Westell Technologies' (WSTL) CEO Richard Gilbert on Q1 2015 Results - Earnings Call Transcript

| About: Westell Technologies, (WSTL)

Westell Technologies, Inc. (NASDAQ:WSTL)

Q1 2015 Earnings Conference Call

July 31, 2014 7:00 PM ET


Tom Minichiello – Senior Vice President and Chief Financial Officer

Richard Gilbert – Chairman and Chief Executive Officer


Mike Latimore – Northland Securities, Inc.


Welcome to the First Quarter Fiscal Year 2015 Earnings Conference Call. My name is Vanessa, 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 Mr. Tom Minichiello, CFO. Sir, you may begin.

Tom Minichiello

Thank you, Vanessa. Good morning, and welcome to our conference call to discuss the fiscal year 2015 first quarter 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 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 Risk Factors. The forward-looking statements made in this presentation are being made as of the date and time of this conference call. Westell disclaims any obligation to update or revise any forward-looking statements based on new information, future events or other factors. Our presentation today also will include non-GAAP financial measures. We have provided reconciliations to the most comparable GAAP measures in our news release.

Now, I'll begin by discussing the financial results for our fiscal year 2015 first quarter ended June 30, 2014. Rick Gilbert, Westell’s Chairman and Chief Executive Officer, will then provide his perspective, and we'll conclude by taking questions.

For the first quarter of fiscal 2015, Westell Technologies reported consolidated revenue of $27.8 million, a 14% increase from the $24.4 million in the fourth quarter of fiscal 2014. Revenue this quarter consisted of $14.1 million from the In-Building Wireless or IBW reporting segment and $13.7 million from the Communication Solutions Group or CSG segment.

The IBW segment generated strong quarterly revenue driven by record quarterly sales of our distributed antenna system or DAS product lines. For the CSG segment, revenue was impacted by lower sales of tower mounted amplifiers or TMAs, which were at a record quarterly high in the prior quarter.

On a GAAP basis, we reported a consolidated net loss for the first quarter of fiscal 2015 of $2.8 million, or $0.05 per share versus net income of $4.6 million, or $0.08 per share in the prior quarter, which included non-cash tax accounting benefits of $9 million.

On a non-GAAP basis, net loss for the first quarter of fiscal 2015 was $200,000, or $0.00 per share compared to a non-GAAP net loss of $1.3 million, or $0.02 per share in the prior quarter. Both the GAAP when you exclude the tax benefits and non-GAAP sequential quarterly profitability improvements were attributable to the growth in revenue and gross profit, while operating expenses were only slightly up on a GAAP basis and were relatively flat on a non-GAAP basis.

Turning to the gross margin, consolidated GAAP gross margin was 34.8% in the first quarter compared to 33.1% in the fourth quarter. The GAAP gross margin increased due to accounting adjustments that involve acquired inventories to be revalued from their actual costs to market prices, and we have less revenue associated with acquired inventories this quarter when compared to last quarter.

Consolidated non-GAAP gross margin, which excludes the acquisition related adjustments was 36.1% compared to 37.6% in the prior quarter. Contributing to the lower non-GAAP gross margin in the first quarter was the lower CSG revenue, as well as a less favorable mix within the CSG segment. This was partly offset by the higher IBW segment revenue.

Turning now to operating expenses, consolidated GAAP OpEx was $12.6 million in the first quarter compared to $12.2 million in the fourth quarter. Consolidated non-GAAP OpEx was $10.4 million this quarter compared to $10.6 last quarter. Increasing both GAAP and non-GAAP operating expenses this quarter was the reporting of CSI for the full quarter versus the previous quarter, which included just one month. Almost entirely offsetting this increase [ph] however, were several factors, including R&D and integration synergies within the new CSG segment, non-recurring acquisition-related expenses associated with the CSI transaction last quarter, and lower anticipated performance incentive plan attainment this quarter, sorry, this year.

Moving to the balance sheet, we used $4.6 million of cash in the first quarter bringing to $46.8 million our total cash and short-term investments at June 30, 2014, and no debt. Primary uses of cash during the quarter included payment of accrued expenses from fiscal year 2014 and higher receivables as a result of the sequential revenue growth.

Before we begin discussing the segment results, please note that as disclosed in our most recent 10-K filing, we began operating and managing our business in two new segments starting in fiscal 2015. First, the recent acquisition of CSI combined with our internally developed DAS interface panels formed the In-Building Wireless or IBW segment.

