Westell Technologies, Inc.
Q4 2013 Earnings Call Transcript

Published: 23 May 2013

[Operator:]

Good morning and welcome the Fourth Quarter Fiscal Year 2013 Earnings conference call. My name is Dawn and I will be the 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 is being recorded. I will now turn the call over to Brian Cooper. Sir, you may begin.

[Brian Cooper:]

Thank you, Dawn. I want to welcome everyone to our conference call covering the annual and fourth quarter results for Westell Technologies during our fiscal year 2013, which ended March 31. We issued our earnings news release last night and it is posted on our website, westell.com. On this call, Rick Gilbert and I will update you on the business and our financial results. 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 they 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, 2012 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. Our presentation today also will include non-GAAP financial measures. We have provided reconciliations to the most comparable GAAP measures in our news release. I will begin this morning by discussing the financial results for our fiscal fourth quarter and the full year ending March 31, 2013. Rick Gilbert, Westell’s Chairman and Chief Executive Officer, will then provide his perspective, and we will conclude by taking questions. I will focus most of my comments on the results for the quarter and conclude with a few observations about the fiscal year. In summary, key results for our fourth quarter include revenue of $10.7 million, a net loss of $38.2 million or $0.66 per share, and a non-GAAP net loss of $1.3 million or $0.02 per share. For the year, revenue was $40 million. The net loss was $44 million or $0.73 per share, and the non-GAAP net loss was $66.2 million or $0.10 per share. Before getting into specifics, I want to address two large non-cash charges which were recorded in the fourth quarter and are reflected in the results for both the quarter and the year. First, we recorded an increase to our valuation allowance of $34.0 million which has the effect of fully reserving our deferred tax assets. These assets consist primarily of net operating losses which shield future earnings from income taxes. Reserving these tax assets with a valuation allowance does not affect their use or availability. Second, we recorded a $2.9 million non-cash charge for impairment of the goodwill in the Westell division. This goodwill arose from acquisitions and was evaluated for the division as a whole. Both of these non-cash charges resulted from applying accounting guidance, which by its nature is very conservative, at a time when the Westell division has been incurring operating losses. Remember, though, that these same losses have also been a deliberate and necessary part of our strategy to grow and return to profitability. Westell has been investing into R&D and sales to foster new products in the areas of ethernet, distributed antenna systems, and tower-mounted amplifiers. We have been investing to make acquisitions. We believe in the promise and emerging results of our new products and our acquisitions continue to perform, so in spite of the accounting effects these losses represent investment that is important to our company’s future. Moving into some of the detail, we reported revenue for the fiscal 2013 fourth quarter of $10.7 million, all from the Westell division. That is our best quarterly revenue for the division since the fourth quarter a year ago when it generated the same $10.7 million and CNS added about $600,000. Westell division revenue also is up more than 20% compared to our third quarter. Custom systems integration and tower-mounted amplifier revenue were both strong. In addition, orders and sales for our new products have been robust so far during this first quarter of fiscal 2014. Consolidated gross margin for the quarter was 36.9%. Excluding effects from CNS, Westell division’s gross margin was 37.6%, down from 39.1% in the fourth quarter a year ago. Gross margin reflects the effects of fixed costs spread over low volumes, higher introductory costs for new products, and changes in the mix of products sold. Consolidated operating expenses for the quarter totaled $9.4 million, including the non-cash impairment of goodwill for $2.9 million. Operating expenses were $5.7 million in the fourth quarter a year ago. Expenses were higher primarily because of impairment, our ongoing investments in new products, variable compensation, and costs related to the acquisition of Kentrox, offset by reduced spending in CNS. Including the two large non-cash charges, the loss for the fourth quarter nets out to $38.2 million or $0.66 per share compared to a net loss of $2.4 million or $0.04 a share a year ago. On a non-GAAP basis, adjusting for the non-cash charges and other unusual items, the net loss for the quarter was $1.3 million or $0.02 per share. That compares to a net loss of $0.7 million or $0.01 per share a year ago. On an annual basis, fiscal 2013 revenue was $40 million compared to revenue of $69.7 million in fiscal 2012. The decline resulted from the planned wind-down of CNS and a $4.8 million drop in the Westell division; however as already noted, Westell division revenue has rebounded in the last two quarters and sales of newer products are ramping up. Net loss for the year was $44 million or $0.73 per share compared to net income for fiscal 2012 of $42 million or $0.62 per share. Of course, fiscal 2012 benefited from gains on the CNS and Conference Plus transactions. Adjusting for those gains, discontinued operations and other unusual items, the non-GAAP net loss for fiscal 2013 was $6.2 million or $0.10 per share compared to non-GAAP net income for fiscal 2012 of $2.6 million or $0.04 per share. On the balance sheet, we had $115.1 million in cash and short-term investments at March 31, 2013, and no debt. Cash and investments compared to $119.2 million at December 31, 2012. During that quarter, uses of cash included the operating loss and a $1.8 million increase in accounts receivable as a result of increased sales. Of course, on April 1 we also invested $30 million in the acquisition of Kentrox Incorporated. That expenditure is not reflected in the March 31 balances. With that overview of the financial results, I’d now like to turn the call over to Rick Gilbert, Westell’s Chairman, President and Chief Executive Officer.

