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Westell Technologies, Inc. (NASDAQ:WSTL)

Q4 2014 Results Earnings Conference Call

May 22, 2014, 9:30 AM ET

Executives

Rick Gilbert - Chairman & CEO

Tom Minichiello - CFO

Analysts

Mike Latimore - Northland Capital

Jeff Bronchick - Cove Street Capital

Brian Horey - Aurelian Management

Edison Chu - G2 Investment Partners

Operator

Good morning and welcome to the Fourth Quarter Fiscal Year 2014 Earnings Conference Call. My name is Brandon and I’ll 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 it over to Mr. Tom Minichiello. You may now begin, sir.

Tom Minichiello

Thank you, Brandon. Good morning and welcome to our conference call to discuss the fiscal year 2014 fourth quarter and full year results for Westell Technologies. The news release that we issued last night is posted on our website, westell.com. On this call, Rick Gilbert and I will update you on the business and our financial results.

Before we begin, please note that our presentation and discussion contain forward-looking statements about future results, performance or achievements, financial and otherwise. Words such as should, believe, expect, trend and similar expressions are intended to identify such forward-looking statements.

These statements reflect management’s current expectations, estimates and assumptions. These forward-looking statements are not guarantees of future performance and 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, 2013 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 will also include non-GAAP financial measures. We’ve provided reconciliations to the most comparable GAAP measures in our news release.

Now, I’ll begin by discussing the financial results for our fourth quarter and full year ended March 31, 2014. Rick Gilbert, Westell’s Chairman and Chief Executive Officer, will then provide his perspective and we’ll conclude by taking questions.

For the fourth quarter of fiscal 2014, Westell Technologies reported consolidated revenue of $24.4 million, a 3% decrease from the $25.2 million in the third quarter of fiscal 2014. Revenue this quarter consisted of $17.4 million for the Westell reporting segment, $3.4 million for the Kentrox segment and $3.7 million for the Cellular Specialties, Inc., or CSI segment, which was acquired on March 1, 2014.

The Westell segment generated strong quarterly revenue driven by record quarterly sales of tower mounted amplifiers, or TMAs, and distributed antenna systems, or DAS, interface panels. Kentrox segment revenue was, as expected, down this quarter due to the completion of major projects in the prior quarter. For the new CSI segment, which included results for the month of March, over half of the revenue was sales of DAS interface units.

For the fiscal year ended March 31, 2014, Westell Technologies reported consolidated revenue of $102.1 million, up 163% from the $38.8 million in fiscal ’13 and exceeding our stated stretch goal of $100 million for the year. Revenue consisted of $52.2 million for the Westell reporting segment, which included significant growth from our new wireless product lines as well as revenue from the two new reporting segments added during the year, $46.2 million for the Kentrox segment acquired on April 1, 2013, and $3.7 million for the CSI segment acquired on March 1, 2014.

We reported consolidated net income for the fourth quarter on a GAAP basis of $4.9 million or $0.08 per share versus net income of $1.9 million or $0.03 per share in the prior quarter. On a full-year basis, GAAP net income was $5.4 million or $0.09 per share compared to a net loss of $44 million or $0.73 per share in the prior year.

GAAP net income for the quarter and the year included a $9.1 million non-cash accounting benefit recorded to income taxes. Because amortization expenses of acquired intangible assets is not deductible for income tax purposes, deferred tax liabilities of $9.1 million were recorded. This lowered our net deferred tax assets requiring a corresponding decrease to the full valuation reserve we have in place against our net deferred tax assets. It’s important to understand that this adjustment does not affect the use or availability of our gross deferred tax assets which totaled $37.7 million at year end.

On a non-GAAP basis, net loss in the fourth quarter was $1.3 million or $0.02 per share compared to a non-GAAP net income of $4.2 million or $0.07 per share in the prior quarter. For the full year, non-GAAP net income was $7.6 million or $0.13 per share compared to a net loss of $3.2 million or $0.05 per share in the prior year.

While the expected lower Kentrox business was the primary driver of the non-GAAP result for the quarter, we were solidly profitable for the year as we added significantly more higher-margin revenue and dramatically lowered operating expenses as a percent of revenue.

