Westell Technologies, Inc.
Q4 2016 Earnings Call Transcript

Published: 19 May 2016

[Operator:]

Good morning and welcome to the fourth quarter fiscal year 2016 earnings conference call. My name is Bianca and I will be your 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, Bianca. Good morning and welcome to our conference call to discuss the fiscal year 2016 fourth 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 strategy. I will then update you on our financial results for the quarter and we’ll conclude by taking questions. Before I 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, 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 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. So now, I will turn the call over to Tom Gruenwald.

[Tom Gruenwald:]

Thank you, Tom, and good morning everyone. Today I’ll share my views on our fiscal fourth quarter financial and operating results, recap fiscal 2016, and provide a high level view of our fiscal year 2017 first quarter. I’ll then hand it back to Tom to further review our financial performance. Westell’s fourth quarter revenue was up substantially, 12% year-over-year. Our IBW segment, however, did not contribute as it has in previous quarters. Fourth quarter was actually its weakest quarter this fiscal year; however, our CSG segment had its best quarter in two years led by outside plants. Reflecting the seasonal pattern that I discussed last quarter, Westell’s fourth quarter revenue increased 3% compared to the third quarter, which is typically our weakest of the fiscal year. This is less of a rebound than we typically see, but our 4Q revenue was up nonetheless. Our CSG business had strength across the board. Outside plant achieved its highest quarterly revenue since the June 2013 quarter, benefiting from sales of integrated cabinets under the Connect America Fund Phase 2, or CAF2 program. Shipments of cabinets are lumpy and we should not expect this level of contribution to continue uniformly in the future quarters. Our emphasis on power distribution is also starting to pay off as this product achieved good revenue growth again this quarter. Our ISM business had a solid quarter as well with good sales of both software and hardware as the business benefited from better focus. Our cell site optimization business, essentially our tower-mounted amplifier, or TMA product line rebounded from its seasonally low third quarter. As a whole, the combined strength of all three areas improved CSG’s results 31% both year-over-year and sequentially. IBW’s results, in contrast, were disappointing, with revenue off 18% year-over-year and 33% sequentially. Sales of our passive DAS conditioner product lines were weak, although sales of our active universal DAS interface tray, or UDIT, did better on a sequential quarter basis. Taking a step back to look at fiscal 2016, the combination of a 5% full-year revenue growth combined with a gross margin that grew significantly more from 31.9% in fiscal 2015 to 39.1% in fiscal 2016, generating earnings improvement that significantly exceeded revenue growth. We’re nearing the end of the fix phase of our multi-phase fix-build-expand plan. We fixed internal processes in R&D, product management, operations, and vendor management. We have also strengthened our leadership team, and on the sales side, we’ve acquired new customers in Latin America and made good progress with neutral host customers in the in-building wireless space. As we head into fiscal 2017, we anticipate developing and launching a number of new products. In IBW, the good news is that our ClearLink DAS is ready to launch. We are working with customers on trials and testing and expect to ship beta product during the June quarter. Our ClearLink DAS not only addresses the near-far problem but also features per-carrier power assignment and reporting ideal for neutral host applications. While we would have liked a smoother transition as our standalone DAS conditioners rolled off and ClearLink DAS came on stream, we look forward to revenue contributions from clear link DAS later in fiscal 2017. We have other new products coming in fiscal 2017 as well. In IBW, we’ve refreshed our repeater product line and introduced a new public safety repeater, which is also a new market for us. Later in the year, we will introduce a new line of antennas for in-building applications. To complement our TMAs, we plan to introduce a suite of smart filters for our cell site optimization business. These will balance our results as older products like our DAS conditioners enter the later portions of their life cycle. Looking ahead to the first quarter, we are seeing some softness in carrier spending, and as I mentioned, there is lumpiness in some of the outside plant product areas that were especially strong in the fourth quarter. I also want to point out that IBW continues to be in a transitional state as ClearLink DAS is not yet contributing revenue. Yet, I want to emphasize that profitability is our primary near-term goal. We will focus our efforts in three areas to make this happen

[Tom Minichiello:]

