Westell Technologies, Inc. Undervalued Communications Play With Significant Upside Potential

| About: Westell Technologies, (WSTL)


The company's In-Building Wireless (IBW) segment is expected to be a strong revenue and income contributor for the foreseeable future.

The synergism between recently acquired Kentrox and Cellular Specialties Inc. is starting to show positive trends as new products and services are being launched having elements of both technologies.

Increasing international sales of non-Kentrox products and services will be key to bringing revenues closer to the company's ambitious $200 million revenue run rate, up from $102 million.

Westell Technologies, Inc. (NASDAQ:WSTL), headquartered in Aurora, Illinois, is a leading provider of intelligent site management, in-building wireless, cell site optimization, and outside plant solutions focused on innovation and differentiation at the edge of telecommunication networks, where end users connect. The comprehensive set of products and solutions the Company offers enable telecommunication service providers, cell tower operators, and other network operators to reduce operating costs and improve network performance. Westell Technologies, Inc. was founded in 1980 and is headquartered in Aurora, Illinois.

The stock, which traded as high as $4.9 as recently as March 2014, has been trading flat at around $1.7/share following the July 30, 2014 release of the company's Fiscal Q1 2015 financial results ended June 30, 2014. WSTL missed the $33.7 million consensus revenue estimate by reporting only $28 million in consolidated revenues. The EPS, however, was $0.00, or $0.03 better than the analyst estimate of ($0.03).

In its July 30 press release, the Company said that 1Q revenues were led by $14.1 million from the In-Building Wireless (IWB) segment, up 72% from the $8.2 million last quarter. The sequential revenue increase was driven by record quarterly sales of the company's Distributed Antenna Systems (DAS) conditioners, and small cells, as well as strong revenue traction for the recently introduced active UDIT (active DAS RF Conditioner and Management System). This product line, which has been approved for use by both AT&T (NYSE:T) and Verizon (NYSE:VZ), is experiencing rapidly ramping sales in the current 2Q 2015 quarter which will end on September 30, 2014.

The Communication Solutions Group or CSG segment, on the other hand reported revenue was $13.7 million in the quarter, down 15% from $16.2 million in the quarter ended March 31, 2014. This segment consists of the company's intelligent site management solutions (formerly Kentrox which was acquired in 2013), cell site optimization, the Tower Mounted Amplifiers (TMA) product line, and outside plant solutions. Main contributors for this segment's decline were lower revenues from intelligent management solutions and TMA products.

Regarding 1Q 2015 results, Rick Gilbert, Chairman and CEO of Westell Technologies stated in the release:

"Due to strong and growing demand for DAS conditioning products, our IBW segment performed exceptionally well during the first fiscal quarter. During the quarter, we announced the Universal DAS Interface Tray (UDiT) and have already obtained key customer approvals and generated meaningful revenue with this new product. While the intelligent site management business remains soft, our Communication Solutions Group segment experienced positive momentum in several other areas, and CSG continues to see opportunities for further growth, especially in the wireless areas of the business."

Mr. Gilbert added in the conference call, "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."

The company reported IBW and CSG segment financial results for the first time after the incorporation of its most recent acquisitions, Kentrox in 2013 and Cellular Specialties, Inc. (CSI) in March 2014. CSI is a key component of the IBW segment while Kentrox is central in the CSG segment. 1Q 2015 was the first full quarter for CSI.

With the acquisition of Kentrox, the Company designs, distributes, markets and services intelligent site management solutions. This machine-to-machine (M2M) communications unit enable service providers, tower operators, and other network operators to monitor, manage and control of a range of devices remotely thus enabling them to save significantly by eliminating site visits while increasing system reliability. Of all of Westell units, Kentrox is the one with strongest international presence. Company management has stated that it will use this unit's international exposure to leverage the sales of other company products globally.

Kentrox proved in fiscal 2014 that it can be a strong revenue and net income contributor. Full-year 2014 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. Fourth quarter revenue for the Kentrox segment was $3.4 million, down 77% from the $14.7 million in 3Q 2014. The sequential 4Q decline which continued in 1Q 2015 was due to completion of major projects in 2Q and 3Q 2014. As a point of reference, In 2014 Kentrox achieved a remarkable 50.9% gross margin due to the high yearly revenues.

The IBW segment is expected to continue to be a strong contributor in the current as well as in the short and long-term future with strong demand for its existing array of products as well as the new products like the UDiTs.

An ATT blog article last week discussed the importance of small cells and DAS technologies in the company's immediate and long-term plans (all other service providers do too). The blog stated:

"The FCC is now considering a number of additional actions, including the streamlining of deployments for small cells and Distributed Antenna System ("DAS") technologies. This is one area that is particularly importance since it would help provide broadband for areas that might be hard to serve because of the physical environment (like a garage) or is being blocked by other structures - real mountains or urban canyons.

Like all carriers, AT&T is deploying denser vertical networks in order to accommodate the ever-increasing demand for wireless services, especially wireless broadband services like full motion video. AT&T currently operates more than 34,000 Wi-Fi hot spots nationwide and has more than 143,000 Wi-Fi access points across the country. More than 2.7 billion Wi-Fi connections were made on AT&T network in 2013.

AT&T is also aggressively deploying DAS to address rapidly growing network traffic at large venues and other hard to serve areas. At the 2014 Super Bowl, AT&T customers used 624 GBs of data on our in-stadium DAS - a new high for a major sporting event.

Small cells and DAS technologies also provide benefits where macro cells (the larger towers that were the only option when cellular began) are unsuitable because of zoning or leasing challenges.

We recently filed an ex parte, which in addition to establishing the legal basis for streamlining the environmental and historical review required for small cells systems, also provides some photos of recent small cell deployments. AT&T tried for years to deploy a "macro" site to improve our coverage in this populated residential area. With new technology, we were able to deploy small cells directly on light poles to provide the same coverage.