Turning to the gross margin, in the fourth quarter, consolidated gross margin was 34.9% compared with 48.5% in the third quarter. The major contributor to the lower margin this quarter was the overall revenue mix shift. In the fourth quarter, the lower-margin Westell segment accounted for a significantly greater percentage of the revenue, whereas in the prior quarter, the higher-margin Kentrox segment accounted for the majority of revenue.

For the year, consolidated gross margin was 41.1% compared to 34.3% in the prior year. We achieved yet another one of our stated financial goals for the year consolidated gross margin of better than 40%.

Turning now to operating expenses, consolidated GAAP OpEx was $12.6 million in the fourth quarter, compared to $10.2 million in the third quarter. The primary factor for the increase was the addition of $1.6 million for CSI in the month of March. Consolidated non-GAAP OpEx was $10.6 million this quarter compared to $8.9 million last quarter. The primary factor for the increase was the addition of $1.2 million for CSI in the month of March.

On a full-year non-GAAP basis, operating expenses were $38.2 million and when compared to the prior year, improved substantially to 36.7% of revenue. The significant year-over-year revenue growth combined with tight control of operating expenses generated non-GAAP operating profit in fiscal 2014 of $7.6 million, a solid 7.7% operating margin.

Our balance sheet remained strong with $51.4 million in cash and short-term investments at March 31, 2014 and no debt. In the fourth quarter, we used $37.2 million of cash for the CSI acquisition and generated $900,000 in cash from operations. On a full year basis, we generated $1.6 million in cash from operations achieving another one of our stated financial goals for the year.

Now, let’s take a deeper look at the fourth quarter and full-year segment results. Fourth quarter for the Westell segment was $17.4 million, up 65% from $10.5 million last quarter. The sequential increase was driven by continued strong demand for the new wireless product lines in this segment as TMAs and DAS panels each achieved record high revenues this quarter.

Westell segment gross profit was $5.8 million and gross margin was 33.2% compared to $3.4 million and 32.6% last quarter. Gross profit and gross margin increased due to the higher revenue partly offset by higher amounts recorded this quarter for excess and obsolete inventory. Westell segment R&D expenses were $1.8 million compared to $1.6 million last quarter. As a result, Westell segment profit was $3.9 million compared to segment profit of $1.8 million last quarter.

Full-year revenue for the Westell segment was $52.2 million, up 35% from the $38.8 million last year, driven by the growth of TMAs and DAS panels. Westell segment gross profit was $17.1 million and gross margin was 32.7% compared to $13.3 million and 34.3% last year. Gross profit increased due to the higher revenue while gross margin was down due primarily to higher excess and obsolete inventory costs.

Westell segment R&D expenses were $6.9 million compared to $5.9 million last year. As a result, Westell segment profit was $10.1 million compared to segment profit of $7.4 million last year.

Fourth quarter revenue for the Kentrox segment was $3.4 million, down 77% from the $14.7 million last quarter. The expected sequential decline was due to completion of major projects in the prior quarter. Kentrox segment gross profit was $1.4 million and gross margin was 41.4% compared to $8.8 million and 59.8% last quarter. Gross profit and gross margin decreased due to the lower revenue as well as acquisition-related adjustments. Kentrox segment R&D expenses were $1 million compared to $900,000 last quarter. As a result, Kentrox segment profit was $400,000 compared to $7.9 million last quarter.

Full-year revenue for Kentrox segment was $46.2 million, which, on a pro forma basis, increased 34% from the $34.4 million in the prior year. The growth was driven by a number of large and expanded deployment projects that peaked in the second and third quarters of fiscal 2014.

Kentrox segment gross profit was $23.5 million and gross margin was 50.9%, which, on a pro forma basis, compared to $14 million and 43.4% last year. Gross profit and gross margin increased due to the significantly higher revenue in fiscal 2014. Kentrox segment R&D expenses were $3.8 million compared to pro forma R&D expenses of $3.3 million last year. As a result, Kentrox segment profit was $19.7 million compared to a pro forma segment profit of $10.7 million last year.

We reported revenue in the fourth quarter for the CSI segment acquired on March 1, 2014 of $3.7 million, gross profit was $1.4 million and gross margin was 37.1%. Although excluding acquisition-related adjustments, gross margin was 51.9%. R&D expenses were $600,000. As a result, segment profit was $700,000.

