Westell Technologies, Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Good morning, and welcome to the Westell Third Quarter Fiscal Year 2017 Earnings Call. My name is Allen 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. Tom, you may begin.

[Thomas Minichiello:]

Thank you, Allen. Good morning, and welcome to our conference call to discuss the fiscal year 2017 third quarter results for Westell Technologies. The news release we issued last night is posted on our website, westell.com. On this call, Kirk Brannock, 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 will 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, 2016 under the section Risk Factors. The forward-looking statements made in this presentation are being and 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 provide reconciliations to the most comparable GAAP measures in our news release. With that, I will now turn the call over to Kirk.

[Kirk Brannock:]

Thank you, Tom, and good morning, everyone. As I mentioned during our last earnings call, our first call was to get operating expenses down to a level or we can sustain profitability at current business volumes. At that time, Westell had already been taking important steps to returned profitability. I am proud to report to the Westell team made tremendous progress this quarter. Let me highlight those accomplishments. Let’s talk about operating expenses. Our goal was to bring quarterly non-GAAP OpEx down to a range between $7 million to $6.5 million. We substantially exceeded this goal by driving down non-GAAP OpEx to $5.9 million. Gross margins, our target has always been 40% or greater, which we achieved in the third quarter by generating a consolidated gross margin a 40.4%. Profitability, by surpassing our OpEx goal and gross margin target, our non-GAAP operating profit was positive for the first time in three years. Cash flow, we indicated that we should see a flat or slight increase in the third quarter with the goal of maintaining cash at or above $20 million. With the $2.9 million of positive cash flow generated at this quarter, our cash grew 14% to $23.8 million. So we have $23.8 million of cash and no debt. Let me say that again, our cash balance is currently $23.8 million and we ended the quarter with no debt. These results would have been possible without the contributions across the entire Westell team and represent a positive change as we move forward. We're pleased with the progress, but at the same time there's more to do and feel we can continue to drive further efficiency in the business and shareholder value. For example, we reported last quarter that we expected to complete the consolidation of our in-building wireless, final assembly, and test operations with Spinnaker, a contract manufacturer in New Hampshire with whom we've been doing business with since 2000. This process was successfully completed on schedule and we saw the first benefits in this quarter as a gross margin for our in-building wireless business improved to 40.3%. We expect the ongoing benefit for this arrangement to reflect positively in future results, including the costs associated with some space we vacated in January in our Manchester, New Hampshire facility as a result of the consolidation at Spinnaker. I don't believe guy Nickerson is on the call today with us, but I want to thank guy who is the owner of Spinnaker for his great partnership. We're continuously working on additional profit improvement initiatives across all three business segments. We're looking at product costs, labor efficiencies, product pricing strategies, sales force alignment and even a new lease for our Aurora headquarters location. Moving to the revenue side, as indicated in our last call, the December quarter is historically a relatively strong one for our Intelligent Site Management and Services segment, while a season would be low period for our CNS business. Through to these historical patterns, the ISMS business grew sequentially and in fact had its highest revenue quarter since the same purity year ago, while CNS was down sequentially. We have more work to do growing our topline. Our in-building wireless business was strong again this quarter, led by increased demand of our Universal DAS Interface Tray. We also continue to be encouraged by the positive order momentum we have for our half-watt public safety repeater and in late November, we announced we would be launch in this quarter our new two-watt public safety repeater, the latest edition of our IBW portfolio. But with products meet the necessary regulatory requirements, including those of the first responder network authority, FirstNet, the first plan nationwide mobile broadband communication network for public safety. Today we are already seeing more and more municipalities define their in-building wireless public safety requirements. Excluding the future effect of FirstNet, we estimate using nationwide building data and other industry analysis that the North American market for in-building wireless public safety to be approximately $277 million in 2017 and growing roughly to $487 million by 2021. Our intention is to provide a full portfolio of products and solutions that addresses this growing market. Let me just take a minute to talk about another important item to Westell and that’s customer diversification. Westell’s business is traditionally relied on two large North American service providers. In recent years, the Company has made efforts to expand its North American customer base and we are beginning to see some success. We now sell our in-building wireless products to all four major wireless service providers along with several large neutral host operators and a growing number of integrators across the U.S. and internationally within Mexico. We have made some significant progress, resetting our expense structure for sustainable profitability and we are encouraged by the traction we are gaining in the exciting in-building wireless public safety market and we are stepping up our focus to focus on topline growth. But there's much more to do to drive shareholder value and I believe our team is up to the task. With that, I’ll now turn it back over to Tom.

