Westell Technologies, Inc.
Q2 2015 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Welcome to the Second Quarter Fiscal Year 2015 Earnings Conference Call. My name is Richard, 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 is being recorded. And I will now turn the call over to Rich Minichiello, CFO. Sir, you may begin.

[Tom Minichiello:]

Thank you, Richard. Good morning, and welcome to our conference call to discuss the fiscal year 2015 second quarter results for Westell Technologies. The news release we issued last night is posted on our website westell.com. On this call, Rick Gilbert, Westell’s Chairman and 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 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 estimates, expectations 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, 2014, 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’ll now turn the call over to Rick.

[Richard Gilbert:]

Thanks Tom. Before Tom carries on the details of our Q2 results, I’d like to make a few qualitative observations about our performance in the unusual market conditions. And less reported factor affecting our Q2 results is that we’re experiencing the same significant reductions in carrier capital spending that are currently affecting many of our competitors. This was widely reported in the industry press, this pull backed again in early August shortly after we had experienced a very strong revenue month in July and after we reported our first quarter results. As noted in the press release, we expect these spending delays to continue throughout the current quarter with improvement expected in January when the carriers become easier in view 2015 in capital budgets. I also would point out as submitted some more trends this is clearly an industry wide issue and not specific to Westell. That said we’re not ready for market conditions to change. We’re actively working (inaudible) to secure spending accruals for our products and solutions. During the last month we’ve already began to see a step up in bookings for delivery in 2015. In fact for backlog for shipments in 2015 is already similar to our entire backlog entering this quarter. We’ve two more months to increase between the 15 backlogs. We believe these bookings are due to the fact that some shareholders have already began allocating their 2015 capital budgets to highest projects. We expect our much better understanding of carrier spending trends we’ll announce in our fiscal third quarter results in late January. Exposure to unusual carrier spending controls all phase that we talk at the time of business and something we’ve highlighted is a risk in previous earnings calls in annual 10-K filings. I should also note that we have experienced this kind of capital spending reduction before. For example, till the fourth calendar quarter of 2011 and it's a condition Westell is well-prepared to weather. Let's take a look at each of our business segments, starting first with in building wireless. Notwithstanding the days in carrier spending, we believe Westell solid position in this business segment will enable shareholders to participate in the sectors anticipated strong growth. ABI Research expects the overall worldwide market for in building wireless equipment and deployments to grow to over $8 billion in 2019, up from a forecast of $4.4 billion for 2014 at a 14% compound annual growth rate. Our already strong position in the IBW space is continuously improving. Our universal data interface tray or unit inactive gas conditioning system, is approved for use by the leading North American carriers and already installed with multiple high profile locations. Carriers like the fact that unit is vendor agnostic and compatible with gas systems produced by another major manufacturers. We are now seeing the predicted industry shift from passive gas strays, to active gas conditioning systems. Especially in neutral host installations. Well, we are well-positioned with our current products, we continue to invest in this area and our product development teams are focused on further enhancing our position in this important market. Turning to the Communication Solutions Group, of the three markets that comprise that segment are tower mounted amplifiers or TMAs performed relatively well. Our outside plant products declined sequentially and our intelligence segments with solutions improved sequentially, but continue to lag behind our expectations. That said, all three areas were adversely affected by the reduction in carrier spending. Although we believe we have significant market share for the US wireless operator that uses TMAs for self side optimization. We also expect that the most likely growth opportunity for TMA sales will come from overseas carriers, as they install and seek to my optimize LTE equipment at cell sites. Our outside plant products with the area of CSG, that was most affected by spending reductions. The change we mentioned last quarter of shifting this business area to build auto manifestly model has begun and we expect it will be effective in reducing ENO charges and increasing the accuracy of our sales forecasting. On a sequential quarter basis, we experienced slightly stronger sales in our intelligent site management business, however, we expect this area to remain unpredictable for the foreseeable future. That said, we believe in the long-term growth prospects of this market and we will continue to invest in the technology. In summary, to progress this quarter against our goals will significantly affected by carrier capital spending restrictions. Looking forward, our objective to grow both IBW and CSG revenue will be adversely affected until resumption of normal carrier spending. As a result, it will be difficult to achieve our internal revenue and operating profit goals for this fiscal year, despite the anticipated normalization of carrier spending in early 2015. We still expect 80% of our revenue that come from the wireless sector but how close we come to our 40% gross margin and positive operating profit goals. Obviously depend on the overall revenue and expense levels through the rest of this fiscal year. Our final goal to expand to regions outside the U.S., will be one of the primary focus areas from Mark Skurla, our new Senior VP of worldwide sales. Mark was most recently the Vice President of sales for the Americas, the service provider unit in net care. He knows our business, our customers, and our chain as well and he will certainly help us develop sales opportunity in the wireless growth markets, both here and abroad. I will now turn the call over to Tom for an update on our performance this quarter.

