Westell Technologies' CEO Presents at Cellular Specialties, Inc. Acquisition Conference (Transcript)

Mar. 5.14 | About: Westell Technologies, (WSTL)

Westell Technologies, Inc (NASDAQ:WSTL)

Acquisition of Cellular Specialties, Inc. Conference Call

March 05, 2014 9:30 AM ET

Executives

Tom Minichiello – Senior Vice President and Chief Financial Officer

Richard S. Gilbert – Chairman and Chief Executive Officer

Scott Goodrich – President

Analysts

Mike Latimore – Northland Securities, Inc.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Steve Shaw – Sidoti & Company, LLC

Todd Christopher Brady – Oppenheimer & Co. Inc.

Operator

Good morning and welcome to Westell’s Investor Call regarding Cellular Specialties’ Acquisition. My name is John, 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 Tom Minichiello, CFO. Tom, you may now begin.

Tom Minichiello

Thank you, John. Good morning everyone. On the call with me is Rick Gilbert, Westell’s Chairman and Chief Executive Officer. Our call this morning is focused on Westell’s announced acquisition of Cellular Specialties, Inc. or CSI. We’re very excited about the acquisition and want to keep our prepared remarks brief, so that we can address your questions. I’ll address our Safe Harbor language and provide some key facts about the acquisition and then we’ll open up the lines for Q&A.

Please note that our presentation and discussion contained 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 performance, results 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, 2013 under the section Risk Factors.

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. I would like to refer you to our new release and 8-K filing both issued earlier this week. I will try not to answer some questions or some of the more obvious questions without repeating too much of that information.

First, key aspects of the transaction itself. Westell purchased the stock of CSI for $39 million in cash, no debt assumed and subject to normal working capital adjustments. There are no earn outs or other similar payments from Westell and the transaction close on March 1, 2014. For some more information about CSI, for 17 years CSI has been an innovator of in-building wireless connectivity solutions for 3G and 4G cellular coverage. CSI’s range of product includes active and passive DAS Interface Panels, high-performance digital repeaters, bi-directional amplifiers, system components and antennas, and E911 location-based enhancement solutions. It has a broad range of customers including strong relationships with the major North American wireless service providers.

For the 12 months ended December 31, 2013, CSI’s revenues were approximately $37 million, which was up significantly over the prior year. Its products generate strong margins and CSI was solidly profitable in 2013. It also has excellent momentum in the marketplace, including a new active DAS offering called the Universal DAS Interface Unit or UDiT. We expect CSI’s business to continue to grow and sustaining solid profitability into the future. For the combined Westell-CSI business, we expect over 80% of revenue to come from wireless products and consolidated gross margin should be above 40%. We also expect CSI to be accretive on a non-GAAP basis.

Now, for a few additional points about the combination of Westell and CSI. We will operate and report CSI as a separate segment. It will continue to be led by its current President, Scott Goodrich. CSI employs approximately 90 people at its facilities in Manchester, New Hampshire, where we expect to maintain a long-term presence. That said, there are some excellent synergies between CSI’s and Westell’s product lines including integrated the Kentrox optimum management system with CSI’s active Universal DAS interface Tray. In addition, we’ll coordinate sales activities to jointly support opportunities with common customers and operational leaders will work together to explore opportunities to source products more effectively. Hopefully this address some of the questions on your minds, before we get to the Q&A session, I would like to note that in addition to our 8-K filing earlier this week we’ll also within the next couple of months would be filing ordered financial statements for CSI together with consolidated Westell CSI pro forma financials.

With that we would now like to open up the floor for questions. John?

Question-and-Answer Session

Operator

Thank you and I’ll begin the question-and-answer session. (Operator Instructions) Our first question is from Mike Latimore from Northland Capital.

Mike Latimore – Northland Securities, Inc.

Hi, great, good morning thanks a lot. Hi, Tom, hi, Mike. On the active DAS products, can you talk a little bit about when those products became available, are they shipping revenue on, does the CSI revenue on them. What’s pipeline like, little more detail on that would be helpful.

