Westell Technologies, Inc.
Q4 2015 Earnings Call Transcript

Published: 21 May 2015

[Operator:]

Good morning and welcome to the fourth quarter fiscal year 2015 earnings conference call. My name is Deborah and I will be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call is being recorded. I will now turn the call over to Tom Minichiello, Westell's Chief Financial Officer. Tom, you may begin.

[Tom Minichiello:]

Thank you, Deborah. Good morning and welcome to our conference call to discuss the fiscal year 2015 fourth quarter results for Westell Technologies. The news release we issued last night is posted on our website, westell.com. On this call, Tom Gruenwald, Westell's Chief Executive Officer will begin with a discussion of our business 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. 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. 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 performance and facilitates comparisons across reporting periods. Our discussion of results today will include non-GAAP financial measures. We have provided a reconciliation to the most comparable GAAP measures in our news release. With that, I will now turn the call over to Tom Gruenwald.

[Tom Gruenwald:]

Thank you, Tom and good morning, everyone. Before Tom covers the details of our report, I will make a few observations about our fourth quarter and provide the status of initiatives we are putting in place lace to both improve the company's performance in the near-term and get us on track for continued long-term growth. This comprises moving the company toward increased operational excellence and evolving the product portfolio in concert with evolving customer needs. Our fiscal fourth quarter revenue came in at $18.6 million, which was solidly above the $14 million of the quarter before. While this shows improvement, this level of performance needs to get significantly better. We can and must deliver improved performance. There are a few bright spots in the quarter. First, our TMA product line recovered nicely showing strong demand and good momentum going forward helping to drive growth in our CSG segment. Next, our Active Universal DAS Interface Tray or UDiT achieved record quarterly revenue since its introduction in the fiscal first quarter of 2015. These are two, albeit small indicators that carrier spending has improved from its low in the second half of calendar year 2014, but not to previous levels. Our experience is, the carriers are spending, but it's very targeted and at a measured pace. We have previously highlighted several areas upon which we wanted to focus here at Westell to drive short-term recovery and build the foundation for long-term growth. First, we committed to building up our sales force and opening new markets as well as acquiring new customers in existing markets. To that end, we have hired several new salespeople with exceptional skills, great industry knowledge and truly solid relationships. We are seeing the initial impact of this in areas where we are winning new business. Our power product line is one area where we are seeing the effect of heightened sales focus. We expect meaningful year-over-year growth in power both as we increase share and roll out new products. Next, I am very happy to welcome Chuck Bernstein to Westell as Senior Vice President of Worldwide Sales. Chuck is an outstanding sales leader with a record of significant success in our industry. He is also an exceptional team builder and will raise the level of performance of our entire sales team. We are thrilled to have Chuck as a key member of our executive leadership team as Chuck is a results driven leader. Next, we committed to diversify our customer base and revenue stream. To achieve this, we have dedicated new sales resources, focused on new markets and customers, both on a domestic and international basis, where our products are a good fit for customer needs. We have also hired our first sales professionals dedicated to developing the Latin American market. In addition, we are excited about a new product being developed by our Manchester engineering team for our IBW business. We are on target to announce more details about this product in the next couple of months and why we believe it is a game changer in the In-Building Wireless market. Also, in the cell site optimization area, customers are buying multiple products as part of an overall solution. So we are working to enhance the current solutions we offer by developing new products that are adjacent to our current set of TMAs. Another key initiative for Westell is to improve our consolidated gross margin to a sustainable 40% or better. There are now few focused teams, one looking at general supply-chain overhead and efficiency, the other looking for product specific cost and labor savings. Both are making progress and we have already identified areas of potential savings that should significantly impact gross margins. Looking forward, our focus is to be profitable as soon as possible. This will, of course, take a combination of revenue improvement, margin improvement and expense control. We feel as though revenues are increasing at a slow but steady pace. We are encouraged by the level of bookings to-date in the fiscal first quarter and are ahead of where we were at the same time last quarter for revenue captured, which we consider shipped or committed to ship. I will now turn the call over to Tom Minichiello for a detailed update on our performance this quarter.