In the context of the full quarter, on a pro forma basis, revenue for CSI was $10.2 million for the quarter ended March 31, 2014. For additional financial information on CSI including audited financial statements and unaudited pro forma combined financial information, I refer you to our Form 8-KA filed on May 13, 2014.

With that review of the key financial results, I’d now like to turn the call over to Rick.

Rick Gilbert

Thanks, Tom. Since Tom has covered our Q4 performance, I’ll focus my comments on our overall performance during FY14, and then given my perspective on the coming year.

A year ago on this call, I listed seven goals for Westell to complete in FY14. Let’s review our actual performance relative to those goals. One, complete the integration of Kentrox. Westell and Kentrox are now fully integrated with the final step of consolidating operations recently completed. The consolidation of Kentrox into Westell went smoothly and the FY14 revenue performance of the intelligent site management solutions exceeded our expectations.

Two, achieve a balance between wireline and wireless revenue. This long-term Westell strategic goal has been far exceeded with more than 70% of our FY14 revenue coming from sales of wireless products.

Three, expand sales to selective regions outside North America. This is the one area where we have yet to see positive results. A wide array of Westell products are being offered to current and potential customers in Latin America, Australia and South Africa, however the majority of our sales outside North America are still derived from the Kentrox intelligent site management solutions.

Four, find and execute additional accretive acquisitions. Near the end of FY14, we completed our largest acquisition to date during my tenure at Westell. The acquisition of CSI adds key in-building wireless products to the Westell portfolio, including the recently announced Universal DAS Interface Tray, which is an active DAS RF conditioner and management system. CSI also adds highly skilled product development, operations and sales support personnel to our staff. Finally, we do expect the CSI division to be accretive during the current fiscal year.

Five, aggressively grow the business primarily through new products. A key goal was to achieve $100 million in annualized run rate by the end of FY14, driven primarily by sales of new products. We achieved that goal by shipping $102 million in revenue with about 70% coming from products developed or acquired during the past two years.

One positive aspect of our Q4 results is that the revenue came from a well-balanced combination of our four solution areas, which are intelligent site management, in-building wireless, cell site optimization, and outside plant. I believe this revenue balance bodes well for the future as we prefer to maintain sales momentum without being too dependent on any single area.

Six, maintain consolidated gross margins of better than 40%. On a GAAP basis, we met this goal with a consolidated gross margin of 41%. Removing the negative effects of acquisition-related accounting adjustments, the consolidated gross margin for FY14 was actually 44% on a non-GAAP basis.

And finally seven, achieve a positive cash flow on a consolidated basis. During FY14, we generated $1.6 million from operations and still maintained solid investments in sales, marketing and R&D.

In summary, we clearly met or exceeded six out of the seven stated goals during FY14 and we have effectively completed the transition plan we’ve set out to accomplish four years ago. Westell is now a pure play telecom vendor, selling differentiated wireless products and services to a wide array of customers. And we are well prepared for continued growth.

Now, let’s consider the list of our key goals for the current fiscal year. The FY15 goals are one, expand sales to selective regions outside North America. This is obviously the one remaining unmet goal from FY14. Therefore, we will redouble our efforts to introduce and sell a wide array of Westell products by leveraging the existing Kentrox relationships.

Two, continue the strong growth of our in-building wireless solutions. CSI and Westell are currently experiencing rapid growth in the DAS interface panel marketplace. While CSI will continue to run as a separate subsidiary, Westell and CSI are combining efforts to cross-leverage technology and to develop new products to serve the in-building wireless market.

We have already consolidated all of our DAS products under a common sales and marketing effort. We are also adding support for the CSI products to the Kentrox optima management system and we are actively funding the Manchester design centers efforts to develop products for the rapidly growing DAS market.

Three, achieve 80% of revenue from the wireless sector. As operators continue the dramatic shift of their capital budgets from wireline to wireless, we expect to continue our own shift toward more reliance on revenue coming from our wireless products. This effect obviously continues to be a major factor in our strategic investment decisions.

Four, maintain consolidated gross margins of better than 40%. One of our strongly held beliefs is that a telecom solutions provider should never skimp on engineering investment. Therefore, our steady-state financial models call for consolidated gross margin of at least 40% in order to support annualized spending of about 12% of revenue on R&D and still produce a positive operating profit. We must obviously continue to avoid commodities and focus on highly differentiated products that justify high gross margins.

