Westell Technologies, Inc.
Q2 2016 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Welcome to the Westell Second Quarter Fiscal Year 2016 Earnings Call. My name is Christine, 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. Please note that this conference call is being recorded. I will now turn the call over to Tom Minichiello, Westell's Chief Financial Officer. You may begin.

[Tom Minichiello:]

Thank you, Christine. Good morning, and welcome to our conference call to discuss the fiscal year 2016 second 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 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, 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 periods. Our discussion of results today will include non-GAAP financial measures. And we 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 our second quarter financial and operating results. I'll then hand it back to Tom for further review of our financial performance. Westell's progress in the fiscal second quarter shows that our growth and operational strategy is on track. We posted our third consecutive quarter of revenue growth in both our IBW and CSG business segments achieved sequential double-digit increases. Our consolidated gross margins exceeded 40% the highest level since the December 2013 quarter. Looking at our segments IBW recorded 19% sequential growth. Our universal DAS interface tray or unit achieved its third consecutive quarter of the growth. And we also saw good demand for passive DAS conditioners, repeaters, and ancillary products. Revenue for our CSG segment grew 18% sequentially. ISM had its best quarterly revenues since December 2013 reporting double-digit sequential revenue growth. Our tower mounted amplifiers or TMA's also posted double-digit sequential revenue increased well. As you know, over the last three quarters, we’ve reorganized and refocused our sales force. Our sales team is now following the wider and deeper and as a result we are now seeing potential revenue opportunities we had not seen previously. Our improved revenue performance reflects our sales teams much enhance coverage of network operators, channel partners and integrators. We believe, we can further penetrate existing customers while increasing outreach to potential new customers. Our better overall financial and operating execution also reflects recent additions to Westell's leadership. During the quarter, we appointed Brian Brouillette as SVP of Intelligent Site Management and Worldwide Services. Last week, we announced the appointment of Mike Moran as SVP and Chief Technology Officer. Finally, I am truly thrilled that Jeannie Diefenderfer, an experienced Corporate Director and previously a Procurement Engineering and Planning Senior Executive with Verizon joined our Board of Directors in September. With respect to our financial performance, our non-GAAP operating expense increased reflects prudent investments to upgrade our sales team. As discussed last quarter, our new ClearLink DAS development is nearing completion. This is a new DAS solution enables Westell to enter the DAS head-end and remote equipment market which is significantly larger than the standalone DAS conditioner market which we currently address. ClearLink DAS is positioned where the market is headed and squarely within our core RF engineering competency. We anticipate shipping this new important product to customers during our fiscal fourth quarter with revenue recognition dependent on a number of factors including customer acceptance and approval. Returning Westell to long-term profitability is our fundamental goal. Restarting revenue growth through an effective sales coverage model was the critical first step followed by the required investments to enhance our product portfolio. To be sure, we will continue to find an execute cost reductions, for example by taking cost out of our production process and curtailing any unproductive spending. With that notwithstanding, we believe the best way for Westell to sustain gross margins of 40% or better and become profitable is by growing revenue. The responsible investments we are making in our sales organization and product development position us to do exactly that. These investments are important to Westell's future. I want to say a few words about our outlook. As you know, we entered 2Q with a strong backlog and we began the third quarter with a backlog that’s equally strong. However, I must point out, that the third quarter is historically a seasonally difficult quarter including adjustments related to seasonal customer deployments in budget cycles. In addition, looking at the calendar, there are approximately 15 fewer selling days in the third quarter compared to the second quarter due to the Thanksgiving and Christmas holidays. For these reasons, we anticipate that equaling our 2Q revenue and 3Q would represent a very strong performance in the quarter ahead. There are no carryover customer factors at this time that causes the change of favorable view of fiscal year '16 as a whole. Let me sum up, with half of fiscal year 2016 reported our growth and operational turnaround strategy has produced good results thus far this fiscal year. We’ve achieved two quarters of sequential revenue growth, we have the UDIT product that has gain customer acceptance and a second product ClearLink DAS that is nearing rollout. We have reorganized our leadership team and sales force and have appointed the CTO who will drive us to new market opportunities. With that let me turn it over to Tom Minichiello for the financial review.