[Tom Minichiello:]

Thank you, Tom. For the fourth quarter of fiscal 2015, Westell Technologies reported consolidated revenue of $18.6 million, a 33% increase from the $14 million in the third quarter of fiscal 2015. Revenue this quarter consisted of $7.1 million from the IBW reporting segment and $11.5 million from the CSG segment. On a GAAP basis, we reported a consolidated net loss for the fourth quarter of fiscal 2015 of $13 million or $0.22 per share versus a net loss of $27.5 million $0.46 per share in the prior quarter. The $14.5 million favorable sequential comparison for the GAAP results was due primarily to a non-cash goodwill impairment charge of $20.5 million in the prior quarter, partly offset in the current quarter by a $3.2 million charge for the restructuring plan we announced in early February and non-recurring expenses of $2.1 million related to the departure of the former CEO. On a non-GAAP basis, net loss for the fourth quarter of fiscal 2015 was $5.5 million or $0.09 per share, compared to a non-GAAP loss of $4.8 million or $0.08 per share in the prior quarter. The $800,000 unfavorable sequential comparison for the non-GAAP results was due primarily to an unusually low gross margin this quarter. So now let's turn to the gross margin. The consolidated non-GAAP gross margin was 25.6%, compared to 32.3% in the prior quarter. While the favorable effect of higher revenue was almost all offset be a less visible product mix this quarter, the unusually low gross margin was largely due to higher than normal reserves for excess and obsolete inventory, attributable primarily to lower revenues in recent quarters that resulted in an abnormally high buildup of inventories. Without the sequential increase in excess and obsolete inventory costs, which was $1.4 million, non-GAAP gross margin would have been 33%, or slightly better than the prior quarter. While maintaining sufficient inventory levels to meet anticipated customer demand that may or may not materialize is an ongoing business risk, we do not expect to experience these higher than normal levels of excess and obsolete inventory costs in future periods. Turning now to the operating expenses. Consolidated non-GAAP OpEx was $10.2 million in the quarter compared to $9.4 million last quarter. The higher sequential OpEx was driven primarily by an increase in sales and marketing expenses which was largely due to backfilling positions within our sales team that had been vacated throughout the latter part of calendar 2014. Moving to the balance sheet. We used $5 million of cash in the quarter, bringing our total cash and short-term investments to $37.9 million at March 31, 2015 at no debt. The cash decrease was driven by the operating loss during the quarter and employee severance payments related to the restructuring plan and to the departure of the former CEO. Now to take a deeper look at the fourth quarter segment results. Revenue for the IBW segment was $7.1 million in the quarter, up 31% from $5.4 million last quarter. The sequential revenue increase was driven by record quarterly sales of our active DAS conditioner or UDiT. IBW segment gross profit was $1.6 million and gross margin was 23% compared to $1.9 million and 35.3% last quarter. Gross profit and gross margin decreased largely as a result of the higher excess and obsolete inventory costs. IBW segment R&D expenses were $2.3 million in both the current and prior quarter. As a result, IBW segment loss was $700,000 compared to a segment loss of $400,000 last quarter. Revenue for the CSG segment was $11.5 million, up 34% from $8.6 million last quarter. The sequential revenue increase was driven by higher sales of TMAs and systems integration projects, partly offset by lower ISM revenue. CSG segment gross profit was $3 million and gross margin was 26.4%, compared to $2.5 million and 28.8% last quarter. The gross profit increased due to the higher revenue while the gross margin decreased largely as a result of a less favorable mix. CSG segment R&D expenses were $1.9 million compared to $2 million last quarter. As a result, CSG segment profit was $1.1 million compared to segment profit of $500,000 last quarter. So with that review of the key financial results, I would now like to open up the call for your questions. Deborah?

