Westell Technologies, Inc.
Q3 2015 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good morning and welcome to the Third Quarter Fiscal Year 2015 Earnings Conference Call. My name is Brandon, 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 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, Brandon. Good morning, and welcome to our conference call to discuss the fiscal year 2015 third 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 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, 2014, under the section of 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 will also 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 covers on the details about the quarter, I’ll make a few observations about our Q3 performance and our early Q4 business results. As I stated during the last earnings call, the dominant factor affecting our business during our fiscal Q2 and to a much greater extent during Q3 with the dramatic reductions in North American carrier spending during the latter half of 2014. Our Q3 results highlight our dependency on North American carrier spending for the health of our business. In short when AT&T and Verizon stop spending we suffer greatly. So there was very little good news from a business standpoint in Q3. That said, I can point to several positive indicators for current and future business. First, our expense in Q3 did not result from customer dissatisfaction with Westell. During the slowdown, our key customer context reassured us that they like both our products and our service and that we would very likely see improve buying trends when the 2015 budget were released in January. At this time I have no evidence that we lost market share during the capital spending slowdown. In fact our intelligent site management business recorded as best results for the year in Q3 as ISM tends to be less effective by large carrier spending than our other product lines. Second, we took advantage of the slowdown in the business to accelerate a major new development project in our in building wireless segment. We now expect to announce production shipments of a significant new dash product by midyear when we believe the business climate will be healthy and receptive. Third, as discussed in our last call, we expected to see revenue and booking improvements in early January when the carriers began using our new 2015 capital budgets. I am happy to report that’s exactly what we have seen in the first month of our fiscal Q4. At the time of this call, we have already shipped or committed to ship more than $10 million in the current quarter as compared with $14 million in all Q3. Finally, we are seeing a broad based recovery across our product lines in IBW, NCSG. This recovery is especially apparent in the new product lines. For example we’ve either shipped booked to ship more than $2 million worth of tower mounted amplifiers during Q4 as compared to only $200,000 shipped in all of Q3. I hasten to point out that we are still early in our fiscal Q4 and it's always possible the carrier spending trends will change again. At this point however, we have growing confidence that the capital spending discontinuity has passed history and that the business climate is now much more normal. Despite the recent good news in our market, we still believe we must react to the Q3 results from financial management perspective. To that end, we are currently restructuring our business including steps to reduce full time personnel and consolidate facilities. These actions which are expected to generate annualized saving of approximately $3 million will allow us to continue to invest in IBW product development activities and to enhance our international sales program with the goal of reducing our dependence in North American carrier during future spending cycles. In summary, although Q3 was certainly a very tough quarter for Westell, as it was for most telecom vendors, Q4 appears to be headed toward a much better result. We remain confident in our wireless strategy and our North American business prospects. We also expect to expand our customer base in selected domestic and international markets by developing distribution channels and OEM partnerships. I will now turn the call over to Tom who will update our performance for this quarter.

[Tom Minichiello:]