[Tom Minichiello:]

Thank you, Tom. Before getting into the financial review for the quarter, let me address the 8-K we filed yesterday. As the filing notes, Ventures, Kentrox, goodwill impairment charge for the quarter ended September 30, 2014 should have been $895,000 higher a non-complex benefit for the quarter ended March 31, 2014 should be $550,000 lower, since due to Kentrox contractual obligations that existed prior to Westell's acquisition of Kentrox in April 2013. The liability was not [indiscernible] towards the time of transaction and therefore we plan to adjust previous periods. These non-cash adjustments results in applying accounting guidance which is conservative by nature and currently have no impact on our operating results or business outlook. Now let me return to this fiscal year second quarter and provide additional color on the financial performance for the quarter. On a GAAP basis, we reported a consolidated net loss for the second quarter of fiscal 2016 of $2.5 million or $0.04 per share versus a net loss of $3.9 million or $0.06 per share in the prior quarter. On a non-GAAP basis, net loss for the second quarter of fiscal 2016 was $700,000 or $0.01 per share compared to a non-GAAP net loss of $2 million, or $0.03 per share in the prior quarter. The favorable sequential comparisons for both, the GAAP and non-GAAP results were driven primarily by the increased revenue in gross profit. Our consolidated non-GAAP gross margin was 40.3%, compared to 39.3% in the prior quarter. This quarter's gross margin of greater than 40% was, as Tom Gruenwald just noted, the highest since the quarter ended December 31, 2013. Turning to operating expenses, consolidated non-GAAP OpEx was $10.9 million this quarter compared to $10.6 million last quarter. The higher non-GAAP OpEx was driven by an increase in sales and marketing expenses, this was largely the result of making the necessary investments in our sales organization to increase market coverage, develop new market opportunities and drive revenue growth. Moving to the balance sheet, we used $600,000 of cash in the second quarter, bringing our total cash and short-term investments to $36.4 million at September 30, 2015 and no debt. Note that the $600,000 use of cash is a significant improvement when compared to the previous three quarters, not only due to our improved operating performance and lower net loss contributed this improvement. We’ve also significantly reduced our inventory levels in recent quarters. As a result, Westell generated $800,000 in cash from operations this quarter. Now let's take a deeper look at the second quarter segment results. Revenue for the IBW segment was $10.8 million in the quarter, the highest since the September 2014 quarter, and up 19% from $9.1 million last quarter. The sequential increase was driven by higher revenues across all product categories, DAS conditioners, repeaters, and ancillary products and included record quarterly sales of our active DAS conditioner, the Universal DAS Interface Tray or UDIT. IBW segment gross profit was $4.5 million and gross margin was 42% compared to $4 million and 44.1% last quarter. Gross profit increased due primarily to the higher revenue or the gross margin decreased primarily to a less favorable mix. IBW segment R&D expenses were $2.8 million compared to $3.2 million in the prior quarter. As a result, IBW segment profit was $1.8 million compared to $800,000 last quarter. Revenue for the CSG segment was $14.7 million, the highest since the March 2014 quarter and up 18% from the $12.5 million last quarter driven by higher revenues across all product categories ISM, TMA's and outside plan and included the highest quarterly revenue level for ISM since December 2013. CSG segment gross profit was $5.7 million and gross margin was 38.7%, compared to $4.4 million and 35.4% last quarter. The gross profit and gross margin increased primarily as a result of the higher revenue. CSG segment R&D expenses were $1.9 million in both the current and prior quarter. As a result, CSG segment profit was $3.8 million compared to $2.5 million last quarter. Now that we are starting to see our new team and strategies deliver performance improvements, we are working to expand visibility of the Westell story with investors. We look to be happier than marketing our story with new analyst and investors and we’ll be participating in two conferences in early December. We will be presenting at the LD MICRO Conference in Los Angeles on December 03 and our presentation will be available via a live webcast and reply available at our website westell.com. We’ll also be participating at the benchmark Micro Cap one-on-one conference in Chicago on December 10. We hope to see some of you at these events. With that, we'd like to now open up the call to your questions.

[Operator:]

Thank you. [Operator Instructions]. And our first question is from Mike Lattimore of Northpoint Capital. Please go ahead.

[Unidentified Analyst:]

Good morning Tom, Tom, its Mike.

[Tom Gruenwald:]

Thank you.

[Tom Minichiello:]

Thanks Mike.