[Operator:]

[Operator Instructions]. And your first question comes from the line of Mike Latimore.

[Mike Latimore:]

Good morning, guys.

[Tom Gruenwald:]

Good morning, Mike.

[Tom Minichiello:]

Hi, Mike.

[Mike Latimore:]

I don't know if you report this here on your 10-Q, but did you have any 10% customer in the quarter?

[Tom Minichiello:]

Yes. Hi, Mike, this is Tom Minichiello. There are two Tom's here. We had one top ten customer, over 10% customer in the quarter and for the full fiscal year.

[Mike Latimore:]

And which one was that?

[Tom Minichiello:]

It's Verizon Wireless.

[Mike Latimore:]

Okay. And then on the gross margin, so absent the obsolete reserve effectively, I guess 33% gross margin, is that sort of a good way to think about the business for a while until revenues ramp?

[Tom Minichiello:]

Yes. I think a good way to think about it, Mike, is that's a good starting point and without the increase in the E&O charge, we would have been at 33%. And we did have some sort of general reserve beyond that. So I think mid-30s is where we are at run rate wise on the $18.7 million in revenue that we booked this quarter.

[Mike Latimore:]

Okay. And then on the new product that you are going to be launching here shortly, can you talk a little bit about, are you developing that in conjunction with a specific customer? Is there an immediate opportunity once that's ready? Do you have to get it certified such that maybe you don't get revenues for a while? Can you just talk a little bit about the prospect there?

[Tom Gruenwald:]

The product has been reviewed in a confidential way with a few customers and we have one or two customers that are specifically interested in doing up the ways with us. Of course, it will have to go through their lab and everything, the normal processes, but we do have customers that are interested in the new product.

[Mike Latimore:]

But how long does it take to get through the labs and all that to be able to --?

[Tom Gruenwald:]

Typically, that's several months.

[Mike Latimore:]

Okay. And then what would you say is your breakeven revenue level at this point?

[Tom Gruenwald:]

It's still about the same as we discussed last quarter, which is $25 million to $27 million and we will be working pretty hard to try to lower that but right now that's a good number.

[Mike Latimore:]

Okay. And then for your intelligent site management area, what are the prospects looking like there? You have had a number of big customers that have bought that in the past, some of it's software, but I guess what's your general view on that over the next 12-months?

[Tom Gruenwald:]

We are looking for some growth in that, of course, quarter-over-quarter. I just got back from a visit to Nigeria. We have good prospects in Africa. And also we are still very active in Australia as well as the United States. Our activity in the United States is good, but we are looking for slow and steady growth out of that product.

[Mike Latimore:]

Okay. Great. Thank you.

[Tom Gruenwald:]

Sure. Thanks, Mike.

[Operator:]

And you next question comes the line of Brad Evans.

[Brad Evans:]

Yes. Thanks for taking the question. Can you just maybe expand a little bit on the levers you have to pull to reduce the breakeven point? And why haven't you taken -- what's the decision making process that hasn't motivated you to, at this point, take those actions to move the breakeven point lower?

[Tom Gruenwald:]

Well, naturally we are taking actions as we speak. We have certainly worked very hard on improving our gross margins. And we have identified a lot of areas where we can improve the gross margins. We are doing a lot better job of inventory control. That's going to help as well. And we are now in the throes of looking at the organizations and see if we can get some organizational efficiency. So it's not like we have been sitting here, waiting to take action. We have got plans in progress and we have identified a lot of cost savings, especially in the gross margin area.

[Tom Minichiello:]

Yes. I would add to that, Brad, that we did have the restructuring that did take out some expenses. But at the same time we were also charging pretty hard on the development that we talked about in the IBW area and we feel that that's a good investment. So we are juggling a few things that are taking expenses out. We are also investing. So net net, we are a little up in the OpEx, but that's going to work out, I believe. And so that's something that we feel strongly about that we need to invest in for future growth.