[Richard Gilbert:]

Thanks Brian. I want to make a few observations about the fourth quarter and then give my perspective on the coming year. I believe our fourth quarter will be viewed as one of the critical milestones in the ongoing strategic plan at Westell for two reasons. First, we saw continued sales progress with our wireless product lines and our custom systems integration program. These product categories represent a large part of our R&D investment over the past couple of years and we’re seeing results that are in line with our expectations. Second, we completed the acquisition of Kentrox on April 1. Kentrox clearly represents a key strategic step for Westell as it fully instantiates the intelligent site management product category which was one of our primary targets for inorganic investment, and we’re already seeing the benefits of this acquisition during the current quarter. Speaking of the first quarter and despite my reluctance to give specific financial guidance, I think it may be useful for investors to know that we have had an excellent start to the new fiscal year. The Westell division is tracking to plan with good growth in new products, and our Kentrox division is running well ahead of plan with robust sales of site management solutions. The telecom market also appears to be less volatile than it did a year ago and our overall outlook is positive. As I consider the many goals of our current fiscal year, a few stand out as critical

[Operator:]

Thank you. [Operator instructions] Our first question comes from Mike Latimore from Northland Securities. Please go ahead.

[Ryan MacDonald:]

Good morning Rick and Brian. This is Ryan McDonald on for Mike Latimore.

[Richard Gilbert:]

Hey Ryan.

[Ryan MacDonald:]

Hi, how’s it going? First question is in the press release, there was mention that there was a bit of a delay in the DAS panels during the quarter. What caused that delay?

[Richard Gilbert:]

Well Ryan as you know, we have forecasts for every one of our product lines, and the forecast for that product line was specific by customer. In one customer’s case, we had expected earlier orders for the DAS panels and they simply came a little later than we expected, so they didn’t make the quarter. It’s good for this quarter, I suppose, but it was a delay and we felt it was important to make that comment. I would also say, however, about the DAS panels that they are selling extremely well and they are selling through multiple customers, including some very large customers. We’re pretty happy with their performance.

[Ryan MacDonald:]

So that one customer, that order has now come and will be reflected in the next quarter?

[Richard Gilbert:]

The orders we expected from that customer have come in.

[Ryan MacDonald:]

Okay, great. So then next, in the traditional product line, did you expect normal seasonality for the June quarter? I believe it’s usually up sequentially.

[Richard Gilbert:]

Did we expect normal seasonality for the current quarter? Is that what you’re talking about?

[Ryan MacDonald:]

Yeah, so the upcoming quarter, are you expecting normal seasonality in your traditional product line?