Thank you, Rick. For the third quarter of fiscal 2015, Westell Technologies reported consolidated revenue of $14 million, a 41% decrease from the $23.6 million in the second quarter of fiscal 2014. Revenue this quarter consisted of $5.4 million from the IBW reporting segment and $8.6 million from the CSG segment. IBW segment revenue was affected by reduced capital spending by the major North American wireless service providers. For the CSG segment, lower sales of tower mounted amplifiers and outside plant solutions which were also affected by reduced carrier spending were partially offset by an increase in revenue for intelligent site management. On a GAAP basis we reported a consolidated net loss for the third quarter of fiscal 2015 of $27.5 million or $0.46 per share, versus a net loss of $14.6 million or $0.24 per share in the prior quarter. On a non-GAAP basis, net loss for the third quarter of fiscal 2015 was $4.8 million or $0.08 per share, compared to a non- GAAP net loss of $1.5 million or $0.03 per share in the prior quarter. Well, the GAAP and non-GAAP results were affected by the continued carrier spending slowdowns during the third quarter. In addition the GAAP results this quarter included a $20.5 million accounting charge for the impairment of goodwill in the IBW segment compared to a similar but smaller charge of $10.6 million last quarter for the impairment of goodwill in CSG segment. Several factors contributed to this impairment including the company's market capitalization and the recent results of IBW. As was mentioned in our last call with regard to the CSG goodwill, IBW goodwill impairment doesn’t signal the end of the economic value of our IBW business. In fact, we are committed to the in building wireless market and see opportunities in this market to grow and deliver long term value. Let me additionally point out that this accounting charge has no direct effect on Westell’s cash balance, operating cash flows or business outlook. You may recall, we recorded a goodwill impairment charge at the end of fiscal 2013 related to the Anton acquisition, which was followed in fiscal 2014 by a successful year for the TMA product line acquired as part of that deal. Turning the gross margin, consolidated non-GAAP gross margin was 32.3% compared to 35.4% in the prior quarter. Contributing to the lower non-GAAP gross margin, in the third quarter was a lower overall level of revenue partly offset by more favorable mix. Turning to operating expenses, consolidated non-GAAP OpEx was $9.4 million this quarter compared to $10 million last quarter, the lower sequential OpEx was due primarily for temporary decreases in the number of sales in marketing headcount during the quarter, lower sales incentive expense and other administrative expenses in the second quarter that did not reoccur in the third quarter. As Rick mentioned, we are currently restructuring the business. This includes a reduction of about 20 fulltime personnel or 8% of our total fulltime work force and the consolidation of facilities which would largely include the reduction of office space at our Aurora headquarters building. These are actions which are expected to be completed by March 31, 2015 will result in the pre-tax charge in the fourth fiscal quarter currently estimated at $3 million. As Rick also noted these actions are expected to result in annualized expense savings of approximately $3 million. This will enable us to better align on investments and R&D and sales and marketing to drive profitable growth in long term value for shareholders. Moving to the balance sheet, we used $5.4 million of cash in the third quarter bringing our total cash in short term investments to $42.9 million at December 31, 2014 and no debt. The cash decrease was driven largely by the operating loss during the quarter. Now let's take a deeper look at the third quarter segment results. Revenue for the IBW segment was $5.4 million in the quarter, down 51% from $11.1 million last quarter. The sequential revenue decrease which was driven by slowdowns and DAS appointments by major North American wireless service providers, IBW segment gross profit was $1.9 million and gross margin was 35.3%, compared to $4.4 million and 39.3% last quarter. The gross profit and gross margin decreases were due to the lower revenue. IBW segment R&D expenses were $2.3 million, compared $2.1 million last quarter. As a result of IBW segment loss was $400,000 million compared to segment profit of $2.3 million last quarter. Revenue for the CSG segment was $8.6 million, down 31% from $12.5 million last quarter. CSG gross profit was $2.5 million and gross margin was 28.8%, compared to $3.7 million and 29.5% last quarter. The gross profit and gross margin decreased was due to lower overall revenue, but partly offset by a more favorable mix. The CSG segment revenue segment was $2 million compared to $2.2 million last quarter. So, as a result CSG segment profit was $500,000 compared to segment profit of $1.5 million last quarter. So with that review of the key financial results I would now like to open up the call for your questions. Brandon.

[Operator:]

Thank you. We will now being the question-and-answer session. [Operator Instructions] From Northland Capital, we’ve Mike Latimore on line, please go ahead.

[Mike Latimore:]

Yes, good morning Rick you mentioned $10 million of orders - how do you describe that was this $10 million was that shipped or you receive orders again, how do you describe the $10 million?

[Richard Gilbert:]

The majority of it has shipped. The $10 million is made up of orders that we received from the 2015 budgets came in plus some backlogs that we entered the quarter with, most of that is much of that is shipped and some of it is scheduled in the ship in the next month or two in this quarter, but during the quarter.

[Mike Latimore:]

Okay and is that all - is that concentrated at any product area or is there a mix of the product there?

[Richard Gilbert:]

Yes, it's pretty much across the board. We are seeing recovery in most of our product learning pretty well. Obviously, CSG products including ISM, self site optimization are doing pretty well. IBW is doing okay but probably will catch up a little bit.

[Mike Latimore:]

You mentioned I think that the ISM product a, relatively speaking in the December quarter was that related to one project or one customer or were there couple of customers ordering done, how should we go for that?

[Richard Gilbert:]

Most of those one customer American tower was one of our top 10% customers in the last quarter. I think it was 30% customer. They have continued rolling outside using our gear and we started to see some improvement in that side of the business. We are also though seeing good activity now in Australia that wasn’t captured last quarter but we expect to capture some of it this quarter.

[Richard Gilbert:]

Okay. Got it and you mentioned that new product coming up for IBW you keep that little bit more, what that is?

[Richard Gilbert:]

No, we are not pre announcing it but what I have said before Mike is that we believe that the DAS areas are very important areas going forward in a building wireless. We wanted to play in a larger product than gas than just the gas conditioner market so you assume that it's a product that allows us to play in a much wider space in building gas.

[Mike Latimore:]

And what’s the new expense and what would be a breakeven revenue level?

[Richard Gilbert:]

$25 million to $27 million.

[Tom Minichiello:]

Yes, that’s right Mike you know. Like what just Rick said $25 million to $27 million in that range depending on product mix in a particular quarter right.

[Richard Gilbert:]

Mike, remember we are doing some restructuring initially will save us $3 million annualized but where we are investing that. I mean just make sure we understand that we are already investing the majority of that in international sales efforts and in IBW development.