Thanks Tom. Let me provide some additional color on the financial performance for the quarter. We reported a consolidated GAAP net loss for the fourth quarter of $5.1 million or $0.08 per share, compared to a net loss in the same quarter last year of $13 million or $0.22 per share and a net loss in the prior quarter of $4.8 million or $0.08 per share. Year-over-year, the favorable comparison was primarily driven by a significantly higher consolidated gross margin of 37.8% versus 25.1% in the year-ago quarter and a significantly lower restructuring charge of $700,000 versus $3.2 million last year. Sequentially, the unfavorable comparison was due primarily to the $700,000 restructuring charge. On a non-GAAP basis, we reported a consolidated net loss for the fourth quarter of $2.6 million or $0.04 per share, compared to a net loss in the same quarter last year of $5.4 million or $0.09 per share and a net loss in the prior quarter of $3 million or $0.05 per share. The favorable year-over-year comparison was primarily driven by the substantially higher gross margin. The favorable sequential quarter comparison was almost entirely the result of lower operating expenses. As mentioned, consolidated gross margin in the fourth quarter was 37.8%, a substantial improvement over the 25.1% in the year-ago quarter due primarily to significantly lower excess and obsolete inventory costs and secondarily to cost reductions. Sequentially, the 4Q gross margin decrease from 39.4% last quarter was mainly due to a less favorable product revenue mix. Our consolidated gross margin for the full fiscal year 2016 was 39.1%, a significant increase compared to 31.9% in the prior year. Lower excess and obsolete inventory costs and higher revenue were the primary contributing factors. Turning to operating expenses, consolidated non-GAAP opex was $10.7 million this quarter compared to $11.2 million last quarter. Lower non-GAAP operating expenses were largely the result of headcount reductions in connection with the restructuring plan that we began implementing in mid-February. Moving to the balance sheet, we used $5.1 million of cash in the fourth quarter, bringing our total cash and short term investments to $29.7 million at March 31, 2016 and no debt. The use of cash increased when compared to the first three quarters of fiscal 2016 due primarily to a revenue pattern weighted more towards the latter part of the fiscal fourth quarter, resulting in a higher customer receivable balance at March 31, 2016. Now let’s take a look at the fourth quarter segment results. Revenue for IBW segment was $5.8 million in the fourth quarter, lower by 18% compared to the year-ago quarter and down 33% compared to the prior quarter. The year-over-year and sequential quarter decreases were largely indicative of a market shifting away from our standalone DAS conditioners as the functions served by these devices are increasingly integrated into larger network elements. IBW segment gross profit was $2.1 million and gross margin was 35.6% compared to $1.6 million and 23% last year and $3.3 million and 38.2% in the prior quarter. The favorable year-over-year improvement was primarily due to the lower excess and obsolete inventory costs while the sequential quarter decrease was principally a result of the change in segment revenue. IBW segment R&D expenses were $2.4 million compared to $2.3 million in the year-ago quarter and $2.7 million in the prior quarter. As a result, IBW segment loss was $300,000 compared to a segment loss of $700,000 last year and a $600,000 segment profit in the prior quarter. Revenue for the CSG segment was $15.1 million in the fourth quarter, up 31% compared to both the year-ago quarter and the prior quarter. The year-over-year improvement was due to increased ISM revenue and significantly higher outside plant revenues, while the same 31% sequential improvement was due to the greater outside plant revenue and increased sales of tower-mounted amplifiers. In 4Q, outside plant achieved its highest quarterly revenue level since the June 2013 quarter, driven predominantly by sales of integrated cabinets. CSG segment gross profit was $5.8 million and gross margin was 38.6%, compared to $3 million and 26.4% last year and $4.6 million and 40.3% in the prior quarter. The year-over-year gross profit and gross margin increases were primarily due to the lower excess and obsolete inventory costs as well as product cost reductions, while the sequential quarter gross margin decrease was mainly due to a less favorable mix. CGS segment R&D expenses were $2.3 million compared to $1.9 million in the year-ago quarter and $2.2 million in the prior quarter. As a result, CSG segment profit was $3.5 million compared to $1.1 million last year and $2.5 million in the prior quarter. So with that, we’d now like to open up the call for your questions.

[Operator:]

[Operator instructions] From Northland Capital, we have Mike Latimore on the line. Please go ahead, sir.

[Mike Latimore:]

Good morning Tom and Tom. Tom, you mentioned near-term goals, the profitability highlighted, new customers and introducing new products. I guess can you just elaborate a little bit on that? Is that something that you have good visibility into in the June quarter, or is that something that will sort of transpire over the course of the year?

[Tom Gruenwald:]

You know, some of it will transpire over the year. The specifics of it are working more closely with distributors who have specialties in things like utilities, where many of our products will play very well and we haven’t traditionally sold, as one example. So that’s where we’re thinking about new products or new customers. You know, that will probably start playing out over the summer as we’re just starting to work with a couple of new distributors.