[Richard Gilbert:]

Well, we do have seasonality. It tends to be at the end of the calendar year that we see most of our seasonality effects. I would say also though – and this is an important point – that as we move into a lot of these new product lines, we expect there to be less seasonality in our business because we are now distributing our revenue over a lot more products, and a number of the products, a good example are some of the Kentrox products and even some of our new wireless products that aren’t as affected by seasonality in terms of installation.

[Ryan MacDonald:]

Okay.

[Brian Cooper:]

Yeah, so Ryan, the soft quarter is the quarter that ends in December. The other quarters are less affected by seasonal factors.

[Richard Gilbert:]

Historically.

[Brian Cooper:]

Historically.

[Ryan MacDonald:]

Okay. All right. Moving to Kentrox, you seem pretty enthusiastic about the prospects of Kentrox so far. The strength that you are seeing, is that more from new customer wins or is that more expanding your footprint with the current customers that you already have.

[Richard Gilbert:]

It’s from both. Kentrox, we looked a long time at different companies and we were very happy with the Kentrox acquisition. It’s got very strong momentum in the marketplace and in its particular niche market it is an extremely strong player. We’re just seeing them moving from strength to strength right now. This is a business that has long-term sales process, but when the sale takes place it tends to last for quite a while, and they have real strength right now. I’m sure it came across – we are very happy with their performance.

[Brian Cooper:]

And Ryan, there were a lot of things we liked about that acquisition. One of them is the fact that they have been growing so well, which is—you know, we’re happy to see is maintained right now, the momentum is very good in that business. There’s also a lot of synergy with our existing businesses in the product lines and so forth, and we hope to start taking advantage of that over time. But the near term is the momentum they brought with them.

[Richard Gilbert:]

I would add one more thing that we’re very happy with. This is a business that has good visibility to bookings, and it’s something we really like about that market segment.

[Ryan MacDonald:]

Okay. So just one final question – I know that post-the acquisition, it seemed that the expectations or estimates were about an $80 million run rate for the entire business as a whole. Is that still something that you still see as a target for this year, or do you think you could see upside to that at all?

[Richard Gilbert:]

Well, we don’t give specific guidance on the year. It probably came across in my remarks that we certainly see upside, and one of the things I said in my remarks is that our next revenue target is $100 million annualized run rate, and that’s where we need to go.

[Ryan MacDonald:]

Excellent. All right, thanks a lot. Great quarter. Thanks guys.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Jeff Linroth from Leaving It Better. Please go ahead.

[Jeff Linroth:]

Morning.

[Richard Gilbert:]

Morning Jeff.

[Jeff Linroth:]

Well certainly is an enthusiastic report. Thanks for your remarks. About the Kentrox acquisition, you’ve had it in place for a little over a month. Have there been any significant favorable or unfavorable things that you’ve discovered?

[Richard Gilbert:]

Yeah, we like it better every day. Basically the culture down there, I’ve spent a fair amount of time down there, our guys have spent a fair amount of time down there and vice versa. The culture is a very good match for our culture of quality, caring about customers, hard work—

[Brian Cooper:]

The products.

[Richard Gilbert:]

--the products. It’s an extremely good fit, and that coupled with the fact that the sales organization at Kentrox is a huge addition to our sales capabilities. We haven’t even really dug into the tip of the iceberg yet in terms of cross-selling opportunities. We have had some discussions about that, but both groups are working very hard selling their current product lines, and I think once we start getting into the cross-selling opportunities and some of the things I spoke about in terms of exploiting the international channels and such, we’re going to see even more positive aspects of the combination, I think.

[Jeff Linroth:]

Thanks for that. That leads right into my next question, which was to ask you about those cross-selling opportunities. Do you have just a very high-level timeline as to when you see that sort of starting to occur? Are we talking about months or weeks, or just an idea?

[Richard Gilbert:]

Well, it falls into two categories. The first category, obviously, is selling our existing products that we have on the shelf here to some of their existing customers that we don’t sell to today, and those activities are already underway. The second category, which is in some ways even more interesting, is to specifically develop products integrating some of the Kentrox functionality into our products for adding remote site management capability into some of our new product lines, for instance, and that will take some development activity. I will say that the engineering teams and the sales teams have already spent a significant amount of time together getting to know each other and talking about these opportunities, and I would expect to see some of the results from the first category almost immediately.