[Unidentified Analyst:]

On this mix of revenue IBW versus CSG that we have in this quarter is that kind of a good mix to think about going forward or would those around a little better?

[Tom Gruenwald:]

Yes, I think it’s a good mix going forward, I think we don’t see any gross changes except may be for seasonal construction issues and things like that, that might favor one over the other.

[Unidentified Analyst:]

Sure, okay. And then on the – you call on press release, your intelligent site management business I guess can you give a little bit more detail there is, is the strength there coming from one customer or several customers and is there other new software purchases or mostly hardware just more color on the strength there be interesting?

[Tom Gruenwald:]

It’s really due to about four customers primarily hardware purchases not as much software.

[Unidentified Analyst:]

Okay, got it. And then, you talked about your new DAS product potentially I think shifting in the fourth quarter, where are we in terms of kind of certification by some of the big U.S. [indiscernible] for that?

[Tom Gruenwald:]

We plan to start going into the [Telco] labs in the next couple of months. I would say certainly by the midpoint in December or we should have some trials going on.

[Unidentified Analyst:]

Okay. And then, can you give us may be percent of revenue from top 2 or top 3 customers in the quarter?

[Tom Minichiello:]

Mike, we had one 10% greater than 10% customer but just to add a little bit to that we had five other customers that were in the mid to high single-digits with the second one pretty close to the 10%.

[Unidentified Analyst:]

Got it. Okay. Great. And just from I gues just from a margin standpoint, it sounds like you are comfortable with may be gross margin can stay at 40% range that’s one question. The other one is the OpEx that we saw in the quarter that sort of a very good level so think about going forward?

[Tom Minichiello:]

Yes I take on your second question Mike, yes and on your first question yes as well, with the exclusive explanation that the volume mix is always a factor and we’ve also then keeping a good look at our inventory and better managing that to keep our P&L costs significantly reduce from what we had in the past.

[Unidentified Analyst:]

Okay. And this is last question for me is the, through the cash dollar, the cash ones what we are seeing, we see any benefit Westell from kind of last finisher?

[Tom Gruenwald:]

We do, we’ve already had indications from one customer and that will be, some reasonably significant cap spending for that customer and we are certainly approaching some others in the same way and so here we think we will see – and it probably won’t occur for next calendar year because of the construction season people pretty much shut that down late in the year, but we will see uplift from cap.

[Unidentified Analyst:]

Okay. Thanks a lot good luck for the rest of the year.

[Tom Gruenwald:]

Thank you, Mike.

[Tom Minichiello:]

Thank you, Mike.

[Operator:]

Thank you. Our next question is from Brent Morrison of Zuma Capital Management. Please go ahead.

[Brent Morrison:]

Good morning guys, decent quarter, can you talk about -- is the sales uplift coming more from the carriers coming back or your customers coming back in spending or more of the outgoing sales initiatives with the new sales force?

[Tom Gruenwald:]

I think it’s a little bit of the carriers coming back, but it’s also getting revenue from new customers we’ve had several new customers come on that, are significant revenue.

[Brent Morrison:]

And could we expect that there is new customers start from now you see your products and start sees increased sales going forward?

[Tom Gruenwald:]

Yes, that’s what we hope. In some cases we’ve entered – we brought the new customer with one particular product and of course once we’ve got that relationship we will try that, both sell more of that product but so other products as well.

[Brent Morrison:]

Okay. And how many of these kind of mid single-digit customers were brand new to the company?

[Tom Gruenwald:]

Brent they were existing customers.

[Brent Morrison:]

Okay, okay are existing. Great. And then you didn’t mention anything about backlog is that because it’s kind of Q2 and was too early or just it – can you mention – can you talk about that Gruenwald?

[Tom Gruenwald:]

Yes, it’s a little early to mention how the backlog is going, because typically early in the quarter, we are into our backlog and then we rebuild it, so that’s really how we have to say right now about backlog.

[Brent Morrison:]

Okay, that’s all I have. Thank you.

[Tom Gruenwald:]

Thanks Brent

[Tom Minichiello:]

Thanks Brent.

[Operator:]

Thank you. [Operator Instructions]. And we have no further questions. I will now turn the call back over to Tom Minichiello for closing remarks.

[Tom Minichiello:]

Thank you everyone for joining us today. We look forward to speaking with you again in the near future.

[Operator:]

Thank you. And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.