[Mike Latimore:]

Then just from an opex standpoint, you said that’s part of the obviously near term goal to get to profitability, so do you envision sort of more cost reductions here or do you feel like you’re at the right level?

[Tom Minichiello:]

Yeah, hey Mike, Tom M. On the opex, we’ve taken the headcount down, as you can see, and that was--most of that occurred in the fourth quarter, but you’ll get more of the full impact of that this quarter, so you’ll see it move in a downward direction.

[Mike Latimore:]

Okay, got it.

[Tom Gruenwald:]

And then just to add on to that, Mike, there is other things we’re looking at with a goal to taking it down even further. As the detailed planning goes forward, we’ll be able to share more of that with you.

[Mike Latimore:]

Got it. Then on ISM, it sounded like that was pretty solid, I guess. Is that coming from current customers or new customers [indiscernible]?

[Tom Gruenwald:]

You know, ISM is a really good story because it was very, very weak in fiscal year ’15. This year, we saw a very, very solid rebound in that business, and some of it was traditional customers and some of it was a couple of new customers getting added. We’re finding that we’re getting some traction in some of the Tier 2 customers and some of the non-traditional carriers.

[Mike Latimore:]

Okay. Then how much--you know, Verizon is obviously going through a strike. Does that have any effect on trajectory, do you think?

[Tom Gruenwald:]

Well, that’s obviously having an effect because, you know, in some areas there is still some purchasing going on, but in many areas the folks who we would typically work with are on strike duty, and so I’d have to say there’s a general slowdown in Verizon spending in a couple of the areas that we’re pretty strong with Verizon in.

[Mike Latimore:]

Okay, got it. Just last one on the DAS ClearLink. It sounds like beta is this quarter, revenue later this year. When you think about revenue levels for this fiscal year, are we talking a few hundred thousand, a few million? Just kind of a general ballpark would be interesting.

[Tom Gruenwald:]

Yeah, I’ll give you a little color on that. The product is basically done and we’re entering in what we call a controlled introduction phase, which is basically getting the higher volume manufacturing up to snuff, which usually takes a few months. So in the near term, you’ll see some beta testing going on. In the intermediate term, which is probably July and August, we’ll see some revenue of several hundred thousand, and then I think we certainly have plans to see it into the millions this year.

[Mike Latimore:]

Okay, great. Thanks a lot.

[Tom Gruenwald:]

Sure.

[Operator:]

Once again, if you have a question, please press star, one on your touchtone phone. We have Joseph Caplan, a private investor with a question. Please go ahead, sir, your line is open.

[Joseph Caplan:]

Hi. I have a follow-up question, if I may, reference to ClearLink. I know that you started work on that since last year, and I know--I listen in every conference. Why is it that it seems like you were going to turn it out last year and now it’s been delayed two quarters? I mean, I feel terrible to say this, but this sounds like the HomeCloud scenario. Also, I know you had some link-up with some private organization that has to do with emergency notifications that ClearLink was supposed to work on. Have you generated any [indiscernible] in that direction or is that even viable to even consider?

[Tom Gruenwald:]

Okay, I’ll answer. I think that’s three questions, so I’ll try to at least answer them as I understood them. ClearLink is a very complicated product, and what we ended up having to do was measure the ClearLink performance very carefully over time and basically tweak the product, and we measured competitors’ products with the same type of performance in mind. What we were looking for was did we really solve the near-far problem, and the answer was yes; did our competitors really have it, and the answer was yes; and in addition, we had to really make certain that the ClearLink signal didn’t interfere with any public safety frequencies. So those were all things that we had to check and we did suffer some delays because of that, but we’re past that now. So we acknowledge that we had some delays, but like I said, we’ve done all the measurements, done all the tweaking. Now, the public safety market is another very good market that we’ve just introduced a public safety repeater into, and we expect to do more in that market as time goes on. So I hope that answered your question.

[Joseph Caplan:]

It did. If I could just follow up, I think because there was a release, was it named ClearBoost, some organization that puts in these kind of systems in hotels and--

[Tom Gruenwald:]

Yes, there is an integrator called RoamBoost - R-O-A-M-B-O-O-S-T, who basically is an integrator for hotels, so they specialize in the hospitality industry and they have selected ClearLink for two reasons

[Joseph Caplan:]

So I’m sorry, I just wanted to follow up with this because I felt that this new product had so much potential. When you integrate with them, what exactly does ClearLink do? What type of revenue--I mean, a range if you can, when something like this is put into one of their locations?