[Mike Latimore:]

Okay. Got it. And then just last question on the tower mounted amplifier opportunity is that still primarily with one customer?

[Richard Gilbert:]

Primarily although we are seeing some interest in initial interest in that product in the - with some partners we are working with in South America. We will see how that ends out.

[Mike Latimore:]

Okay. Thanks a lot.

[Operator:]

From Oppenheimer we have Todd Brady online. Please go ahead.

[Todd Brady:]

Good morning guys.

[Richard Gilbert:]

Good morning Todd.

[Todd Brady:]

Rick, can you talk a little bit more about the international effort? I know that this is an issue that you have addressed prior quarters you have brought personal on board. If you are looking out 12 months from now, what can we shareholders expect on the international side and secondly can you guys talk a little bit more about the personal as you guys have let go and what the headquarters looks like going forward I mean did you guys end up leasing space out, it seemed as though you guys had some excess capacity on the home front anyway. So talk a little bit more about that and how that helps you operating line going forward? Thank you.

[Richard Gilbert:]

Okay, first starting on the international front. It is true that obviously with much scale on board one of his primary mandates is to move more aggressively into selected international markets and marketing team has already identified additional partners. They have had substantial dealing with those partners in terms of training and organizational meetings and our primary target again is Latin and South America in terms of initially growing our business. What we are seeing in terms of the interest from those partners is primarily initially again in the ISM area, because intelligence site management is something they understand and they think they can sell to a multiple set of accounts in multiple countries. So, it will probably what you will see will probably be initially some additional ISM deals, I had also mentioned TMAs there are other products that are possibly applicable to those markets. The products that are probably less applicable to the two international markets are the legacy CSG products simply because at those margins taken them into the international markets with shipping cost and such just as to make very profitable business through distribution. Obviously the in-building wireless products are also of interest but right now we are focused with in-building wireless on primarily the domestic markets. So what we hope to see is improvement in the international front because as we said our Q3 was again a pretty big wakeup call in terms of just how independent we are in a few customers and we really needed to diversify our sources of revenue. When we look at other telecoms vendors they all went through the same stuff in Q3 but the ones that were dependent are North America were hit extremely hard year-to-year. The ones that had more diversification internationally still are hurt but they were down maybe 10% versus 30% or 40%. So, we need to fix that problem and internationals are in our priority list. In terms of your second question, again we so far we have done adjustment about only 8% of our work force site that leaves us like 230 plus full time employees. And they came from across the board, CSG and IBW. In terms of consolidation of facilities we still are primary facilities are Manchester, which is the headquarters obviously Dublin, Ohio we saw site in [Regina] we did close down the site in [indiscernible] because we are doing the TMA stuff here now. And the consolidation of facilities also includes better utilization of our space which Tom do you want to comment.

[Tom Minichiello:]

Yes, Todd and you have been to our building so you know, so it's better utilization of the space which means we are vacating some of the space we no longer need. And that allows us to save some expense through the restructuring process.

[Todd Brady:]

That's very helpful. One quick follow-up guys, you guys have talked about the new members of the family, New Hampshire and how that helped your position with a top tier one carrier domestically that would not be Verizon or AT&T can you give us an update on how that integration is going and the relationship with the customer that really if I am not mistaken helped you guys be able to save the work with the top three wireless carriers tier one in the U.S.?

[Richard Gilbert:]

Yes, I mean just so name the customer Sprint right and we had very little business with Sprint. We have some but very little business with Sprint prior to the acquisition of CSI. CSI has a strong relationship with Sprint and DAS conditioning units. They are passive DAS conditioning units and the active unit product there is also effectively approved as Sprint as well. What we hope to do obviously is more of our product lines into the Sprint market. We didn’t recently just very recently hired a new in building sale guy who is actually based right next to Sprint and we expect to our really focus on that as we go forward. So far we haven’t seen many results of cross sales in Sprint. But we are seeing that continued purchase of the Manchester product to Sprint.

[Todd Brady:]

One final question. Rick it sounds like you have given us a material reset of the business and obviously expectations have come down a lot. Would it be fair to say that today on Thursday February 5, 2015, you feel a lot better about the business going forward and expectations going forward and really it sounds like the expectations have been reset across the board, would that be a fair compliment?