[Brad Evans:]

Can you share with us a target as to where you think you can lower the breakeven to, over the next, say, six to 12 months?

[Tom Gruenwald:]

I would start with a simple model of, take the $25 million to $27 million range we just talked about, just take the low end of that range of $25 million with we are at 40% margin and let's say a $10 million burn, that's a breakeven. It's not all that dissimilar to a quarter we had early on in the fiscal 2015 where we did a little bit more revenue and a little bit less gross margin and we broke even. So that's a good way to really start to think about it.

[Brad Evans:]

I am sorry. Can you just expand on the, from an R&D perspective you just alluded to -- where are you -- the area of focus? Can you just elaborate on products, product lines and markets that you are directing current R&D dollars to, please? Thank you.

[Tom Gruenwald:]

The primary focus right now is the In-Building Wireless area. For us, that's one of the biggest addressable markets we have. We feel like we have some technology advantages that have already shown in our UDiT area that we can leverage into the next generation of products. So that's primarily where the increased R&D is going. Brad, are you still there?

[Operator:]

[Operator Instructions]. And we do have a question from the line of Todd Koffman.

[Todd Koffman:]

Thank you very much. In the area of In Building Wireless, what product area and market opportunity do you view as the most attractive area for you looking forward? What specifically are you trying to highlight or point out?

[Tom Gruenwald:]

Well, in the product area, we are already very active in the DAS conditioner area. We are also very active in the repeater area as well. It's a smaller market but still active. So it's in those two areas that we are most focused. And that's an area where people make decisions based on cost and performance and we have got a really good technology base and a great set of engineers. So we think we can obtain some competitive advantage by producing products that have higher performance levels.

[Todd Koffman:]

And just so I understand, that's a product that would provide some sort of interconnection between a high power base station and some sort of smaller cell? What is the specific product that you are targeting or feel like is a good opportunity for you in that In Building Wireless area?

[Tom Gruenwald:]

Well, we haven't announced the product yet. We will do that sometime in the next month or so. So we really haven't announced it publicly, but we will announce it in the near term, certainly before the next the call.

[Todd Koffman:]

Thank you.

[Tom Gruenwald:]

Sure.

[Operator:]

You have a follow-up question from the line of Mike Latimore.

[Mike Latimore:]

In terms of your TMA opportunity, where do you think you are in terms of penetration of that product in your core customer there? And then separately, you talked about maybe an adjacent product that you are developing around that or something? Maybe you can elaborate a little bit on that as well?

[Tom Gruenwald:]

Certainly. Our TMA product line is pretty active with one or two customers. I am sorry, I think you asked about the market penetration there?

[Mike Latimore:]

How many of the towers effectively are you on versus the opportunities?

[Tom Gruenwald:]

I think our market share is probably around 20% or so of the total addressable market right now. There are a lot of other things that the customers buy when they buy TMAs, such as filters, for instance. And we are developing some things we call smart filters to go along with the TMAs. So that when customers buy, they can buy a complete set of products.

[Mike Latimore:]

Okay. Got it. And then just in terms of carrier spending or whatever, we are five months into the year now, do you feel like they are giving you a little more visibility into their plans for the second half than maybe this time last year?

[Tom Gruenwald:]

Certainly better visibility than this time last year. However, I wouldn't claim that we have all the visibility that we would like. But certainly this time last year, there was no inkling yet the spending would be cut the way it was by the second half of the year. I think there is good communication from the carriers absolutely. But you maybe even they don't know what will happen in the second half of the year yet.

[Mike Latimore:]

And then in terms of the inventory reserve, which products do that relate to?

[Tom Gruenwald:]

So in the CSG, it was mostly our legacy SONET TDM T1 cards where the demand has continued to accelerate downward quicker than originally anticipated. And so that was where it was in CSG primarily. And then in IBW, it was mostly in passive DAS material and some finished goods after we built up some inventory at the beginning of last year for what was higher demand than what actually happened in the back half of calendar 2014.