Five, achieve positive operating profit. We expect to achieve a positive operating profit during the current fiscal year on a non-GAAP basis.

And finally, six, achieve a $200 million annualized run rate by the end of FY15. A key FY14 goal was to achieve a $100 million annualized run rate by the end of the year. We did that. We also said that we had a goal of achieving a $200 million annualized run rate by the end of our FY15. That will be a very difficult goal to accomplish.

In fact, a lot of things we don’t control, including operator capital budgets and the health of the general economy, will have to align in our favor for us to achieve this goal. However, I’m convinced that Westell has the right set of people, products and market opportunities to track toward $200 million in annualized revenue by the end of this fiscal year.

Finally, my staff and I believe that corporate goal should be aggressive but realistic. And while this particular goal is certainly on the aggressive side of the spectrum, it is an important goal for us, it has been a key strategic goal for a couple of years now, and we are going to make every effort to achieve this goal during this fiscal year.

With that, I’d like to open the call for your questions.

Question-and-Answer Session

(Operator Instructions) From Northland Capital, we have Mike Latimore on line. Please go ahead.

Mike Latimore - Northland Capital

Just on Kentrox, can you talk a little bit about the pipeline for Kentrox, how are you thinking about that business in fiscal ’15? Obviously, it’s had some really strong quarters, a little bit softer this quarter, what are the opportunities there? And do you think that business overall can grow this year?

Rick Gilbert

We had a fantastic year for Kentrox in FY14. We had some very large projects that, as Tom pointed out, finished up last quarter and it will be tricky to grow the business from just under $50 million in FY14, especially given the fact that we just had a $3.4 million quarter from Kentrox.

That said, the pipelines in place, we’ve talked about that before, we haven’t lost any customers and we’ve actually gained customers with Kentrox, but these are projects that take a long time to plan and are subject to budget controls and budget priorities. So we’re very confident about the technology. We like the M2M space.

And one of the things that I think a lot of investors don’t necessarily notice is the fact that we have Kentrox, the fact that we have the optima management system and the remote capability is causing us to make significant additional sales in other areas in the wireless market, and so Kentrox is important to us.

But the answer to your overall question on a direct comparison, it will be hard to have Kentrox have a bigger year than we just had with those giant projects we did.

Mike Latimore - Northland Capital

And the projects that are in the pipeline that you’re looking at, are they of the size that you could see pretty significant projects going forward or the deal size a smaller than what you’ve seen in the past?

Rick Gilbert

They are potentially of that size, but the projects tend to be phased and we’ll have to see how they develop.

Mike Latimore - Northland Capital

And then, on the CSI, did you say that the gross margin was 51.9% ex the accounting adjustment?

Tom Minichiello

That’s up for the month of March, Mike. That’s correct.

Mike Latimore - Northland Capital

And I mean is that kind of the run rate margin there, is that higher or lower than what we should expect?

Tom Minichiello

Well, just to give you -- it’s slightly higher, just to give you some perspective on a pro forma for the full quarter it took CSI, for the three months ended March, they did 47%.

Mike Latimore - Northland Capital

I think you said it was $10.2 million for the month of March in terms of revenue?

Tom Minichiello

Mike, for the quarter, $10.2 million.

Mike Latimore - Northland Capital

I mean sorry, yes, for the quarter, for the quarter of March. What was that last in 2013 March quarter?

Tom Minichiello

The 2013 March quarter, it was significantly lower. They were -- they’ve been growing steadily, it’s around $6 million.

Mike Latimore - Northland Capital

And then, what’s your general view on headcount? Is it kind of at the right level right now? Are you going to increase it, reduce a little bit, how do you think about headcount going forward?

Rick Gilbert

The total headcount of the company is in terms of full-time people is under 300 and we’ll keep it in that range for the FY15 time frame. We’re trying to shift headcount as much as we can to specific engineering projects, we mentioned the Manchester design center activity, the activity we have with the TMAs out in Goleta and some additional activity in the Kentrox area.

So the wireless solutions areas, we’ll keep investing in R&D and try to get to that 12% of revenue number. That is our goal. But overall headcount will be maintained at under 300, not including contractors.

Mike Latimore - Northland Capital

And just last question, in the Westell and CSI segments, are there any large projects that say ended in the March quarter that don’t repeat or do you expect in the June quarter?