[Thomas Minichiello:]

Thank you, Kirk. Let me begin by providing some additional color on our revenue and gross margin performance for the quarter. Westell’s fiscal 2017 third quarter consolidated revenue was $15 million compared to $17.8 million in the prior quarter. The $2.8 million lower sequential quarter revenue was attributable to our CNS segment which consists primarily of outdoor products when business in the October to December quarters is historically low due to the approaching winter months. Our ISMS business segment revenue grew 8% sequentially to $5.5 million driven primarily by an increase in sales of software licenses for our Optima management system and by higher deployment services revenue. It's worth noting that ISMS bookings in the third quarter was significantly in excess of revenue as we receive large orders for Optima software licenses and related support for which the revenue is recognized ratably over the support period in this case one year. Our IBW segment revenue was $6.2 million compared to $6.6 million last quarter, while we filled fewer orders for commercial repeaters this quarter due to product updates requiring recertification, our IBW business remain strong. For the second consecutive quarter, unit sales grew sequentially achieving the second highest ever quarterly revenue level. For the third straight quarter, we continue to gain traction with integrators and channel partners for our half-watt public safety repeater. On a year-to-date basis, IBW now represents 40% of total Westell revenue. Third quarter consolidated gross margin was 40.4% up from 35.8% last quarter. The sequential increase was driven primarily by more favorable mix and lower costs. Including as Kirk noted, the consolidation of our IBW, final assembly and test operation with Spinnaker. Turning now to operating expenses, consolidated non-GAAP OpEx was $5.9 million, 24% better than the $7.8 million last quarter and substantially exceeding the goal we communicated on our last call. To provide some perspective here, note that a year ago when we reported $11.2 million in the fiscal 2016 third quarter, our non-GAAP operating expenses stood at an annualized run rate of approximately $45 million. Compare that to the approximately $24 million annualized run rate on the just reported $5.9 million, that's a $21 million or 47% reduction. Turning to the fiscal 2017 third quarter earnings. On a sequential GAAP basis, we improved the bottom line by $4 million or $0.06 per share. On a non-GAAP basis, net income was $200,000 or $0.00 per share compared with the net loss of $1.1 million or $0.02 per share in the prior quarter. In addition to non-GAAP net income, our non-GAAP operating profit of $200,000 and adjusted EBITDA of $0.5 million were both positive in 3Q 2017 for the first time in three years. Moving to our balance sheet. We grew cash by $2.9 million or 14% in the third quarter bringing our cash total to $23.8 million at December 31, 2016 and zero debt. Generating $2.9 million of cash in the quarter was the result of our $0.5 million positive adjusted EBITDA and working capital management. Speaking of cash, you heard Kirk make reference to a new lease for our Aurora headquarters location. Our current lease expires on September 30 of this year and we are currently in negotiations for space more suitable to our current operation. Beginning on October 1 of this year, we expect a significant reduction in our annual cash outlays in the range of $1.5 million to $2 million. We plan to make an announcement once we finalize a new lease. Before we move to your questions, let me summarize. First, the expense structure reset we began earlier this fiscal year and accelerated in the third fiscal quarter has restored non-GAAP profitability to the business and help to our financial position. Second, we are expanding our customer base in existing and new markets with service providers, neutral host operators, integrators, OEM's, distribution channel partners and in select international markets. And third, we are excited about an investing in the growing in-building wireless public safety market. And further analyzing industry trends and our product portfolio to determine additional areas in or adjacent to our core competencies where we believe Westell has the highest opportunities for success. Now we'd like to open up the call for your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Mike Latimore with Northland Capital Markets.

[Mike Latimore:]

Yes, thanks. Thanks a lot. Great quarter there guys. So just on your last comment there, Tom said as of October you think your annual lease costs will drop by $1.5 million to $2 million, is that reason?

[Thomas Minichiello:]

Yes, that’s correct Mike and good morning. We have a lease that was 20 years running. It ends on September 30 of this year. We will have a new lease on October 1, starting on October 1. As I think you're aware, the building here is bigger than the needs of the current business. It's been a sort of a news around the Company here financially in recent years. We are finally at the end of that lease and we're looking forward to a lease that will be more suitable to the current business and we will definitely be saving a lot of cash on a go forward basis once we're in that new lease. Again at $1.5 million to $2 million is the range will be somewhere in that range.

