarter with strong order momentum and while we are primarily are booking ship business which is why we have not historically offered quarterly backlog information, we closed the first quarter with very strong bookings resulting in the highest quarter end backlog in two years. Our quarterly non-GAAP gross margin of 39.3% is approaching our goal of a greater than 40% gross margin for the entire company. This was achievement due to our approved supply chain efficiency, our product specific teams implementing initiatives to lower material and labor costs, and a substantial decline in our excess and obsolete inventory cost this quarter. Cash and short term investments were $36.9 million at June 30, 2015 compared to $37.9 million at March 2015. A reduced net loss and improved working capital including decreased inventory levels contributed to the lower cash use during the quarter versus the previous two quarters. Finally, I'm augmenting our ISM and OSP businesses with strong new senior leadership to grow and drive these businesses to profitable growth. These are encouraging indications. And as I said last quarter, my first mission is to improve Westell's operational effectiveness so that we can excel in product development, customer engagement and operational management. Our entire organization is working extremely hard to achieve these results and we made good progress this quarter. With that being said, we have much higher performance aspirations, and while the trajectory is heading into right direction we still have lot of work to do and we will be relentless in this effort. Now I'd like to say a few words about our operating expenses. You've seen that after declining in the second and third quarters of the last fiscal year our non-GAAP OpEx begin to rise in the fourth fiscal quarter of 2015, and increased again this quarter. Two factors drive this increase. The first is sales and marketing, as we back filled many vacancies to bring our sales organization back to full strength. This has resulted in new customers, increased backlog, and improved performance as I've just mentioned. The second factor is R&D. We are in the late stages of the development cycle for our ClearLink DAS. This is an important product for Westell, it takes us from the DAS Conditioner market which has roughly $0.25 billion total addressable market, the DAS equipment market which while competitive is many times larger. It's a product that sits squarely in our RF core engineering competency and is positioned where the markets heading. We expect to bring ClearLink DAS to market later this year, at which point we anticipate tapering down our R&D expense. I'd like to make a final point. Everyone on this call knows we are intensely focused on returning Westell profitability. Absent R&D investment in ClearLink DAS, we would have been profitable. While doing so we would have been gratifying in the short term, it would not have been in the best interest of our business over the long term. Given the cycles in our industry, bringing this product to market is the next logical step in keeping our product portfolio current. So let me sum up. About a third of the way through the fiscal year we find that customers are spending carefully and deliberately. While there are trends that give us pause such as competition between DAS and small cell. We are gaining new businesses and continuing to build strong relationships. We are intently focused on improving our profit margins by driving increased revenues, managing cost and expenses. And we're extremely excited by our product portfolio and the team we're assembling. Altogether, the first quarter was a good start to what we think will be a positive year for Westell. With that, let me turn it over to Tom Minichiello for the financial review.

[Tom Minichiello:]

Thank you, Tom. Let me provide additional color on the financial performance for the quarter. On a GAAP basis, we reported a consolidated net loss for the first quarter of fiscal 2016 of $3.9 million or $0.06 per share versus a net loss of $13 million $0.22 per share in the prior quarter. On a non-GAAP basis, net loss for the first quarter of fiscal 2016 was $2.2 million or $0.04 per share compared to a non-GAAP net loss of $5.5 million, or $0.09 per share in the prior quarter. The favorable sequential comparison for both, the GAAP and non-GAAP results were driven primarily by the increased revenue and a significantly improved gross margin. In addition, the prior quarter GAAP results included $5.3 million of restructuring and other non-recurring charges. Our consolidated non-GAAP gross margin was 39.3%, compared to 25.6% in the prior quarter. The biggest factor contributing to this significant improvement was lower excess and obsolete inventory costs, followed by the higher consolidated revenue and a more favorable overall mix. This quarter's non-GAAP gross margin of 39.3% was, as Tom noted, the highest since the quarter ended December 31, 2013. Turning to the operating expenses, consolidated non-GAAP OpEx was $10.8 million this quarter compared to $10.2 million last quarter. The higher sequential OpEx was driven primarily by an increase in R&D expense, reflecting the added manpower in other project related expenses associated with our ClearLink DAS solution. Moving to the balance sheet, we used $1 million of cash in the first quarter, bringing our total cash and short-term investments to $36.9 million at June 30, 2015 and no debt. Note that the $1 million cash decrease is significantly better when compared to the previous two quarters, a reduced net loss, improved working capital which also included continuation of working down our inventory levels resulted in only $600,000 use of cash for operating activities during the quarter. The other $400,000 was primarily due to capital expenditures and earn out payments. Now let's take a deeper look at the segment results for the quarter. Revenue for the IBW segment was $9.1 million in the quarter, up 28% from $7.1 million last quarter. The sequential revenue increase was driven by higher revenue for both, passive and active DAS Conditioner including as mentioned earlier, the record quarterly sales of UDiT. IBW segment gross profit was $4 million and gross margin was 44.1% compared to $1.6 million and 23% last quarter. Gross profit and gross margin increased largely as a result of lower excess and obsolete inventory costs followed by the higher revenue. IBW segment R&D expenses were $3.2 million compared to $2.3 million in the prior quarter. The $900,000 R&D expense increase was due to the added manpower in other project related expenses associated with ClearLink DAS. As a result, IBW segmented profit was $800,000 compared to a segment loss of $700,000 last quarter. Revenue for the CSG segment was $12.5 million, up 8% from $11.5 million last quarter driven by increased intelligent site management revenue and higher sales of power distribution products. CSG segment gross profit was $4.4 million and gross margin was 35.4%, compared to $3 million and 26.4% last quarter. The gross profit and gross margin increased largely as a result of lower excess and obsolete inventory costs followed by the higher revenue and a more favorable mix. CSG segment R&D expenses were $1.9 million in both the current and prior quarter. As a result, CSG segment profit was $2.5 million compared to $1.1 million last quarter. With that, we'd now like to open up the call to your questions. Andrea?