[Jeff Linroth:]

Great. Last question is you’ve had the Antone wireless acquisition for a while now, and I realize it wasn’t a huge one but how has that panned out and compared to what you anticipated?

[Richard Gilbert:]

Well there was probably about a quarter or two quarter delay in the ramp-up of the sales of the TMA products, and part of the reason for that was – and I think we’ve spoken about this before – part of the reason for that was that Antone was running on a pretty tight budget about the time we bought them, and they weren’t really spending enough time in the sales process out in the field. We’ve been able to ramp that up significantly and we are seeing the results. As Brian pointed out, TMAs are strongly ramping at this point, and we think that—we’ve always said we think we have the best TMA on the market and we’re starting to see the results in sales.

[Jeff Linroth:]

So would a good way of characterizing that be that you’re perhaps just a little bit later than you anticipated things started, you still see yourself getting the results that you wanted from that?

[Richard Gilbert:]

Absolutely.

[Brian Cooper:]

Yes.

[Jeff Linroth:]

Thanks very much. That’s all I have.

[Operator:]

Thank you. Once again, if you do have a question, please press star then one on your touchtone phone. Our next question comes from Brian Horey from Aurelian Management. Please go ahead.

[Brian Horey:]

Thanks for taking my question. Had a few follow-ups. With Antone starting to contribute now, and given the kind of year-to-year comp in revenues, I think we can infer that the wire line part of the business has continued to drop in terms of the revenue level. Do we think we’re at a bottoming of that process, or do you think that there is more to come on that?

[Brian Cooper:]

Hey Brian, this is Brian. One thing I’d say there is the traditional products don’t all fall into one category, so where we’re still seeing some softness and gradual erosion is in the TDM product lines. On the cabinet side, some of the cabinets relate to that TDM business so they also have been under pressures, but cabinets otherwise we’ve been doing pretty well with, and our custom systems integration business has been doing extremely well. And then as you look at fuse panels, power products, those actually have been holding up pretty well also. So the drag we’re seeing is from the TDM products, and I think the others have been doing relatively well; and as a group, there’s a little decline but there’s upside in some of the product lines also.

[Brian Horey:]

Okay. Is the TDM revenue stream still material to the business at this point, or can you give us any sense of scale and kind of how much is left to burn down there?

[Richard Gilbert:]

It’s still material. We have these 10 product categories and it’s a material product category, but it’s a lot less material than it was a couple of years ago, or even a year ago. I would characterize what we’ve just come through in terms of the transition—part of the transition and part of the expected aspect of the transition that we’ve been working is that we knew the legacy products would drop off. We knew we had to replace revenue with new products, and that is happening. Obviously the inflection point that you want is when the new products become dominant and then start really ramping the revenue, and as I said, I think we’re well positioned there. I’m counting Kentrox as a new product category obviously now, but with Kentrox plus our new products, the dominant aspect of the company is new product categories.

[Brian Horey:]

Okay. And just setting aside Kentrox, just looking at Westell, you talked about trying to get balance between wire line and wireless revenue. How far are we from that crossover point where wireless is half or more of the revenue stream at the Westell division?

[Richard Gilbert:]

Well I’d say first of all, I don’t set aside Kentrox when I think about the company. I don’t set aside Antone, Kentrox, Norantel or any parts of the company that are doing design. But I would say that with all those things combined, we’re probably already in a balance of about 50/50 in terms of wireless-oriented sales versus wire line. If we take Kentrox out of the picture, the wireless side of our business is still less than probably the wire line, but—and I can’t come up with a percentage off the top of my head, but it’s probably 25% of something like that without Kentrox.

[Brian Horey:]

Got it, okay. You talked about the goal of being positive cash flow on a consolidated basis. Is that goal still dependent on more acquisitions, or can you get there with Kentrox and what else you’ve got now?