[Tom Minichiello:]

Thank you Rick. For the second quarter of fiscal 2015, Westell Technologies reported consolidated revenue of $23.6 million, a 15% decrease from the $27.8 million in the first quarter of fiscal 2015. Revenue this quarter consisted of $11.1 million from the IBW reporting segment and $12.5 million from the CSG segment. As Rick mentioned, IBW segment revenue is affected by reduced capital spending by the major North American wireless service providers. For the CSG segment lower sales of outside plant solutions which are also affected by reduced carrier spending, were partially offset by an increase in revenue for intelligent site management. On a gap basis we reported consolidated net loss for the second quarter of fiscal 2015 of $14.6 million or $0.24 per share, versus a net loss of $2.8 million or $0.05 per share in the prior quarter. On a non- GAAP basis, net loss for the second quarter of fiscal 2015 was $1.5 million or $0.03 per share, compared to a non- gap net loss of $200,000 or $0.00 per share in the prior quarter. Well, the gap and non gap results were affected by the carrier spending slowdowns during the second quarter. In addition the gap results this quarter included a $10.6 million dollars non-cash charge for the impairment of goodwill in the CSG segment. Well, the CSG goodwill arose from the contract acquisition, it does not signal the end of the economic value of our ISM business or that we are pulling back on our commitment to the intelligent site management market. You may recall, we recorded a goodwill impairment charge at the end of fiscal 2013 related to the Anton acquisition, which was then followed by in fiscal 2014, by a successful year for the Team A product line acquired as part of that deal. Turning the gross margin, consolidated non gap gross margin was 35.4% compared to 36.1% in the prior quarter. Contributing to the lower non-GAAP gross margin, in the second quarter was a lower overall level of revenue, partly offset by more favorable. Turning to operating expenses, consolidated non gap apex was $10 million this quarter compared to $10.4 million last quarter, below our OpEx this quarter was due primarily to a reduction in variable compensation expense. Moving to the balance sheet, we generated $1.5 million of cash in the second quarter, bringing to $48.3 million our total cash in short-term investments as September 30th 2014 and no debt. The $1.5 million cash increase was driven by lower working capital needs during the quarter. Now let's take a deeper look at the second quarter segment results. Revenue for the IBW segment was $11.1 million in the quarter, down 21% from $14.21 million last quarter. The sequential revenue decrease was driven by slowdowns and dazed appointments by major North American wireless service providers. IBW segment gross profit was $4.4 million and gross margin was 39.3%, compared to $5.8 million and 41.2% last quarter. The gross profit and gross margin decreases were due to the lower revenue. IBW segment R&D expenses were $2.1 million, compared $2.2 million last quarter. As a result of IBW segment profit was $2.3 million, compared to $3.6 million last quarter. Revenue for the CSG segment was $12.5 million, down 9% from $13.7 million last quarter. CSG segment gross profit was $3.7 million and gross margin was 29.5%, compared to $3.9 million and 28.2% last quarter. While gross profit decrease was due to lower overall revenue, gross margin improved primarily as a result of a more favorable mix. The CSG segment R&D expenses were $2.2 million compared to $2.3 million last quarter. As a result, CSG segment profit was $1.5 million, compared to segment profit of $1.6 million last quarter. With that review of the key financial results, I would now like to open up call for your questions.

[Operator:]

Thank you. (Operator Instructions) Our first question on line comes from Mr. Mike Lattimore from Northpoint Capital Markets. Please go ahead.

[Jim Fitzgerald:]

Hi, this is Jim Fitzgerald standing on for Mike Lattimore. My first question, could you elaborate a little bit on your international initiative?

[Richard Gilbert:]

Well, our international initiative as we said before is to focus on selected areas outside the United States, which we already sell products in the intelligence site management area too. So, we look at Australia, we look at parts of Latin America, South America, parts of Africa, South Africa. And what we like to do of course is, to take some of our other products in the CSG Group and IBW Group in to those markets through channel partners. We have established channel partners in for instance those many other areas, and what we need to do is, successfully introduce products and start seeing sales in other areas beside intelligence site management. One of the things I like about Mark Skurla joining is that he did run Americas of [Inaudible].He's familiar with this model, and we expect and to focus on him.

[Jim Fitzgerald:]

Okay. Great. And what is in your (inaudible) and do you expect that to increase or decrease in the coming quarter?