Richard S. Gilbert

Sure, this is Rick. The active DAS panels are at production ready capability, they are in the final stages of approval at three largest North American carriers. There has already been revenue on those products relative to trial units. Okay, and it’s obviously always hard to predict these at approval cycle in terms of how quickly they are actually approved but things are looking very positive.

Mike Latimore – Northland Securities, Inc.

Okay, great and it sounds like the company grew rapidly last year, was that – can you talk about which product grew rapidly and also was it one customer they really ramped up? Or was it multiple contributing there?

Richard S. Gilbert

Well, multiple customers, they’re pretty much in North American play, but they do sell to a lot of the carriers and integrators and through distribution channels in North America. There growth has been primarily in the DAS area about 50%, more than 50% of their revenue last year was in the DAS and related products, and that’s how they – they have some other products that Tom, mentioned our repeater products and the BDAs and such that did quite well as well.

Mike Latimore – Northland Securities, Inc.

Okay, and then Westell has DAS products, can you talk a little bit about, will you continue R&D on those, continue selling those – what and of through – what combined DAS portfolio might you have here?

Richard S. Gilbert

Yes, there is a little bit of overlap we have what are called passive DAS panels, they have their DIU’s which are passive DAS panels. The way we look at it is that CSI will be the center of confidence and our design center for all DAS small cell activities going forward in the future now obviously that has to be integrated over time, but the nice thing about the overlap is that we DAS business significant DAS business with two of the large U.S. carriers.

They have significant DAS business with three large carriers, our two large carriers as well. One of the ones we have they don’t yet have al right and one of the ones they have, we never sold anything to, so very nice complementary mix. And I think the only real overlap will be in the passive area, where we have some normalization of the product lines. So that should be fairly simple to do and I think this is the case where they won’t be a lot of cannibalization.

Mike Latimore – Northland Securities, Inc.

Okay, thank you.

Richard S. Gilbert

Thanks, Mike.

Operator

(Operator Instructions) And we did have Mike re-queue for a question. Please go ahead, Mike.

Mike Latimore – Northland Securities, Inc.

Sure, yes, I’ve already want to then, so Rick you’ve talked about getting to a – goal of getting to $200 million run rate by the end of fiscal 2015, and do see this acquisition as enabling you to reset or would you envision need to do another acquisition to get there?

Richard S. Gilbert

Well, I think it’s a big step in that direction. The $200 million goal is a very aggressive goal. Obviously, we have to not only do this acquisition we have to produce a significant organic growth in both companies to do that without any additional acquisitions. We do have some dry powder to do some additional step, if we choose to but, we are taking things a step at a time. We ingrate the two companies in a rational way and move forward on a firm base, and we think we did quite well in FY 2015. And we have the pieces of the puzzle to move toward that $200 million goal without additional acquisitions, but I’ll take some real growth, okay.

Mike Latimore – Northland Securities, Inc.

You guys will probably continue to look at acquisitions, so and what sort of the minimum cash level, you might be willing to run it?

Richard S. Gilbert

[Indiscernible] we need to for working capital, Tom.

Tom Minichiello

Yes, I mean it probably at comfortable level would be around 20 Mike.

Mike Latimore – Northland Securities, Inc.

Okay, and then I guess last question, it would just be on the DAS market versus the small cell markets. Small cell it is kind of on your radar, let’s say if it be perfect on DAS here, how do you generally view that the DAS versus small cell opportunities in the Europe?

Tom Minichiello

I think DAS is going to around for a long time, small cell is important, DAS is important. They have different applications obviously there is in-building and out building applications, but the combination of CSI and Westell in terms of DAS trays both the passive trays, and now the active, UDiT product, which is critical in the DAS area, really makes us one of the leaders in the North American market, immediately in that area.

Now we want to continue expanding our position in the DAS market in general, with internal developments and possibly some additional step outside, and I think it’s – I think we’re positioned very well in that market. Now, in the small cell market we have some activities, we have had some activities relative to small cells within Westell, but those have been primarily in places like cabinets and in power products and fiber trays and things like that. Again, CSI will be the center for DAS and small cell development going forward.

Mike Latimore – Northland Securities, Inc.