[Richard Gilbert:]

We can get there with what we have now. The dilemma of course is always—you know, we just talked in one of the earlier questions about what about cross-selling opportunities. Well, some of the cross-selling opportunities require additional investment in building some additional products. The question is always going to be, how much are we willing to invest versus how fast we want to get to cash flow break-even and eventual profitability on a GAAP basis, and that’s a fine balance. But what I do see in this fiscal year is the opportunity to get damn close, if not to cash flow positive on a consolidated basis. It’s as simple as that.

[Brian Horey:]

And that’s for the year as a whole, or exiting the year?

[Richard Gilbert:]

For the year as a whole.

[Brian Horey:]

Okay, fair enough. Last question – is there an 8-K coming on the historical results for Kentrox in the works?

[Brian Cooper:]

Yeah Brian, we will be including those results probably in our first quarter, the 10-Q. We did not have access to all the information we needed to complete that work or time to do it with the acquisition coming so close to our filing for the 10-K, and were not planning do to an 8-K on that.

[Brian Horey:]

Okay, thank you.

[Operator:]

Thank you. Once again if you do have a question, please press star then one on your touchtone phone. Our next question is from Mike Latimore from Northland Securities. Please go ahead.

[Ryan McDonald:]

Hi guys, Ryan McDonald on again. Just a couple follow-up questions. In regards to 300% growth in the custom systems integration, what do you attribute that growth to during the quarter? Where is an area of strength?

[Richard Gilbert:]

Well it’s an area that we’ve been focusing on really for the past 18 months or so. We’ve been really focusing sales on that, and one of the things that our regional sales force, led by Brian Powers, is very good at is identifying cabinet opportunities and then taking those cabinet opportunities through a process where instead of simply selling the cabinet, moving that into the custom systems integration program where we sell the cabinet plus additional equipment and do the customs system integration for the customer. We’ve had very good success with that strategy, and we’ve had some very positive feedback from customers that have gone through our custom systems integration programs. It’s just an area that we see is ramping and we’re much happier doing CSI than simply selling a cabinet. It’s higher profitability for us and it’s a larger sale for us, so there is some of that aspect; and as I said, for certain types of customer opportunities, we’re probably ideally suited to do custom systems integration, Ryan.

[Ryan McDonald:]

So when you’re talking about some strategies and goals, you talked about the potential of making more accretive acquisitions. Is there any specific technology categories that you’d be looking to for making an acquisition this year or the following year?

[Richard Gilbert:]

Well we have gone through, obviously, a continued strategic process where we identify market categories we are specifically interested in. It’s not the kind of thing I’d like to announce on a conference call for competitive reasons, but yes, we go through and look at that. I can tell you at a high level that we’re obviously still very interested in the wireless area and aspects of that. We’re interested in areas that have good adjacencies to our existing product categories, and with the addition of Kentrox, of course, Kentrox has performed similar strategic efforts and has some ideas of their own in terms of things that could be added that have adjacency.

[Ryan McDonald:]

Okay, just one final question from me. Any expectations surrounding expenses related to Homecloud for this quarter and this fiscal year?

[Richard Gilbert:]

In terms of additional expenses?

[Brian Cooper:]

Yeah Ryan, I think what I would say is most of our focus there is on a sale of the technology. We’re not actively spending money on it as we speak.

[Ryan McDonald:]

All right, thank you very much.

[Operator:]

Thank you. I will now turn the call back to Brian Cooper for closing remarks.

[Richard Gilbert:]

Well let me make a couple closing remarks. This is Brian’s last call as CFO for the Westell company, and I simply would like to thank him for his great work over the last four years. He has made huge contributions to this company and wish him well on his next position, and hope to have a new CFO on the next call. Thank you, Brian. Appreciate your work.

[Brian Cooper:]

Thank you.

[Richard Gilbert:]

And on that note, thank you very much for joining the call and we look forward to the next earnings call, with gusto actually! All right, thank you.

[Operator:]

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