[Mike Latimore:]

Okay, got it. And on the ISM business, I think you said bookings were greater than revenue and just a couple things there, I guess it sounds like a lot of bookings were software and support as opposed to hardware, just as I wanted to clarify that? And also what are the applications sort of the invasion in the bookings areas is this kind of sell side management, are you getting out better than wireless industry here?

[Thomas Minichiello:]

Mike, this was for Optima software licenses with an existing customer internationally and it involved upwards of about $1 million order with potentially more to come in the next quarter or two because the number of sites that the customer needs to cover is greater. But the point that I was making in the prepared statements is that we got the booking for that amount. But the accounting rules require us to ratably recognize that revenue over a 12-month period, which is the period of the post contract support as it's called a PCS. So we've got some of that revenue in the third quarter. We will continue to recognize that revenue over the next three quarters.

[Mike Latimore:]

Got it. And then on the public safety repeater business, can you talk a little bit there about what are them are successful channels to-date and I mean who do you see as your main competitor in some of these FirstNet deal?

[Kirk Brannock:]

Mike, this is Kirk Brannock. I'll take that question. If you look at what we've rolled out, we rolled out the half-watt public safety repeater. And as I mentioned earlier, we announced in the last quarter that we'd be rolling out the two-watt public safety repeater. When you look at the channel, the important channel for us is going to be the integrators. These are the folks that work with the end user to basically develop in-building wireless designs. What we’ve seen is from the integrator perspective is [indiscernible] along with municipalities in some cases that requiring building owners to have better in-building wireless coverage. So we view the integrators as key to our success. I mean those are the folks that are interfacing with the end users and that's where we're seeing our traction. Your second part of your question was competition. Right now, the competition that we're seeing comes from only a few people, ADR [indiscernible]. They have a product out there. It is more expensive than our product. We're trying to find the sweet spot related to our pricing. We do foresee other competitors trying to get in this space, but we're trying to stay ahead of the game and making sure that we're really locked in well with the integrators.

[Mike Latimore:]

Got it, and just last one on the CNS gross margin, where do you see that trending over the longer term?

[Thomas Minichiello:]

Mike, that result is largely attributable to the lower revenue in that segment this quarter. The gross margin typically runs around low 30% when the revenue is higher than that. So we see the business as a 30% plus gross margin business. There are many products in that segment that have various margins cabinets, power, TMAs. And so it's always going to depend a little bit on the mix with in, but if you look back, you'll see that the trend line is around 30% to 32%.

[Mike Latimore:]

Great.

[Kirk Brannock:]

Maybe to add to that too, Mike, one of the things we're doing for each product line is we're looking at the gross margin in great detail. And in that segment in particular, there was some opportunity as far as raising prices for certain products. So we're really looking at every product. Again trying to figure out where the sweet spot is for pricing. Sometimes some of the larger customers have a tendency to push this pretty hard and at times we need to make sure we're doing the right thing for the business and the shareholders, when it comes to our pricing activities.

[Mike Latimore:]

All right, thanks a lot.

[Operator:]

The next question is from Todd Brady with Oppenheimer.

[Todd Brady:]

Good morning. Were there any 10% customers in the quarter, and secondly, can you expand a little bit more on – you're now working with the top four wireless carriers. Tell us more about the developing relationship with these customers? Thank you.

[Thomas Minichiello:]

Sure. Yes, I got the first one here Todd. So as far as 10% customers are concerned, we had three that were greater than 10%. And I would add to that that we had another threethat were high single-digits and close to 10%. So we had nice customer diversification in the quarter.

[Kirk Brannock:]

And maybe to add to that regarding the top four customers, some of our wireless carriers were not as aggressive in their builds and what we're seeing and I'll mention once T-Mobile for example. We are seeing a lot more activity from T-Mobile in our in-building wireless space, which is very positive. AT&T and Verizon clearly were our largest customers, but we are seeing opportunities with the other wireless carriers which is positive.

[Todd Brady:]

Thank you.

[Operator:]

The next question is from Greg Mesniaeff from Drexel Hamilton.