I guess the last question is Kentrox software can monitor a lot of things. Are there synergies between Kentrox and CSI here?

Richard S. Gilbert

Huge, I mean, really important and I think it’s one of the reasons that CSI saw this as a very good partnership as well, because their UDiT product is a real departure, I mean, this is an active prospect. It’s an integrated modular product, very small footprint, a lot of power capability. Our remote management capability includes advanced features like spectrum analysis and tone generators and things. This is where DAS is going in the big, high-end DAS installations.

But coupled with that, we have the best-in-class intelligent site management capability at Kentrox and coupling those two together give us an offering, which we think is unique in the industry. And with significant sales of the major carriers already on DAS products and a lot of interest in the UDiT product, I think when we couple the Kentrox technology to CSI’s UDiT technology we have something pretty special.

Mike Latimore – Northland Securities, Inc.

Okay. And then, you mentioned there is some cross-sell synergies potentially in the U.S. What about internationally? Are these products internationally very well?

Richard S. Gilbert

It’s something Scott and I have talked about in terms of being important in the future. I think that CSI is already starting to exploring some of the international opportunities, but with our relationships we have in parts of the world that were really forged by Kentrox, I think we can probably accelerate the move in the international markets. But our primary initial focus is the North American market, making sure we launch UDiT and the combination of UDiT in the Kentrox technology in a real solid way.

Mike Latimore – Northland Securities, Inc.

Sure. Thanks a lot. Congratulations.

Richard S. Gilbert

Thanks, Mike.

Operator

Next question is from Josh Goldberg from G2 Investment Partners.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Hey, good morning, guys. Just a couple of quick questions. On the acquisition on a stand-alone basis, was Cellular Specialties profitable?

Tom Minichiello

Absolutely.

Josh Goldberg – G2 Investment Partners Management LLC

Okay.

Tom Minichiello

They were. Yes.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Could you give us a rough sense on – you said they did about 40% gross margin. Any rough sense on what operating margins were for them?

Tom Minichiello

Well, on this front they were privately held up to this point, Josh. So we will be filing information regarding their historical results and there will be detail there and that’s going to take a little bit more time to do. But they have strong, above 40% gross margins, strong gross margins above that and we’re solidly profitable.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Okay. So, 40% gross margins, solidly profitable. And my sense from the previous callers…

Tom Minichiello

Josh, they were significant, above 40%. They were greater than 40%.

Richard S. Gilbert

Closer to 50%.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Okay. Okay, great. And in terms of the way you guys arrived at the purchase price of $39 million, did you use it on sort of an EBITDA basis, or kind of how did you arrive at that number?

Tom Minichiello

Yes Josh, we arrived at it. We triangulate in a whole bunch of different ways, including – we have criteria that we look at when we look at any investment, internal or external and then we also do valuations and discounted cash flow analysis, using the range of discount rates, and a range of different multiples of revenue in EBITDA and cash flow.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Okay. And did I hear right? You said that the $37 million or so that they did in revenue last year, there was strong growth in that year-over-year?

Tom Minichiello

Yes, there was very strong growth.

Richard S. Gilbert

Yes.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Could you give any kind of color on that?

Tom Minichiello

I’d refer you to the pro forma that’s coming out, I mean, I think that that’s more appropriate.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Okay. But the sense is that it’s just starting in terms of their opportunity, especially with your relationships with some of the big carriers in the U.S., there is a chance that that $37 million grows in 2014?

Tom Minichiello

Yes, it will grow in 2014.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Of course.

Richard S. Gilbert

So I think this moves us in the right direction. I think if everything fell into place in terms of growth, we probably wouldn’t need much more in the acquisition side of the house, but it would be a very significant stretch to do it with what we have between companies.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

What’s your sense on any sort of operating synergies between CSI and what you have right now?

Richard S. Gilbert

I think the main sense, to steal a phrase from Google, is we want to do no harm in trying to over integrate. Both companies have good momentum. Right now CSI is moving very well and that’s one of the reasons Scott and I chose to do this as a wholly-owned subsidiary. It allows them to keep moving without any interruption. We will do financial integration. The rest of it is pretty independent and the same thing with Westell. The one thing we have to normalize is the slight overlap in terms of the passive DAS panels, but we think we can figure out how to do that. And we’ve decided to run it that way in order to not disrupt very significant momentum.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Got you. Okay. Fantastic. Congratulations.