While configurations vary, small cells can be placed on sides of buildings, on all types of utility poles and sometimes the equipment can be contained within a single small enclosure. In many of these situations, given the use of existing structures, it's easy to see why additional environmental or historical review is unnecessary. In fact, PCIA - The Wireless Infrastructure Association has proposed a clear and workable volume definition that provides a bright line rule for when further environmental and historical review is not needed and where the carrier or infrastructure provider can instead take advantage of a streamlined approval process.

Importantly, streamlining the local environmental and historical review does not eliminate oversight -deployment would still need to meet the National Electrical Safety Code, and local authority is preserved because any installation must still meet other health/safety/fire codes of the locality. And it is in a carrier's best interest to keep small cells small - smaller, lighter equipment is generally less costly to deploy since it does not require expensive replacements of poles or other structures that would be needed to bear a heavier load.

Streamlining the process for small cell deployments is just one of the actions the FCC is considering to accelerate broadband infrastructure deployment. The FCC's Wireless Bureau should be commended for their work in this area, and we look forward to resolution of the proceeding so we can continue to deliver broadband to our customers as expeditiously as possible."

The company's small cell and DAS opportunity is even greater globally as many countries with rapidly growing numbers of cellular users still have rudimentary systems composed mostly of TMA's. Users are demanding more reliable and dependable coverage and operators are starting to realize that small cells and DAS technologies are key and necessary differentiators to gain and maintain market share. The company's drive to expand international sales is a move in the right direction to approach its aggressive goal to increase 2015 revenues from 2014's $102 million to $200 million in the current 2015 fiscal year. Regarding reaching this milestone, the company has not discarded the possibility of more acquisitions citing that they would be comfortable operating with $20 million cash out of the current $46 million (the company currently has no LT debt and 78c/share cash).

Going back to intelligent management systems' outlook, CEO Gilbert stated in the conference call, "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; 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."

I agree with CEO Gilbert that the "softness" in the intelligent management (M2M, Internet of Things) unit is only temporary. This segment will likely be a significant revenue and income contributor going forward because the projected growth for the sector is phenomenal. In a recent report, McKinsey & Co. identifies IoT as one of 12 disruptive technologies in years ahead and it's expected to have an economic impact of $2.7 trillion to $6.2 trillion annually by 2025.

The Internet of Things (IOT) is just the starting point for next generation technology. While IoT quite literally brings static devices to life by connecting them to the global Internet and giving them the intelligence to send and receive data. IoT connects each device, individually, to the Internet - but it does not interconnect and integrate multiple devices controlled by the same operator. The networking of IoT is a much more complex process called machine-to-machine, or M2M technology - which is what Kentrox products do.

An example of this is illustrated in the March 24, 2014 announcement of the partnership between Westell Technologies and BatteryDAQ to provide comprehensive battery management. The integrated solution will provide advanced battery monitoring, management, and control, remote site access, and testing capabilities to ensure backup battery power is always available and ready. Battery strings and individual cells within the string are monitored and can provide real-time data on the status of every battery across multiple sites. Additionally, historical data can be used to provide future battery planning requirements.

But the contribution of this unit is even more far reaching long-term. Kentrox technologies are already being also used to enhance the products from Westell's newest division Cellular Specialties, Inc. (CSI). In a July 12, 2014 press release, the company announced the integration of Westell's Optima Management System with the ClearLink Universal DAS Interface Tray (UDIT). This new solution enables the viewing and management of multiple distributed antenna system (DAS) networks and UDITs from one management platform. This was the type of synergism that CEO Gilbert stated he expects by merging Kentrox and CSI's capabilities/technologies during the CC announcing the acquisition of CSI In March of this year. As mentioned before, Kentrox has strong and growing international presence that will be leveraged to offer other company products globally. A recent example of Kentrox' global reach was the announcement that Telecom Personal Paraguay is using the Kentrox Optima Management System and Remote RMM-1400 for generator management and fuel monitoring of both legacy and new generators.

Other company products are also gaining more attention as reflected in the August 10, 2014 announcement that Mobility Tech Zone, the leading website dedicated to the mobile broadband industry, has recognized Westell's tower mounted amplifiers (TMAs) as a recipient of the 2014 LTE Visionary Award.


It appears that investors are only looking at 1Q 2015's disappointing revenues to value the company at a paltry 90c/share over the cash value, completely ignoring the fact that the recent acquisitions of high-margin Kentrox and CSI once fully integrated will likely become a powerful revenue/income generator. These acquisitions make Westell a key players in high-growth sectors of the global economy - cellular/wireless/IoT/M2M. It is pretty obvious that the demand for small cells and DAS products will increase globally as cellular providers strive to offer more reliable and dependable services to keep and gain market share. Merging some of Kentrox and CSI technologies in new and differentiated products will be key to gaining market share. Finally, increasing international sales of non-Kentrox products is another key step towards approaching the ambitious $200 million revenue run rate for the current fiscal 2015.

Because of the continued high demand for DAS and small cell products, the fast acceptance and strong demand for the new Universal DAS Interface Tray (UDiT) units, the integration of the Kentrox's Optima Management System with other CSI products, increased international sales, etc., I believe 2Q 2015 revenues will be significantly higher than the consensus estimate of $27.55 million. Once the company shows steady growth and regains profitability it will achieve much higher valuations. In fact, Northland Securities had a price target of $5.90 on the stock until they cut it to $4.00 on May 26, 2014. They currently have a market perform rating on the stock. Aside from all the positives I see going forward, I would like to remind investors considering buying WSTL shares that there are risks and uncertainties they must be aware of. These risks are detailed in the latest company 10-K.

Disclosure: The author is long WSTL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.