[Greg Mesniaeff:]

Yes, thank you. Just a quick question, as you guys refocus some of your product areas, could you give us some color as to what you're doing on your sales strategies in terms of your sales force versus distribution? Thanks.

[Kirk Brannock:]

That's a great question, Greg. This is Kirk Brannock. From a sales strategy perspective, we have a new sales lead. That's J.J. Swartwood. J.J. took over in September. And I will tell you since I came in, one of the items that I saw affecting our ability to really get after topline was the fact when we looked at our sales organization, we've had technically a revolving door when it came to sales heads. We've had five sales heads in the last three and a half years, and so we've got J.J. in there and I believe what he is doing makes a whole lot of sense and what he is doing is he is aligning his sales force to the market to our large customers, but also on a geographic basis we're looking at how that sales force sells product. There's always a debate. Do you have a universal salesperson that sells all of our products across the board or do you have sales people focused on their niche markets in where they are best. And so we're looking at strategies in that area. Another thing that we're looking at is we have sales engineers. We have to make sure sales engineers are just not engineers that they understand the word sales in their job function. And so we've got a lot of activity going around with J.J. team. They happen to be right next door today in a sales meeting to discuss where we're going, trying to penetrate the markets. You mentioned another really important thing, Greg and that is our channel. We really need to strengthen our relationships and how well our distributors do. That means having report cards on our distributors. So we know which distributors are really doing well, moving our products and then obviously the new channel with our integrators want to be doing the same thing.

[Greg Mesniaeff:]

Thank you.

[Thomas Minichiello:]

Greg, just one more thing and I think it's worth sharing here is, it can get a little lost is that in addition to the changes we've had at the top of the sales organization. We've also had some churn in my time here three plus years in the sales team itself. And I think it's worth sharing because it gets a little lost and it's an important factor when we're talking about our revenue. We have had the turnover to the extent where at one point in time maybe middle of last year, last calendar year sort of third quarter of last calendar year where we've had a lot of new people in our sales organization, and it takes time for folks to join a company, get established, get the relationships going. We're now at a point where we have a team that has been in place here for a good stretch, a longer stretch than any other time in my three plus years here with Westell. So that's an important factor as we turn our attention to topline growth. We've got our sales team that's now in a position where it hasn't been in a while.

[Greg Mesniaeff:]

Great. Thank you for the color.

[Operator:]

The next question is from Marty Elbaum with Horizon Networks.

[Marty Elbaum:]

Good morning, gentleman. Congratulations. It seems like you really turn the company around and the future looks very promising. The big thing that could be very exciting for the company and it could put us in a different league is that FirstNet. Do you have any idea when that could get released?

[Kirk Brannock:]

Sure. Hey, Marty. Good morning.

[Marty Elbaum:]

Good morning.

[Kirk Brannock:]

Our belief or what we know about it is, is we think it's April where the awards would be granted, but there was a deadline of November of last year where the award was going to be granted. That did not happen. And so now it looks like April. But that's a very significant thing that FirstNet is the first as the name implies, nationwide standardized broadband spectrum specifically dedicated to public safety. So I don't know if there's more you'd like to know about it, but we think April is when the award happens.

[Marty Elbaum:]

Okay. How many share – what do you have per cash – per share based on number of shares?

[Thomas Minichiello:]

At this point toward the $0.40 per share.

[Marty Elbaum:]

We have $0.40 per share and no debt. That's unbelievable. It's crazy [indiscernible].

[Thomas Minichiello:]

I just did $0.39 to be exact, but…

[Marty Elbaum:]

With no debt, right.

[Thomas Minichiello:]

With no debt, correct, yes.

[Marty Elbaum:]

This is exciting. This is very exciting. We're looking forward to future aren’t very good.

[Thomas Minichiello:]

Thanks.

[Marty Elbaum:]

Congratulations again.

[Operator:]

The next question is from Marc Silk with Silk Investment Advisors.

[Marc Silk:]

Hi, guys. Thanks for talking my question here. So on the public safety I like the strategy with the integrator, so there's not a huge cost outlay, but unfortunately terrorism is not just a U.S. centric issue. So once you kind of fine-tune the strategy other options basically internationally because obviously that could be you know modest growth driver that's basically?

[Kirk Brannock:]

Mark, that's a great question and we have made inroads with our products and we've seen growth in Latin America. We have one individual long with assistance that is really focused on Latin America. I do believe that there are opportunities we have not really our timing and you can correct me here. If it really penetrated euro where you know as you mentioned earlier there's just this is much activity there, but I don't see any reason. If we can get these products to market and get them in the right spot from a pricing perspective that we can see these products grow elsewhere.