Richard S. Gilbert

Thanks, Josh.

Tom Minichiello

Thank you.

Operator

Our next question is from Steve Shaw from Sidoti & Company. Please go ahead.

Steve Shaw – Sidoti & Company, LLC

Hi, guys. Can you just provide some quick color on CSI’s rail products. May be how big a piece of pie that is and what the market size is like or anything else?

Richard S. Gilbert

Which products?

Steve Shaw – Sidoti & Company, LLC

The rail solutions.

Richard S. Gilbert

The?

Tom Minichiello

I don’t think there is some work for the Excello Rail [ph] I don’t if they have a…

Richard S. Gilbert

I don’t think it’s something that’s very significant from our perspective.

Steve Shaw – Sidoti & Company, LLC

Oh yes.

Richard S. Gilbert

And we’re focused much more on the telecom side of it.

Steve Shaw – Sidoti & Company, LLC

Yes. Got it.

Operator

Our next question is from Todd Brady from Oppenheimer. Go ahead, start with your question.

Tom Minichiello

Todd you may be muted, we’re not hearing you.

Todd Christopher Brady – Oppenheimer & Co. Inc.

Rick sorry about that, I apologize. Really quickly, can you just tell us a little bit about when you guys started talking with the company and your relationship with senior management? And it looked just a little bit background on the management team that you’re bringing into Westell and may be some benefits and some synergies we might be able to see going forward as you continue to build out your management team? Thank you.

Richard S. Gilbert

Sure, well it’s one of the companies that we have had an eye on for some period of time, we’ve always been impressed with their performance in the DAS sector and some of the other products they have that we’ve never had. It seems like a like a very good fit relative to our push toward more revenue from wireless and less from wireline. The combination of the two companies by the way get us to about 80% of our revenue from the wireless side of the business which we liked a lot. But the most important thing on any combination of companies, whether it’s a merger or acquisition, is to make sure the cultures of the two companies in the management teams is such really fit. And so we did a lot of discussion between the senior management here, a lot of visits back and forth. And I think that both sides feel very, very comfortable with the cultural fit between the two companies.

And they bring a lot of strength, they’re a company that somewhat like Westell, they’ve been around for 17 years, a lot of the people there have been around for a long period of time in the company, this isn’t a company with a lot of turnover rate, it’s like Westell in that sense, I mean, these are experienced telecom people that have been around the block and worked extremely well together. And it feels like a really a family-like environment which is exactly what we like.

Scott of course, Scott’s been there for the whole 17 years and he is a huge addition to my executive staff as the President of the CSI. He brings a lot to the table. And then his team, and I’m not going to go through them individually, because it will be probably a little unfair, but his team is very, very strong. Technically, they bring a lot to the table in terms of the products they have in the marketplace and products that are under development that we’re talking about here are just as exciting from our perspective. Their 90 people, split about a third, a third, a third between operations, engineering and SG&A and sales. And the one-third engineering all in wireless is a huge addition to our capability. Here, we do have our own engineers, we have our own very good wireless and RF engineers, I mean, example, a few guys out in the Santa Barbara for instance at ANTONE. But this brings a whole lot more. And so that’s future Todd, we really like about this fit.

Tom Minichiello

Does that help a little.

Todd Christopher Brady – Oppenheimer & Co. Inc.

It does Rick, just a quick follow up and thank you for readdressing your friends at ANTONE. You are developing an act and a reputation for buying companies and bringing them into the Westell portfolio and growing them significantly above the acquisition price, and you sound as excited as you have in previous acquisitions that being said, just tell us a little bit this company has been selling to two Tier-1 carriers are these customers that this company has been working with for while these are experienced telecom guys you feel comfortable and the experience and professional approach tell us a little bit more about how long they’ve been working with Tier-1 carriers. Thank you.