[Richard Gilbert:]

We had about four time equivalent around 315 at the end of the quarter including that 250 full time employees and it's probably going to stay pretty even through the next quarter or two.

[Jim Fitzgerald:]

Okay. Got you. Are the current gross margin levels sustainable in your opinion?

[Richard Gilbert:]

Yes, they are definitely sustainable. The margins as you can see last couple of quarters were in the 35 – 36 range and volume is really the main driver and we obviously expect to improve those, we want to improve those so your goals remains to get at 40% or greater on gross margin and that will be driven largely by improvement in the top line.

[Jim Fitzgerald:]

Okay. And what kind of mix you guys are seeing between the active and passive DAS panels?

[Richard Gilbert:]

We are seeing both. One of the major carriers still uses passive. Fortunately they use almost all passive of ours. And then two of the other carriers have really started shifting fairly dramatic to the active model. I must say that I don't think we can see total active versus passive because there are smaller sites and things where passive make perfectly good sense whereas the active really work well are in the very large scale sides that are neutral hosts via multiple carriers and multiple vendors are involved.

[Jim Fitzgerald:]

Okay. Great. And then last question from me. What are the prospects for re-acceleration in contracts over the next 6 to 9 months?

[Richard Gilbert:]

I think they are reasonable. We already saw slight improvement in contracts in the last quarter. We are selling to lot of our existing customers in increased quantities and I think our best to short term aspects for intelligence side manager our two of the biggest customers we currently have Bianca and Australia has a big decision to make in terms of their architecture and we think we are involved with that and then American tower of course has an ability to expand its footprint fairly significantly and then of course we sell to Verizon and AT&T as well. So we are cautiously optimistic that we are going to be able to keep growing that business. Now obviously we have an unusual spending situation going on in the carriers and we have to get through that but as we said as we look forward to 2015 we are starting to see good indication that 2015 bookings are looking good.

[Jim Fitzgerald:]

Okay. Great. Thank you. That’s it from me.

[Operator:]

Thank you. [Operator Instructions] We have a question on line from Eugene Robinson from Coast Three Capital. Please go ahead.

[Unidentified Analyst:]

Hi good morning Richard. It's Jeff and Eugene how are you?

[Richard Gilbert:]

Hi, how is it going guys.

[Eugene Robinson:]

Good morning.

[Unidentified Analyst:]

So just getting to contracts again. So just maybe a little bit more detail on the two things you mentioned for example in Australia is there a – let's talk about that process and is there a specific date in which decisions are made on a regulatory basis and are we talking about an equivalent sized opportunity from what you have originally brought into or is it just more of an add-on smaller and then secondly just again more detail on the American tower and is that global country specific and how that has developed?

[Richard Gilbert:]

Sure. Well NBNCo things moved extra ordinarily slowly down there. We do not have a specific date where decisions are going to be made. It is a multi-year, multi-million dollar yield but it is smaller than our original NBNCo roll out at American tower. It is multiple countries. We – they have obviously a lot of tower sites and a lot of stuff moving forward with and our business there is adding additional monitoring to the sites and also of course the maintenance and service contracts and that seems to be at about the rate we’d expect.

[Unidentified Analyst:]

Well I mean do you have American tower business now and in what countries?

[Richard Gilbert:]

We do. We have thousands of sites and installed American tower in countries including United States, South Africa, Columbia, Mexico.

[Unidentified Analyst:]

And so are those are not we saw in the contract for x thousand towers that those are obviously series of smaller decisions that sort of run through your income statement. Is that correct? It's not a --

[Richard Gilbert:]

The decisions are made on a continuous basis and made independently just an extend of them various countries so it's not a case where you have a single overwriting PO for thousands and thousands of tower. You get opportunities as they come up and it's depends on their needs and their prioritization at any given time. What we do have are long term service contracts and those of course cover everything.

[Unidentified Analyst:]

So, do you agree with the GAAP accounting decisions on the write-off of what paid or as far as the long term value in what you paid or do you –?

[Richard Gilbert:]

From my perspective, you do accounting correctly and I don't question we have great auditors, we have great accounting team here. You do accounting correctly and it's not something like question because what I am focused on it's the business you want to be and it's the business you think has likes for the future and it's the business we want to continue on investing in and the answer to those all three questions are absolutely yes.

[Unidentified Analyst:]

Well, I guess my question is one of the key issues at west tower is right the ability to identify interesting these technologies that are slightly off the radar and be able to utilize the company's long term relationships with major carriers and be able to make them a lot bigger. So that was my question. So you feel that -- whatever time frame uncertain but justifies what you have paid for?

[Richard Gilbert:]

Yes.