[Marc Silk:]

And my last question is more of a comment, so I'm sure if they get after this quarter and your progression of stock might get over a dollar. I would still be an advocate of not do anything about reverse stock split. If you're going to turn this company around you've shown you have, I just let the market take care of itself and that's just my opinion?

[Kirk Brannock:]

We appreciate that.

[Marc Silk:]

And good luck going forward.

[Kirk Brannock:]

Thank you.

[Thomas Minichiello:]

Thank you.

[Operator:]

The next question is a follow-up from Todd Brady with Oppenheimer.

[Todd Brady:]

Can you guys just give us an updated you guys are made some changes with the Board and as you are reestablishing credibility in the investment world. Tell us a quick update on the Board and what are some goals the new Board has placed as top priorities? Thank you.

[Kirk Brannock:]

Sure. Sure. I will tell you I am pleased with the changes we've seen within the Board and currently have six members on the Board and just brought on an individual by the name a Mark Zorko. Mark Zorko is local. He has some very good financial background. He's the head of our audit chair. He replaced an individual who had previously been on the Board a couple of years for a little bit and I think he's going to be a very good addition. He is all about driving shareholder value. He is engaged and I would tell you the Board is continuously looking at making changes when it's necessary and I have no prediction of the future, but you may see more changes in the future to ensure we have the strongest Board that is aimed at driving shareholder value. I'm really pleased about having Mark join the Board.

[Todd Brady:]

Thank you.

[Operator:]

The next question is a follow-up from out from Mike Latimore with Northland Capital Markets.

[Mike Latimore:]

Great thanks. I know you're not giving sort of granular guidance at this point, but you did mention you're maybe increasingly focused on growth. I mean did you think you will return to kind of growth and displacing?

[Thomas Minichiello:]

I think Mike that starts with we talk a lot about public safety which we're encouraged with our progress there. And that's going to be a good future for us. I think really it starts with in the more near-term with the CNS business and again with CNS you've got three major product lines you've got integrated cabinets, the tower mounted amplifiers and we have hard and power distribution fuse panels and circuit breaker panels. The power distribution line is relatively steady business. The other two can be lumpy depending on the time of year and depending on carrier funding, depending on some cap money Connect America Fund grants from the government and the projects itself tend to be lumpy. So the TMA is I should also mention we are in a little bit of a transition with that product line. We are now moving towards a dual band tower mounted amplifier where the customer will be able to use one TMA to enhance an optimized the signal from the cell towers across two frequency bands. It's actually approved now it's going out and get in the business. So it's that's where it starts and so it was very low this quarter. I mean it's typically low in the December quarter. This one was probably lower than normal, but those dynamics going on. As far as cabinets is concerned, we actually received a PO, the month earlier this month in January, earlier this quarter for a new project. Again when we deliver that project, it's going to be a timing thing, but we expect it to be delivered sometime in the spring, whether it will be the fourth quarter or the first quarter. At this point when it’s hard to tell, but that business is coming and then we've got another opportunity for a fairly large deployment of Integrated Cabinets that's in the early stages.

[Mike Latimore:]

Okay, got it. And then I'm just curious to your ISM business, is there any synergy between ISM and to say public safety repeaters. Can you kind of create some integration there over time or is that distinct business?

[Kirk Brannock:]

Yes, I would say Mike, right now we haven't seen a whole lot of synergies between public safety in ISM. We have seen some synergies between our traditional UDIT business and as customer’s approaches DAS, we have ISM monitoring those DAS systems. So if you look at ISM today, you really have cell towers that are being monitored. You have network equipment in the case of the sale that Tom mentioned earlier we're optimize speaking really to network equipment actually in Australia. And then the third piece is we are using our ISM equipment to talk to distributed antenna systems to basically monitor that. But so far we have not seen any applications in In-Building Wireless, although there will be remote capabilities to configure In-Building Wireless public safety, but it's an area that we probably need to look at. But right now I would say I don't see any overlap. Tom, would you…?