[Tom Gruenwald:]

Okay, that’s a good question. It really depends on the size of the hotel, and we have a couple examples right now that we’ve already quoted. One site that we quoted is a couple of hundred thousand dollars, and the other one is about $800,000. I think in the hotel industry, you’ll see them range from the low 100s to the mid to high hundreds of thousands.

[Joseph Caplan:]

So if that’s the case, if ClearLink then--and we’re talking about this is more of the private sector, and I would presume--I know everybody thinks it’s the Verizons and AT&Ts and Sprints of the world use these things larger, so--I mean, you could be talking about--if you’re saying you’re getting several hundred thousand dollars from a hotel, would these larger venues be in the millions? And if that’s the case, I mean, you’d be--potentially if this was used, seeing very, very large income, or am I misunderstanding you?

[Tom Gruenwald:]

We absolutely hope that that’s the case, but you know, we have to execute in the end. What we believe is--you know, I should point out too that there is a--there has been a shift in spending where the carriers used to fund everything, and now they--you know, they still fund some locations but they’re looking more and more to building owners, hotel owners, and even stadium owners to fund these things. So--but our real message is there are a lot of buildings, there are a lot of hotels that will be putting in DAS systems over the next several years, and so we really think the market is big, but we have to execute and we have to get our message across and sell the thing.

[Joseph Caplan:]

All right. If I may have one last question, what other companies, if you can say, have a competing product with [indiscernible]?

[Tom Gruenwald:]

Well, the DAS space is pretty full of competitors, both public companies and private companies. CommScope has a competing product, as does Corning, and then there’s a number of other private companies that also have competing products.

[Joseph Caplan:]

But you feel that the Westell product is superior?

[Tom Gruenwald:]

Yes, of course we do, and we have measured the performance of our product in a lab against the competitors, and we feel that we do compete very well.

[Joseph Caplan:]

All right. Is there a substantial difference in what your implementation is and cost versus, let’s say, CommScope, which I know is a very large company?

[Tom Gruenwald:]

Well you know, I can’t be sure of that because I don’t really know their cost, but in the pricing that we’ve done in some competitive bids, we found that we’ve been able to maintain reasonable margin and still be competitive.

[Joseph Caplan:]

Okay, and do you feel that--are they aware of your superiority, or not superiority to your product? I have to presume that--

[Tom Gruenwald:]

Well, I think everybody is aware because we were just at a show called DAS Congress, and we showed the system there, and I’m sure they stopped by to look at it. I’m sure that--I know one company is claiming that they too are addressing the near-far problem, but it doesn’t look like it from what we’ve measured in our lab.

[Joseph Caplan:]

All right. When you say that, are you saying that CommScope does have a near-far solution, or they’re just not talking--

[Tom Gruenwald:]

No, no, I didn’t say that they do. I said that some companies will claim that they do, but so far from what we’ve measured in our lab, it doesn’t appear to be the case.

[Joseph Caplan:]

So you feel that right now, Westell may be--I know you don’t know as an absolute, may be the only company that may have a true solution?

[Tom Gruenwald:]

Right now from what I know personally and professionally, Westell is the only--Westell’s product is the only one that is specifically designed to solve the near-far problem. Further, I know that we have measured it in our laboratory, both our system and four competing systems.

[Joseph Caplan:]

I know, and this is what I thought I understood, so what I don’t understand is why not everybody--you know, or a lot of people are just jumping on your product. I mean, I know you’re still testing, but--

[Tom Gruenwald:]

Well, they will. I mean, we had a lot of interest in the show that went on earlier this week, and I think people will. But again, you never know. We have to get out there and sell the product against entrenched vendors, and that’s what we’re about to do.

[Joseph Caplan:]

I really appreciate your time to take this call.

[Tom Gruenwald:]

No, thanks for some great questions.

[Joseph Caplan:]

Thank you.

[Operator:]

As a reminder, if you’d like to ask a question, please press star, one on your touchtone phone. We have no further questions at this time. I would like to turn the call back to Tom Minichiello for closing remarks.

[Tom Minichiello:]

Okay, thanks everyone for joining the call. Appreciate it, and we’ll look forward to speaking with you again in the near future. Thanks.

[Operator:]

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