[Unidentified Analyst:]

Thank you.

[Operator:]

Our next question on line comes from Brent Morrison from Zuma Capital Management. Please go ahead.

[Brent Morrison:]

Hi good morning thanks for taking my call. In the recent industry conference there was spokesmen for one of the carriers talking about how their budget is larger now than it was Jan 1 that multi-year foresight into the DAS market as queries about, can you talk about how the carriers place orders with you. Do they kind of give you some visibility on what their needs are or do they just come, phone ring and they just place POs and – can you just give us some insight to that process?

[Richard Gilbert:]

Well, first of all it varies by carrier and it varies by product area. We do have some visibility to large projects in advance. We obviously bid against competitors in those projects and in most cases specially the larger opportunities we do have – we do have a certain amount of visibility specially in the building wireless area and there are other areas I mentioned like CSG the outside some of the outside plant products that really is the case of the phone – getting the phone call and wanting something on Thursday afternoon but we have to deal with that. And I think we have to deal with that reasonably well. Your comment to start that comment about the capital budgets, be careful because if you go out and feel free to call me afterward I can point you to a number of things in the press but be careful because some of the carriers said yes, overall budget is excellent and it hasn’t changed but if you listen carefully they say they spent a lot of that early in the year and we are going to slow our spending to a very slow rate until we get back to 2015. That doesn’t indicate that oh we have changed our mind on how we rollout DAS or how we do in building wireless or how we do other projects, it simply means that the spending was done early and they have slowed it down. And that is clearly present in the press we are seeing other competitors seeing the same event. The other factor we are seeing and of course is this it the last budget quarter for the other carriers and every year this time you will see the carriers as they approach the holiday season, they will start to freeze network, start freeze projects, start to recover whatever is left in the budget and move it to next year or reallocate it to high priority projects and we simply are seeing that effect as well and so the main message we are giving is this – what was unusual this year was that in August we saw a rapid drop off in spending from one of our major customers and as we approach this quarter we saw the more normal budget management at the end of the quarter and you add those two things together I mean we had a tough quarter. It's going to continue this quarter but what we are seeing and I hope you heard this is a lot of bookings for the 2015 time frame we expect to have a very good backlog going into 2015.

[Brent Morrison:]

Okay. Thanks. Now can you talk about from our research the DAS gets for the in building segment maybe it applies to contracts I think that’s more macro towers but to my research the carriers have started with the largest spending of the arenas, the 85,000 capacity -- and they are working their way down. Can you talk about maybe how as the venues become smaller, maybe it's more repetitive business but it's not larger price point type projects and things how does that effect your business?

[Richard Gilbert:]

Well, I am not sure I have yet seen that exact effect. So you are proposing is that the large venues are going to be saturated and then it will build small business from that point on. I am not sure that --

[Brent Morrison:]

No I am just asking that's not my conclusion. I have just – how I have from talking to different people in the industry they started the things very large venues that the fill was more frequently than others and then they work their way now they are kind of vertical large buildings, hospitals, away from the stadium because the stadium is kind of being contracted or that kind of leveling has been taken out?

[Richard Gilbert:]

Well, it’s true in every one of stadiums and large venues but we are also in other in building environments as well and what I can say is that refer back to the ABI information we talked about in the form of converts it's a big market worldwide in building wireless and we think there is a healthy pipeline for a long, long time and I think we have heard a number of carrier players if you listen to the speeches given by some of the carrier executives they are saying the same thing. So what we like about it is we have a full range of conditioner product range from the small passive products to the much more capable active products and those are appropriate for various venues from the smallest as you say a small hospital to a large stadium and we expect to play in all those venues. So we are pretty optimistic frankly about the in building wireless area with products we currently have and with products we currently have underdevelopment as well. So it's a big play for us. And by the way, I should mention intelligence site management is used DAS monitoring as well. It's not just use the parasite.

[Brent Morrison:]

Okay. And for my last question, there has been a lot of talk about shortage of skilled engineers to install the DAS equipment. Could that be one of the bottom acts in the process here as there is not enough for these integrators to get the cycle or the kind of sales to a run rate that can meet your needs we’re seeing some of that bottom act coming from the integrators?

[Richard Gilbert:]

If that's a dynamic we haven’t seen it directly. Basically I think the biggest restriction on sales in IBW has been the capital spending restriction per say and not installations services.

[Brent Morrison:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] At this time we see, we have no further questions. I would now like to turn the call over to Richard Gilbert for closing remarks.

[Richard Gilbert:]

Okay. Well thank you everyone for joining the call today. We look forward to our next call and see you there. Thank you.

[Operator:]

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