Rick Gilbert

No.

Operator

(Operator Instructions) And from Cove Street Capital, we have Eugene Robin on line. Please go ahead.

Jeff Bronchick - Cove Street Capital

Hey, good morning, guys. This is Jeff Bronchick in Eugene. How are you? So just maybe just talk again, how you managed Kentrox as far as flexing people up or down given this volatility in revenue? And then, secondly, do you -- does Kentrox and you have sort of the manpower to both successfully A, complete big jobs, as well as B, on the sales side at the same time working on backlog and sort of next-generation projects sort of at the same time or is that one of the challenges not having the scale to do both at the same time?

Rick Gilbert

I think we have the scale. Kentrox, as we said, is fully integrated now with the Westell side and more importantly, all the operational part is fully integrated here in Aurora. So in terms of building products, I mean that flex is all temporary people and operations that you bring in or out as you need them. The permanent people at Kentrox are primarily engineers now and an overlay sales force that focuses on Kentrox products, so that group is -- we don’t flex that group.

We don’t think we need to flex that group, because we know what we’re working on and we have enough people to work on the priority list that we have in those areas. But the nature of the Kentrox business, we talked about this very openly in the last several calls, is going to be lumpy. You are going to have big projects hit and you are going to do those projects and then when they finish, hopefully you are able to load your pipelines so you have more continuous projects, but this is something we expected and we talked about on the last call.

And what we, as I said before, we are extremely happy with the Westell -- the Kentrox technology and the way we are able to apply it to our whole product line, including and we didn’t mention it, Jeff, but one of the big things was CSI, CSI just came out with a blockbuster product, the UDIT I talked about and we’re already far along the line of integrating UDIT with the Kentrox management systems which will make a truly differentiated solution in the marketplace, nobody has the combination that we have.

Jeff Bronchick - Cove Street Capital

So you feel like you have the sufficient sales force to again simultaneously build new backlog as well as execute on current plans when you get really busy?

Rick Gilbert

Yes. I think we do. We did do some adjustments in the sales force as we entered FY14 to put even more emphasis on sales of specific overlays beyond the fast-growing months, I mean the DAS from TMA stuff, it’s just growing very rapidly, that’s well covered with sales. But we did put some dedicated sales for us in place for Kentrox and for some of the Westell legacy products that we want to make sure that we focus on and I think we’re already seeing results.

Jeff Bronchick - Cove Street Capital

And is it fair to say obviously CSI has its own cyclicality but it is nothing like the massive project issues with the Kentrox, is that a fair statement?

Rick Gilbert

Well, I object slightly to the word issue, because it’s something we knew, we expected, but I will say that both CSI and Westell products don’t show that kind of cyclic nature. They tend to be a lot more projects and perhaps not as large scale as some of the Kentrox projects when they occur, but what we’re seeing is pretty steady growth in both of those areas and we don’t expect a lot of oscillation.

Jeff Bronchick - Cove Street Capital

And so when you look again at each of the divisions and combining to Westell as a whole and you look at 40% plus gross margins, how it drops down the income statement, is it -- what does it take to have double-digit EBITDA margins, is it simply just more scale driven through what you have or is there another challenge?

Rick Gilbert

Well, scale is obviously important and growth is important. If you look at the areas that we have, Kentrox grew very rapidly year-to-year, Westell grow rapidly year-to-year, CSI has grown rapidly on a pro forma basis year-to-year. So we have the growth. To get the double-digit EBITDA stuff you’re talking about, one option is to not invest in the future which we’re not willing to do, all right and the other is to just keep growing at a steady pace until we get to the volumes that will support that with the number of people we need to maintain in the company.

And I think we’ve been very upfront about the fact that we don’t want to be a flash in the pan company, we want to be a long-term successful company and that means investing in R&D and we’re doing real investments in that area plus sales and marketing investment to expand our footprint. And I hope that answers your question, you want to add anything to that?

Jeff Bronchick - Cove Street Capital

So the answer is -- you have -- again just say let’s looking at the company what it is today, really the dropping 40% plus gross margin down to double-digit EBITDA margins is scale of growth, in other words same people, manufacturing footprint, sales force, just whatever 30% more sales, it starts to drop in a hurry is the math.