[Thomas Minichiello:]

I would say right now that's true. We are looking at some opportunities in the network densifications or a centralized Radio Access Networks and so we're pretty excited about that because we see an opportunity there for example for our cabinets with our power panels and remote monitoring all together. So well, today there isn't much crossover, where the carriers are going, where the network is going. We see opportunity across really all three businesses, but ISM and CNS in particular.

[Mike Latimore:]

Yes.

[Kirk Brannock:]

Yes, and what Tom is speaking to Mike is the CRAN build. If you look at the wireless carriers, it's really hard to put up a new tower. Every municipality doesn't want to new tower and so what they're doing is they are moving from the tower out into the field basically on a distributed architecture and those locations will require monitoring. So we see that, now that's not public safety, but it's kind of an expansion of the wireless expansion. And it's basically in the CRAN space and when you listen to the carriers, carriers are saying a lot of their spend is going to be in this area.

[Mike Latimore:]

All right, okay. Thanks.

[Operator:]

The next question is from Brent Morrison with Zuma Capital Management.

[Brent Morrison:]

Hi, guys. Congratulations on the cost cutting.

[Kirk Brannock:]

Hi, Brent.

[Brent Morrison:]

Let me get you guys to elaborate on the kind of the bringing a couple segments together. Can you elaborate on public safety and the enclosure business, a lot of the standardization of public safety requires the equipment to be enclosed with certain specifications. Can you talk about how you could bring those segments together or how you guys have thought about it?

[Kirk Brannock:]

Yes, I can answer that Brent. First of all, in fact I'm looking at our half-watt public safety repeater, which is in our demo room here. And clearly as we look at our public safety product, the product requires hardening, we're designing it to meet all of the standards that are required under FirstNet, and the device is not very large. However, we have mentioned that one of the items that we're looking at along with public safety is and there should hopefully be an announcement out shortly is with public safety with a public safety repeater there's going to be requirement for battery backup. And in the battery backup arena, it requires a cabinet to actually house the batteries, so we see synergies between our CNS organization and public safety by having a bolt-on product called battery backup. And so that and itself has excited because we think that there could be a bolt-on over on top of the actual repeater itself. So that's where we're seeing the synergies now with CNS along with public safety.

[Brent Morrison:]

Great. Thank you.

[Thomas Minichiello:]

Interesting you bring that up, Brent. I would just add one thing. I mean that's a good point because enclosures as you know because you know us pretty well are something that we've been in the business doing for years especially the outdoor harden ones in the outdoor network, so to bring that capability over into the public safety where you've got similar requirements more stringent, but similar, it plays to a strength of the company which is one of the things among others that we like about the public safety market.

[Brent Morrison:]

Also there has been talks that you guys said the carriers were sort to weaken in the previous quarter, but there's been signs that they are starting to spend again. Can you comment on – I know you commented on the cabinet order, but can you comment on any other talks or maybe they are not POs yet, but planning that you are seeing from the large carriers?

[Kirk Brannock:]

Yes. We really like the CRAN expansion because I think Mike mentioned earlier, we think there's opportunities in the CRAN space, there could be candidate opportunities, there also could be intelligent site managing capabilities because as you scatter and distribute your architecture you don't want technicians in trucks having to drive and this will give them some site monitoring that they badly need. And so that's where I think we're going to see the growth with a largest carriers as they expand and distribute their network our further. That's where I see the growth so far.

[Brent Morrison:]

And then lastly on R&D spending, it seems like it's coming much more in line with the topline. Can you talk about Tom maybe where R&D spending will be a couple quarters?

[Thomas Minichiello:]

Yes. I think you're seeing it now, right we’ve got roughly $2.5 million quarterly run rate on R&D expense and you can see in the press release how it's distributed heavily weighted into the IBW sector with much lower amounts in the CNS which are products that don't require as much dollar spending on R&D for those products. So I think you're seeing where we're probably going to be for a while. Remember, we are investing for the future. We're developing offerings in the public safety market. We're refreshing our commercial repeaters and we're supporting products across the rest of the business.

[Brent Morrison:]

Okay. And lastly, what's the headcount, total headcount?

[Thomas Minichiello:]

It ended the quarter at 130, so we've made some nice progress. Actually I'm sorry, 125.

[Brent Morrison:]

Okay, thank you. Look forward to the next couple of quarters.

[Thomas Minichiello:]

Thank you, Brent.

[Operator:]

The next question is from Eugene Robin with Cove Street.

[Eugene Robin:]

Good morning, Kirk.