[Operator:]

Thank you. [Operator Instructions] And you have a question comes from Mike Latimore of NCM.

[Mike Latimore:]

Good morning, guys, really nice quarter.

[Tom Gruenwald:]

Good morning, Mike.

[Tom Minichiello:]

Good morning, Mike.

[Mike Latimore:]

Thank you. So on the - I guess probably product areas, the intelligent site management, was that hardware and software or more hardware sales?

[Tom Gruenwald:]

It was both.

[Mike Latimore:]

It was both, okay, great. And did you guys have any 10% customers or how many if you did?

[Tom Gruenwald:]

Yes, Mike, we had two.

[Mike Latimore:]

Great. And then, what - you mentioned the power distribution strength, is there any sort of technology trends or is that more just on a general CapEx related?

[Tom Gruenwald:]

I think it's maybe a little more focused on it from our sales team, number one. We have introduced our product extensions, so a little broader product line. So I think those are the two components, and we're continuing to really examine that product line to see in what other ways we can grow it more rapidly.

[Mike Latimore:]

All right. And it sounds like that you guys made a lot of progress on gross margin, is it kind of a sustainable rate or -

[Tom Minichiello:]

Yes, Mike, this is Tom Minichiello. The excess and obsolete expenses that we were incurring which were larger in the back half of the fiscal year '15 are big reason that we moved from what was - I would call last quarter $25.6 million which was much, much lower than normal. That brought us up back into the low to mid 30s. And then on top of that you add on the fact that we're working on cost reduction, we had increased revenue and a little bit better mix and that got us up to the $39.3 million that we reported this quarter.

[Mike Latimore:]

All right. And then you also mentioned you have a record backlog I believe, exiting the quarter, how was order momentum so far this quarter?

[Tom Gruenwald:]

I think it's - it has not accelerated but it's consistent with last quarter given that it's one month.

[Mike Latimore:]

Okay. That's it for me for now. Thanks a lot.

[Tom Gruenwald:]

Sure.

[Operator:]

[Operator Instructions] We do have a question from Mike Latimore of NCM.

[Mike Latimore:]

Just to add a couple of more here. Can you talk a little bit about the new DAS products you guys have, maybe just - when do you see so you're going to bring it to market later this year, maybe a little bit more on timing on - the next steps that you need to take to make sure it's certified and ready to roll, when you might see start seeing orders?

[Tom Gruenwald:]

Yes, we're bringing it to FOA sometime this fall. We haven't selected an FOA site yet. And then suddenly point you will see us selling that thing pretty heavily, and hopefully before the end of the year it will be in sales product.

[Mike Latimore:]

Okay. And maybe a little bit of color on - you've developed this product, I assume you've kind of consulted with few of your big carrier customers about the product and then they've kind of given you some general guidance on what interest they have here or what their needs are?

[Tom Gruenwald:]

Yes, we've actually talked to a lot of folks in the industry, including the people who are putting these systems in, deploying them actually, to find out what kind of problems they are finding and also the people who support them. And we think that hallmark of this system is its exceptional performance. There is an issue which we've talked about called near/far, and we believe that our system, our ClearLink system will not have that problem, it will - it is a system which will perform extremely well even in the presence of the near/far issues that almost all venues have.

[Mike Latimore:]

All right. And then I guess, Tom, maybe with the current product mix that you guys have how do you think about just general seasonality in the business, on a sequential basis what are kind of strong or weaker sequential quarters, put that pattern?