Rick Gilbert

You got to leverage your expense base to get that. I mean we stated one of our goals was obviously to get to a very large run rate. When you get to that point, you are going to start seeing those kind of EBITDA margins, but we are able to leverage our people from this point on pretty well. That said, up until now, we have been balancing investments relative to the need to be profitable and I think we’ve actually done a pretty good job of that.

Jeff Bronchick - Cove Street Capital

And just maybe discuss specifically, so how -- I think your background is quote -- I can make eight phone calls and show any product we have to a U.S. large telecom customer, how does international rollout, do you do it yourself, do you need third-party sales help or partner with somebody, how does that practically -- how are you thinking about that?

Rick Gilbert

We absolutely need a partner within in-country distribution channels and we don’t want to do it ourselves in-country. I’ve seen that fail far too often especially when small companies try to do it. It’s very expensive. We have had very dramatic success with that in Australia with our relationships down there.

What we need to do is duplicate that kind of thing in Latin America and other countries that we want to specialize in. And as I said in my review of the goals and accomplishments, that’s the one area that I think we haven’t done a really good job so far and we really need to focus in FY15 to make that happen because we have the products.

Jeff Bronchick - Cove Street Capital

And is that your job or is that -- do you got a guy or who is that --?

Rick Gilbert

It’s my job. We have people and folks, but having met six of the seven goals which we had done seven and that’s one I have to focus on personally.

Jeff Bronchick - Cove Street Capital

And just lastly I just make a comment, obviously having more volume in this company and growing is infinitely better than the alternative and aspirational goals are great, profitable growth is really interesting -- more interesting, I think the people on this call or should be then quote hitting $200 million by the end of 2015.

Rick Gilbert

I think that’s a good observation and I did point out we have five goals not just one. And we do try to balance our work relative to those goals. But I also think if I can just comment, I think we made a hell of a lot of progress in the last fiscal year and if you compare where we were a year ago to where we are now, I think we’re on the right track.

Operator

From Aurelian Management we have Brian Horey on line. Please go ahead.

Brian Horey - Aurelian Management

Just had a few questions. Can you give any color on the inventory charge in the Westell segment, which product group was that and can you give us a sense of the scale of that charge?

Tom Minichiello

Certainly, the charge was around $1 million in the quarter and it was higher this quarter than it was in the third quarter so it did have a bit of an impact on the overall margin and it was really in legacy products of the Westell division.

Brian Horey - Aurelian Management

So that’s OSB?

Tom Minichiello

That’s correct, yes.

Brian Horey - Aurelian Management

And do you think that you’re kind of you’ve run the course on those or do you think there is potential for more of that?

Tom Minichiello

Well, Brian, there is -- with a company like ours constantly shifts in the technology and we do follow accounting rules and put provisions in each quarter, some quarters, they are low, in other quarters they are a bit higher, so it does get a bit spiky from quarter to quarter, but part of it’s the nature of the business.

Rick Gilbert

Hey, Brian, this is Rick. Just to add to that, we’re not a $40 million company anymore. As you grow, you are going to have E&O in telecom. There is technology shifts that occur and no matter how well you forecast, you’re going to have -- and my guess would be a kind of $1 million charge you’re seeing would be more normal than not going forward as we -- if we continue to grow at this rate, all right?

Brian Horey - Aurelian Management

And then on Kentrox, I mean, I understand that there is going to be volatility in the revenue stream as contracts scale up and scale down in terms of execution. Can you give us any kind of visibility on the backlog or the contract discussions, and how they have changed quarter to quarter? Or some -- any kind of metrics or quantification that would give us a little more insight into kind of what the pipeline looks like?

Rick Gilbert

Yes, I wish I could give a little bit more. We don’t obviously give guidance of that sort. I will say that one of the things that concerned me during the last fiscal year was that we were having such big quarters with Kentrox that we were afraid that we were setting expectations that were unrealistic and we tried to speak to that at every one of the calls.

The right number for Kentrox is certainly somewhere between those huge $14 million type of quarters and the $4 million type of quarter we’re doing, that’s what we expected, okay? And so I’m not going to sit here and say I’m not disappointed by the last Kentrox quarter, but I’d be a lot more disappointed if it was traceable to specific customer losses and things.