[Richard Gilbert:]

Well, I mean I want to make it clear though. I felt good about the business last quarter too, right. I mean we have the products we wanted to have. We are building the business the way we wanted to build from a strategic standpoint. We can't control unusual discontinuity and carrier spending. When they happen they happen and it's very dramatic obviously and I understand how shareholders can be very concerned about what happened last quarter but there is not a single thing Westell could have done to mitigate that other than having more diversity in our customer base. So, we had to live through that but I didn’t feel badly about the business while we went through that. I still think we have exactly the right products. We have a great team. And we are moving forward on all fronts. Now what we try to say which is unusual for us by the way what we try to say in this call is that as the 2015 budgets were released by those carriers and they started buying their formal rates we are seeing a much more normal behavior of our business which is what we had talked to see and what we expect to see and what we are seeing. So I don't know what you mean by a reset of the business per say I mean we are still following our strategic, we have got the team and the products and we continue to keep pushing forward without a fundamental change in our strategic. The one thing that I mentioned already that Q3 did for me and I think the all management team is put even more emphasis on the fact that gosh it would be great to get a little bit more diversity in our customer sets. So, when these kind of things happen again which they will some day. When these kinds of discontinuities happen again, we see the 10% effect and at the 30% or 40% effect. Does that makes sense?

[Todd Brady:]

Absolutely, I appreciate your time, I know that you guys do not give guidance, but it also sounds as though you guys are feeling better about business overall?

[Richard Gilbert:]

Yes, I feel good about business and we feel good about the business and certainly we’re going to see a much better quarter than we saw last quarter.

[Todd Brady:]

Thank you very much for your time.

[Operator:]

From Heartland Funds, we’ve Bill Nasgovitz on the line, please go ahead.

[William Nasgovitz:]

Yes, good morning. Just a question here in terms of outside of the business needs more diversity in terms of customer base and spending needs to revive, just looking out two, three years, how optimistic are you that you’ve the right products and the right team here to deliver profitability?

[Richard Gilbert:]

I’m pretty optimistic, but let’s consider the product areas individually that will be easier to answer your question. I think the in-building wireless which we talk about all the time is our R&D investment right now is a great product area to deliver diversity. I mean, because DAS systems are wide spread worldwide, these are in-building solutions, so it’s not all large carriers, it is small integrators that are doing stuff and you can take that kind of products through distribution channels, wide distribution channels as well as the large carriers. So, IBW has a great product to give us more access to a larger set of customers and more diversity and that’s true both domestically and internationally. So that’s one of the things we like about the DAS area. If you look at the CSG area, it’s a little more challenging because lot of what CSG sells outside of the ISM area, a lot of what CSG sells on the self side optimization and the outside plant does tend to go either through distribution are directly to the large carriers and so moving those products to a wider set of customers requires opening up more international channels and getting those products into those channels and as I already said, the legacy outside plant products, the cabinets and closures, power products and things like that those are pretty tough to move through distribution internationally because of the competition and the margins. The one other area though that I think is a bright spot and we do expect to see continuous improvement now is the ISM area because ISM is another area that is first of all high margin and secondly can be taken to a lot more customers than just two or three largest carriers in the U.S. and it’s also product that is well suited for international. As I mentioned in Q3, one of our biggest customers was American Tower and I did mention that ISM had its best quarter in the year in Q3, which is saying something, I mean, we had the carrier cutback in spending, but we didn’t see a significant from, for instance, American Tower and that was a good example of the kind of diversity we need in the future.

[William Nasgovitz:]

Okay. So, today in the marketplace, you have an enterprise value of about $20 million. So, at what point would you consider buying shares back, I know these are difficult times today, but the business outlook is somewhat promising, at what point would you consider buying back stock?

[Richard Gilbert:]

Well that discussion occurs at every board meeting and it’s obviously a board decision to use our cash that way which is to do it, and it may make some sense. Right now, where I think, we’re just focused on the management prospect, we’re focused on doing the business.

[William Nasgovitz:]

In terms of future acquisitions, what’s your strategy there?

[Richard Gilbert:]

As I said on some of the previous calls including the last call, if we do any acquisitions it will be tuck ins right now and frankly we’ve acquired the stuff we wanted to acquire relatively to our stated wireless strategy and right now we want to make sure that we’ve really consolidated it well and that all cylinders are running which haven’t yet. But, I think we’re on the good path. And so, right now, I wouldn’t expect a large scale for even a mid size scale acquisition.

[William Nasgovitz:]

Net of cash, could you find a business and apprised to sales bases as cheap as your stock today?

[Richard Gilbert:]

I don’t know.

[William Nasgovitz:]

And you’re selling at perhaps quite a quarter or third to sales?

[Richard Gilbert:]

I understand, I mean, you asked a rhetorical question there, I mean, I can’t answer that, I understand your point.

[William Nasgovitz:]

Well, it seems to be, on the bargain condor, if you’re optimistic about the future. Thank you.

[Richard Gilbert:]

I think you’re right.

[Operator:]

[Operator Instructions] It looks like we have no further questions at this time, I would now turn it back to Rick Gilbert for closing remarks.

[Richard Gilbert:]

Well, I like to thank everybody for joining the call. We look forward to our next earnings call and we look forward to reporting a better quarter than we did on this call. Thanks very much.

[Operator:]

Ladies and gentlemen, this concludes today’s conference, thank you for joining, you may now disconnect.