Richard S. Gilbert

We got for the whole history of the company I mean this is not new business for them and I was referring specifically to the DAS stuff in terms of the fact that they’re very, very strong in two of the carriers, they’re stronger than we are in two of the three carriers leading carriers in the U.S. on DAS, and that’s saying something, because we’ve been growing rapidly too in that area. So yes, that – this isn’t the question of the same kind of company, this has been steady continuous growth and they are doing a really good job there.

Tom Minichiello

What is the first part of your Todd.

Richard S. Gilbert

You’d asked all about the, how you feel about that obviously we feel pretty good about it I think on both sides this is a fair deal for the two companies I mean, basically you’ve got a company CSI that’s growing very rapidly but has risk in their growth that needs additional investment for some of the additional products they are building. The critical mass of Westell and CSI helps CSI a lot on that side and from our perspective, I’ve been asked before on these calls by a number of people probably including you thought about where we wanted to focus as we looked as [indiscernible] and this team are looking at acquisitions and DAS small cells was exactly where we wanted.

And, when you look at all the various opportunities in the DAS small cells space in our range, these were the exact guys we like at Westell. So we’re very happy with that and I do think it’s overly used but one plus one equals three kind of combination really does apply here because we have technologies that we can apply like the Kentrox technology directly to their product lines that they have nothing like. And so I think adding that to their very advanced active DAS product line it does create something that’s really unique in the industry and the uniqueness can be really important relative to growth and so relative to your growth comment I mean it’s therefore us we have to go out and win it but we think this is combination sets us up perfectly.

Todd Christopher Brady – Oppenheimer & Co. Inc.

Congratulations, Rick and to the team and, keep up the nice work going forward. Thank you.

Richard S. Gilbert

Thanks Todd.

Tom Minichiello

Thank you. Todd.

Operator

(Operator Instructions) And I’ve no further questions at this time and I’ll turn it back over to you, Rick for any closing remarks.

Richard S. Gilbert

I think we just have one that came up, another question from Josh. Josh yes.

Operator

Go ahead, Josh.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Rick, sorry. I have a couple of people asked the more questions you kind of draw picture interest and some things. Could you – would you be able to kind of give us a sense as when you talk about that there was three carriers and, obviously your strength has been with two carriers. How much of your revenue it’s coming from that third carrier where you’ve really not positioned yet?

Tom Minichiello

Yes it’s a – basically Sprint is a carrier that we have never sold much to, they are strong at Sprint. I think they did $10 million roughly at Sprint last year. All right, and that’s a huge shift for us and something we like a lot.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

Was Sprint be as part of the three?

Richard S. Gilbert

No, I know I think it was – I think Verizon was.

Tom Minichiello

Yes.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

And when you look at their competitors as far as who else are they competing with do you think that you gained some share over the last couple of years?

Richard S. Gilbert

Yes, I think they did very well in the passive DAS area over the last couple of years. And they are just introducing the active DAS at this point. But, the competitors in the passive DAS and it was a much smaller market and they were competing against people like us, and CCI and Micro Labs, part of WTT and people like that and doing a very, very good job of competition. I think, you move into the active DAS area starting to compete against bigger players. So, the competitors at that point you start getting into the CommScopes and Cornings and Tycos of the world that have more Indian DAS systems. But that’s where we want to move over time. And, the reception that their UDiT is getting with the big carriers is very early, but very positive. And we think it’s a critical steppingstone if you want to stay active in DAS area which we do, it’s a critical product steppingstone.

Josh R. Goldberg – G2 Investment Partners Management. LLC.

All I could tell you obviously as a long-term shareholder, I think, this is really and perfectly before you’ve been telling in the last years and obviously with the accretion on the deal itself beyond just the strategic merit hopefully some other investors and research house or so they could know what’s going on here. So congratulations again.

Richard S. Gilbert

Thanks Josh.

Tom Minichiello

Thank you Josh.

Operator

(Operator Instructions)

Richard S. Gilbert

Okay well given the fact that we have no further questions, Tom, of course is always available to answer your questions if people want to call him directly. And, we really appreciate you joining us for the call. Look forward to our next earnings call. Thank you.

Operator

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

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