Second, with the full integration of Kentrox into Westell completed, the rest of our business, which consists of our intelligent site management solutions, formerly Kentrox, cell site optimization, our TMA product line, and outside plant solutions formed the Communication Solutions Group or CSG segment. We recognize that given last quarter's performance of intelligent site management, there is heightened interest in tracking this part of the business. While we do not provide revenue at the product line level, we will mention that this quarter intelligent site management revenue was slightly down from last quarter. Going forward, we will continue to discuss intelligent site management as we do our other product lines.

Now, let’s take a deeper look at the first quarter segment results. Revenue for the IBW segment was $14.1 million in the quarter, up 72% from the $8.2 million last quarter. The sequential revenue increase was driven by record quarterly sales of our DAS product lines, including record high revenues for passive DAS conditioners as well as strong revenue traction for the recently introduced active UDIT.

IBW segment gross profit was $5.8 million and gross margin was 41.2% compared to $2.6 million and 31.5% last quarter. The gross profit and gross margin increases were due to the higher revenue, which included the reporting of CSI for the full quarter versus just one month in the prior quarter.

IBW segment R&D expenses were $2.2 million compared to 800,000 last quarter. As a result, IBW segment profit was $3.6 million compared to $1.8 million last quarter. Revenue for the CSG segment was $13.7 million, down 15% from the $16.2 million last quarter. The sequential revenue decrease was driven primarily by lower sales of TMAs, which were at a record high in the prior quarter.

CSG segment gross profit was $3.9 million and gross margin was 28.2% compared to $5.5 million and 34% last quarter. Gross profit and gross margin decreased as a result of lower revenue and a less favorable mix. CSG segment R&D expenses were $2.3 million compared to $2.7 million last quarter. As a result CSG segment profit was $1.6 million compared to $2.8 million last quarter.

With that result of the key financial results, I would like to now turn the call over to Rick.

Richard Gilbert

Thanks, Tom. Tom has already covered the details of our Q1 performance, so I'll make a few qualitative observations and then take your questions. Although we have two well defined reporting segments, IBW and CSG, we also think about the Westell business as comprised of four fundamental product areas, in-building wireless, outside plant, cell site optimization, and intelligent site management.

During the first quarter, as in every quarter, each business area experienced both positive opportunities and ongoing challenges. The In-Building Wireless segment especially the DAS related products performed very well during Q1, continues to experience good sales momentum in the current quarter. In particular, the introduction of our new UDIT, active DAS RF Conditioner and Management System went very well and UDIT is now approved for use by both AT&T and Verizon with rapidly ramping sales.

Our primary challenges in this area are to correctly forecast this growing demand in order to maintain acceptable delivery schedules and to carefully mange the expected transition from passive to active DAS conditioning equipment. During Q1, excuse me – during Q1, our focused outside plant sales efforts began to yield positive results. In fact, the Q1 revenue for this area slightly exceeded our internal goals. As expected there does remain a steady decline in the demand for legacy products related to SONET and TDM, but other outside plant products including cabinets, custom systems and power products performed well during the quarter.

Producing an accurate forecast, given the continuously changing nature of capital spending priorities is our biggest challenge in this area. Outside plant inventories can be very sensitive to inaccurate forecasts because many of these products are custom made for a particular operator and therefore virtually impossible to sell to other customers.

To address this issue we expect to migrate the outside plant business from a build to forecast model to a build to order model which will minimize ongoing inventory risk.

The cell site optimization business is based on sales of various types of tower mounted amplifiers. This business was sequentially down in Q1 and is still subject to customer concentration. The TMA products also face increasing price pressure during Q1 to which we responded with slightly lower prices coupled with cost reduction programs.

Finally, intelligent site management sales continue to be soft during Q1 due to both project timing and customer spending priorities. We have received small orders from our four largest ISM customers during the current quarter and we continue to see additional ISM opportunities. But we do not expect an immediate return to volume sales in this area. That said, we believe in the long-term growth prospects of this business and we will continue to invest in this technology.

In summary, we had a good start to the fiscal year and our Q1 financial result support most of our previously stated goals for this year. As outlined during our last call these goals include: expand sales to selected regions outside North America, continue the strong growth of our in-building wireless solutions, achieve 80% of revenue from the wireless sector, maintain consolidated gross margins of better than 40%, achieve positive operating profit on a non-GAAP basis and achieve a revenue run rate of $200 million by the end of the fiscal year.