[Mike Latimore:]

Great. Good luck this year.

[Tom Gruenwald:]

Thanks, Mike.

[Operator:]

Your next question comes from Todd Brady.

[Todd Brady:]

Hi. Good morning.

[Tom Gruenwald:]

Good morning.

[Todd Brady:]

Can you just talk a bit more about international opportunities? Seems like the company is making some investments in some strategic personnel additions on the international side as we are looking out over the next fiscal year and I know it's too early to project what international could contribute, but can you give us some type of color? Or what are you thinking about international over the next 12-months? Thanks.

[Tom Gruenwald:]

Okay. I will be happy to comment on that. First of all, we are looking, have looked and are looking at how our products fit into certain markets. There are two markets where our ISM product is already established internationally, well actually three markets, Columbia, Australia and Africa and we continue to work. We have some very good partners in those areas and we continue to work with them to increase our sales in the ISM area, as well as to look for other opportunities for other of our product line. So that's number one. But that's current course and speed because we have had those partners for a while. In addition, as I said, we just hired a really experienced, really good salesperson to open up the Latin American market in a little bigger way for us. And so we are actively looking for partners in almost all of Latin American countries. We do know that there the market for some of the In Building Wireless products there as well as a lot of all our other products, power, ISM. So we are at the initial stage of developing that. We are also looking at other areas of the world, again looking for products that before we make a foray into those areas, but we are actively looking at Europe and the Middle East as well.

[Todd Brady:]

I appreciate that. One other issue that you have discussed previously was the company's ability and opportunity to grow its customer base and you guys seem to have suffered from customer concentration previously. Is it still way too soon to talk about a more broad-based customer direction for the company? Thank you?

[Tom Gruenwald:]

Yes, I am not sure exactly what you mean by broad-based customer direction, but I will tell you what we are thinking. We have some initial success with some new customers, a few. One or two of them could be pretty significant customers. But it's a very active and conscious program for us to find new customers. Our new sales leader, Chuck Bernstein, is totally focused on that, as is our sales team as a whole. We are also looking at -- we don't talk to all of the carriers all of the time. And so we are looking at broadening our bases of other carriers as well. I think in the next call, hopefully, we will be able to give you a little more color on that as we are just really starting to get some traction with other customers.

[Todd Brady:]

Thank you. Good luck.

[Tom Gruenwald:]

Thanks.

[Operator:]

Your next question comes from the line of Mark Silk.

[Mark Silk:]

Hi. I was late to the call and most of my questions were answered. So I hope this isn't repeating. Without the higher than normal excess and obsolete inventory costs, what would the gross margins have been this quarter?

[Tom Minichiello:]

Well, without the increase from the previous quarter, Mark, it would have been at 33%. We did mention that in the prepared marks and probably in a more normalized quarter, the way I see it, more like in the mid-30s. That's on the current volume that we did this quarter of $18.7 million.

[Mark Silk:]

Correct. And maybe on Todd's question about extending overseas, are you seeing any headwinds or tailwinds or any surprises there?

[Tom Gruenwald:]

No. We are not. Again, we are seeing new opportunity in Africa. We are actively developing some market plans with our partner in Australia. So we are not really seeing headwinds, not at all in the international arena. Now, to be fair, in some areas we haven't penetrate far enough to see what the headwinds are, but so far so good.

[Mark Silk:]

Thanks for taking my questions.

[Tom Gruenwald:]

Sure. Thanks, Mark.

[Operator:]

[Operator Instructions]. Okay, it looks like we have no further questions at this time. I will now turn the call back to Tom Minichiello for closing remarks.

[Tom Minichiello:]

Okay. Thank you everyone for joining the call today and we look forward to speaking to you again in the near future. Thanks.

[A -Tom Gruenwald:]

Thanks, gentlemen.

[Operator:]

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