We’ve not lost any customers and we’ve gained customers, we have stuff in the pipeline, but it’s very, very hard to predict the long pipelines in terms of when the sales will actually complete, but more importantly what will the volume of each phase be because this is exactly the area that operators manage their budget priorities in and so when they have the money, they’ll spend it and it’s never their first priority. Okay? That said, again we need the Kentrox technology with all the rest of our products and that’s the reason -- one of the reasons the rest of these products are selling so well.

Brian Horey - Aurelian Management

I understand. Okay. So there's nothing like a contract number or commitment number of any sort that you can speak to at this point?

Rick Gilbert

No.

Brian Horey - Aurelian Management

With regard to CSI, I understand that that was only in the family for a month this quarter. Is there any kind of OpEx leverage that you expect to realize going forward, or is that pretty much steady-state based on what you quoted for Q1?

Rick Gilbert

Pretty much steady state. In fact, we’re investing a little bit more in engineering there right now on some very interesting projects I wish I could talk more about but -- so there will be a little bit more investment in engineering, you will see there. And there isn’t a lot of savings on OpEx because we are running as a wholly-owned sub and we’re doing that specifically because their growth has been so significant. We don’t want to disrupt their growth and we don’t want to disrupt what’s going on in Westell on the growth side. And so, where we are seeing commonality is in sales and marketing and obviously the finance and overhead areas, but the savings from that will be very limited.

Brian Horey - Aurelian Management

And then, lastly, you’ve got an earn-out item on the balance sheet. Can you speak to what the kind of maximum exposure is on that number, and when that tail gets capped finally, from a time frame standpoint?

Rick Gilbert

Yes, Brian, that will be concluded probably in about another year from now. That relates back to the ANTONE acquisition is I think what you’re looking at. And that was a deal that was done a year and a half ago with the earn-out and as you can see in the results, that acquisition has been a huge success, so there will be earn-outs in that, that will get dispersed over the next 12 months roughly.

Brian Horey - Aurelian Management

And is that -- is there a cap on the amount, or is it entirely a function of performance?

Rick Gilbert

No. It’s a fixed amount as you see on the balance sheet.

Operator

(Operator Instructions) And from G2 Investment Partners we have Edison Chu on the line. Please go ahead.

Edison Chu - G2 Investment Partners

Just had another question on the visibility of Kentrox. And is there any just -- I know that you have answered this question a little bit, but was just trying to understand better what the sales cycles look like right now in Kentrox? Is it more that the growth going forward now has to come from new customers, rather than the repeat customers, that have implemented the big deals that took place over the last year? Could you talk a little bit more about that visibility? Could these contracts hit in a month? Or is it more likely that these will still take six months before you really see any new customers roll into the numbers?

Rick Gilbert

It’s closer to the latter than the former in my opinion and it does come from both existing customers and new customers. And again, I’ll stress again, we have our customers that are happy with the product. We have some new customers, but big, big projects take a long time to plan and it’s very, very hard to predict that suddenly we are going to have another $14 million or $15 million kind of quarter. I think it’s more likely that we have more moderate growth directly in the Kentrox solution space. So that’s what I would expect.

Edison Chu - G2 Investment Partners

And another question on CSI. I have heard from or I have seen Market Research and other companies that address the in-building DAS space, about a market that really is accelerating at this point, and have talked about potential growth rates in that business of 20%-plus this year. Would you agree with those kind of research numbers, and if so, is there any reason why CSI shouldn't at least grow in that kind of a ballpark or even better?

Rick Gilbert

Well, without agreeing to the exact quantification you gave, I certainly agree that it’s a very fast growing space and I think we’re extremely well positioned. I think the combination of Westell and CSI we believe we’re the only people that have passive DAS panels approved at the three biggest North American carriers, Verizon, AT&T and Sprint.

And the addition of this active panel, the UDIT, I referred to, has been a vendor neutral active panel with just amazing specifications in terms of space and power and management capability. It’s just a breakthrough product for us in the in-building space and the combination of those two things really sets us up.

Combined with the Kentrox management system, managing those things sets us up in a really nice position in a very fast growing market. So I wouldn’t agree that we expect strong growth in the in-building space and that is why we’re putting additional investment in R&D focused in that space.

Operator

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

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Source: Westell Technologies' (WSTL) CEO Rick Gilbert on Q4 2014 Results - Earnings Call Transcript

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