[Tom Minichiello:]

Hi Mike, this is Tom Minichiello, just two times here on the call, though we also use last names. So we talked about that in the past, and if you look at the patterns in the last few years, it's really hard to draw anything as a pattern over the last couple of years since I've joined the company. So we've had some of our outdoor products have their best revenue quarters, and the winter quarters, March quarter, if you look back. So it's more around customer buying patterns and customer budget cycles and when they are - then it is seasonality - and from a season standpoint. And it's a little tricky when you get into the fourth quarter of the calendar year and the first quarter of the calendar year because budgets are changing, so it's not much of a definitive answer than I'm giving you but I'm just giving you the new launches around it.

[Mike Latimore:]

Sure, okay, got it. And then, how do you called out your power amounted amplifiers in areas of strength, where do you feel like - I mean, I think you are one big customer there or you feel there penetration is with that kind of technology, and then are there sort of new carriers that start using your UTMS.

[Tom Gruenwald:]

Well, the tower amps are used in certain specific situations for macro towers and we see that market is more or less steady over the next year to two years but we don't see it as the big growing market. We're continuing to enhance our product in consultation with our customers and we think that will help us maybe grab a little market share. But it competes with other technology that we don't have right now.

[Mike Latimore:]

Okay, great. Thanks a lot. Good luck.

[Tom Gruenwald:]

Thank you.

[Tom Minichiello:]

Thanks, Mike.

[Tom Gruenwald:]

Thanks, Mike.

[Operator:]

[Operator Instructions] Okay, it looks like we have no further questions at this time. I will now turn it back to Tom Minichiello for any closing remarks.

[Tom Minichiello:]

Andrea, I think we have one that just joined if I'm correct.

[Operator:]

And we do have a question from the line of Brent Morrison [ph] from Zuma Capital Management.

[Unidentified Analyst:]

Can you give us some insight, you mentioned a couple of remarks about CapEx, how do you see that trending over the next 12 to 18 months as a percent of revenue?

[Tom Gruenwald:]

You're talking about our CapEx?

[Unidentified Analyst:]

Sorry, I meant R&D.

[Tom Gruenwald:]

R&D, we see it trending down over the next 12 months, and noticeably down. So I can't give you an exact percentage but it will certainly be impactful.

[Unidentified Analyst:]

Okay. And then how about the split between CSG and IBW? Is it IBW side which is going to come down?

[Tom Gruenwald:]

Yes, it's mostly on the IBW side that will come down because that's where most of the investment is now.

[Unidentified Analyst:]

Okay. And then, regarding - kind of a breakeven level now, I don't know, I joined the call late, has the run rate kind of come down below $20 million? What's kind of a new cost - in the new cost structure?

[Tom Minichiello:]

Hi Brent, Tom Min here. We've mentioned in the past a range of about $25 million to $27 million in top line revenue for breakeven, and the reason why it ranges, it depends on the OpEx levels. We're between the $10 million and $11 million range right now if you're higher into that range which is where we were at this quarter at $10.8 million. If we're going to need the higher end of the revenue range for breakeven but as Tom just noted, our intentions are to bring that down closer to the lower end of that OpEx range of say $10 million. You can do the math at 40% gross margin on $25 million as something to model and that would get you breakeven. So we are still in that range in terms of where we think it will be to - need to be to breakeven.

[Unidentified Analyst:]

Okay. And then that is net income breakeven not a cash breakeven, correct?

[Tom Minichiello:]

Correct. Yes, that's profit.

[Unidentified Analyst:]

So that's considerable intangible amortization, and then that's probably back $2.5 million to $3 million in a run rate R&D?

[Tom Minichiello:]

Just to back up a second Brent to clarify, I'm talking about the non-GAAP results when we're talking breakeven.

[Unidentified Analyst:]

Okay.

[Tom Minichiello:]

Okay. And what was your next question?

[Unidentified Analyst:]

So just saying OpEx about $10 million, that's back it into R&D spending of about $2.5 million to $3 million?

[Tom Minichiello:]

Well, it would be - we're at $10.8 million today and we're up closer to that $11 million OpEx number because of the R&D. So if the R&D - the drop will be on the R&D line, not the SG&A.

[Unidentified Analyst:]

Okay. So I'm trying - so R&D maybe around $3 million to $4 million, it's kind of the run rate.

[Tom Minichiello:]

It would be - probably, yes, right around there. I think you've got it right, yes.

[Unidentified Analyst:]

Okay, all right. Thank you. That's all I have.

[Operator:]

And it looks like we have no further questions at this time. I would like to turn it back to Tom Minichiello for closing remarks.

[Tom Minichiello:]

All right, thank you, Andrea, and thank you everyone for joining the call. We look forward to speaking to you again in the near future. Thanks.

[Operator:]

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