At this point the only FY 2015 goal that appears unlikely is our attempt to reach a run rate of $200 million by the end of the fiscal year. We believe we will grow revenue during this fiscal year. That said, it appears that the overall rate of revenue growth for FY 2015 will be determined by a better-than-expected ramp in demand for DAS related products offset by softer than expected performance of intelligent site management.

I should also note that reaching the $200 million run rate has always been a stretch goal for our team and was never as important as achieving a profitable and sustainable business model which of course is our primary goal. And with that I'll open the call for your questions.

Question-and-Answer Session


And thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Mike Latimore with Northland Capital. Please go ahead.

Mike Latimore – Northland Securities, Inc.

Good. Thanks. Hi, guys.

Richard Gilbert

Hi, Mike.

Tom Minichiello

Good morning, Mike.

Mike Latimore – Northland Securities, Inc.

Good morning. The goal of 40% gross margin. I think that requires some increment on the communication system side of things. I mean, do you see that gross margin moving up here over time?

Tom Minichiello

Yeah, Mike. Good morning. This is Tom. Yes, we do see that. To think about the CSG segment now is three of the four business areas, right? You got intelligent site management, outside plant and cell site optimization. So this quarter we had – the volume piece of the margin was really in the TMAs sequentially when you look at the margin. And the sales there were lower this quarter than last quarter.

The intelligent site management piece really was neutral to the gross margin quarter-over-quarter. And then when you look at the outside plant, it was – we did very well in that area in the quarter, although there was a mix issue there were some of the older legacy products were down as expected and the other products that Rick mentioned, cabinets and power products did very well.

So there's always a mix thing in the outside plant. But yes, we can certainly improve. One thing I'll add is that, we had another E&O expense in the cost of goods sold along the same lines as last quarter, about $1 million. And that's again mostly in the legacy products.

Mike Latimore – Northland Securities, Inc.

Okay. Thanks. And…

Richard Gilbert

Just to add to that Mike, I think mainly what we need, obviously, more volume helps the margins but we also need intelligent site management to pick up because that's very volume business. Also I mentioned cost reduction programs on TMA, those need to kick in, all right, and that will also improve margin.

Mike Latimore – Northland Securities, Inc.

Okay. And as you look at the DAS opportunity, I mean, what's the reasonable assumption for active versus passive next year or this year?

Richard Gilbert

That's a good question and something we're working hard to predict. We would have thought the – I mean the active products are so impressive, I mean, in terms of physical and environmental footprint in terms of dynamic management capability. We would expect those to take off the way they have started.

We would have expected a slowdown in passive. We didn't see as much slowdown in passive as we expected and right now we're still trying to analyze that. Obviously, it's important to us to analyze it correctly because as I said, we need to forecast it accurately so we don't end up with extra passive units.

The three largest players Verizon, AT&T and Sprint are still buying passives and actives. And Verizon and AT&T seem to be most aggressive moving passive to active at this point.

Mike Latimore – Northland Securities, Inc.

Okay. And how much is in terms of – on the intelligent site management, if growth returns there is it mainly current customers initiating bigger projects or do you need a new customer to kind of reaccelerate the Kentrox part?

Richard Gilbert

Well, as you know from our previous calls, I mean our top eight customers account for about 80% of our revenue and that includes the largest ISM customers. So realistically growth will come from the larger customers that we currently have. There are opportunities outside of those customers, sure, but what we have to do is get the volumes from those large guys.

And as I said, we have this quarter, not last quarter, but this quarter we received some orders from each of those large customers. But to get to the volumes it's probably going to take a little while longer and gets back to customer's order when they decide they need stuff and when their priorities require it.

Mike Latimore – Northland Securities, Inc.

And just last one from an OpEx perspective you may have mentioned this, I might have missed it, but is this OpEx we saw in this quarter that are good kind of level to think about going forward?

Tom Minichiello

Yeah, Mike, that's probably in the product development area, likely to see a slight uptick there as we invest but the other SG&A categories are pretty well established it for the moment where you see in this quarter.

Richard Gilbert

It's pretty close to where it's going to be. I agree – the one place you will see some additional investment. We are definitely investing significantly in the in-building wireless R&D on new products and that will continue.

Mike Latimore – Northland Securities, Inc.

Okay. Thank you.


And thank you. (Operator Instructions)

Richard Gilbert

Well, given that we have no other questions, appreciate everybody joining us for the call and we look forward to meeting again next quarter. Thank you.

Tom Minichiello

Thank you.


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

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