[Kirk Brannock:]

Good morning, Eugene.

[Eugene Robin:]

So the question on management and I'm curious, you are still interim CEO, so are you the person to lead Westell forward or is the board still contemplating that?

[Kirk Brannock:]

As I said before – great question, Eugene and I appreciate it. I am still the CEO and running the Company as if I'm going to be here the next 10 years, but I will tell you that I am involved with the board to actively seek an individual to replace me. We are doing that on an internal basis and what I mean by that rather than hiring a search firm, we have a handful of candidates were vetting. I am very involved with all the work we've been doing here. I'm going to be very involved with not only the decision, but also the transformation and we will continue to be actively involved at the point in time that that decision is made. But right now there is nobody in the short-term that I am aware of that's going to be stepping in here, but the Board is aware of the understanding we had when I joined and I think we're moving it at the right pace.

[Eugene Robin:]

And I mean are you capable or willing to give a longer term assessment of what the financial model Westell should look like in terms of just looking out three to five years topline and the actual average or normal profitability here?

[Kirk Brannock:]

Yes, our next Board meeting is coming up in March and we will be going over our three-year plan and the Board is open to listening to every opportunity that is out there to drive shareholder value. I feel good about this quarter, but we do need to grow our topline and we've got some plans on doing that. But absolutely we are not looking at this as a quarter-by-quarter company. We are looking at this, where do we want to be long-term and making sure we have not only the right skill sets within the management team, but the right product plans. And so no, we are looking at this as a one term proposition Gene.

[Eugene Robin:]

And I mean the long-term assessment would that be something better left to a permanent CEO or I'm just kind of curious with that?

[Kirk Brannock:]

Absolutely, I don't believe the Board wants and I keep telling people, I'm not operating like I'm Interim, but certainly – but there will be a lot of discussion in the next Board meeting regarding where we're going. But certainly the Board wants to have a permanent CEO and I know the attributes that we're looking for. The Board knows the attributes we're looking for and when that decision is made, I would hope the shareholders would applaud that and I think they well, if we do the right job and we create the right transformation plan.

[Eugene Robin:]

I mean again I hope that in the Board discussion, the question of how – what sort of events would cause the future of this company to be any different than the past would be an important one to kind of mull over it and to answer, just generally speaking though. I mean are you capable of saying whether or not you’re just caretaker of sorts and preparing the Company for some sort of an alternative path?

[Kirk Brannock:]

When I would say the Board, I don't like the word caretaker, because that's not the way I operate. But what I would tell you is the Board is open to listening to any opportunity to drive shareholder value. And that's the best thing I can say toward that, and whether that's trying to grow big time in the public safety sector, whether that is open to opportunities of a merger. That means going public. They are open to everything to drive shareholder value, and would Mark Zorko coming on. As I mentioned earlier, I think that's a positive. And I think that's the way the Board needs to operate and I'm pleased to say I think that's the way we'll continue to operate.

[Eugene Robin:]

That’s not bad. Thank you Kirk.

[Kirk Brannock:]

Thank you, Gene.

[Operator:]

[Operator Instructions] And our next question is from Barry Bergman with Barry Bergman Management.

[Barry Bergman:]

I want to congratulate you guys on turning this thing around. We're definitely going in the right direction. I was just wondering as we go forward here what is the intention of the plan was Investor Relations.

[Kirk Brannock:]

That's a great question. Barry, we've been told by shareholders that sometimes we don't do the best job of getting our messaging out and we obviously wanted to be factual. We wanted to tell what we're doing internally and so we're looking at various alternatives to Investor Relations. Tom Minichiello is really the key who have led our Investor Relations and will continue to do that but we are – we have talked to a number of Investor Relations firms to look at how we do Investor Relations and how we might be able to do it better and we are open in the future and the Board is open in the future to make sure that we do it the best we can. So fair question and believe me it's on our radar screen.

[Barry Bergman:]

Thank you. End of Q&A

[Operator:]

We have no further questions at this time. I will now turn the call back to Kirk Brannock for closing remarks.

[Kirk Brannock:]

Great. Thank you. I want to thank everyone for joining us today and your confidence in Westell. We're pleased with the progress, but we're far from done. We're stepping up our focus to grow our topline and executing on our public safety initiative. This is an exciting new marketing we like it future and I look forward to speaking to all of you again. Thank you.

[Operator:]

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