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Executives

Brian Cooper – CFO

Rick Gilbert – Chairman, President and CEO

Analysts

Jeff Linroth – Leaving It Better, LLC

Steven White – RMB Capital Management

Brad Evans – Heartland

Brian Horey – Aurelian Management

Richard Greulich – REG Capital

Ted Moreau – WJB Capital

Westell Technologies, Inc. (WSTL) F3Q11 (Qtr End 12/31/10) Earnings Conference Call January 20, 2011 9:30 AM ET

Operator

Welcome to the Westell Technologies Third Quarter Fiscal Year 2011 Earnings Conference Call.

My name is Christine and I will be your operator for today's conference.

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 the call over to Brian Cooper, Chief Financial Officer. Mr. Cooper, you may begin.

Brian Cooper

Thank you, Christine. I want to welcome everyone to our conference call covering the results for Westell Technologies during our fiscal year 2011 third quarter which ended December 31st. We issued our earnings news release last night and you can find the copy posted at westell.com.

This morning Rick Gilbert and I will update you on the business and our financial results.

Before we begin, I would like to note that our presentation and discussion contain forward-looking statements about future results, performance or achievements financial and otherwise. Words such as believe, expect, anticipate, estimate, plan, 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 material 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 31st, 2010 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.

Now, I would like to turn the call to Rick Gilbert, Chairman, President and Chief Executive Officer of Westell.

Rick Gilbert

Good morning and thank you for joining Westell Technologies’ third quarter fiscal 2011 earnings conference call. I am Rick Gilbert, Westell's Chairman and CEO. During this call, I will discuss developments in the business and then turn the call over to Brian Cooper who will discuss the third quarter financial results in more detail. At the end of the call Brian and I will answer questions.

I am pleased to report that despite the expected seasonal slowdown in the Outside Plant business, our third quarter results show year-to-year increases in revenue, earnings and cash flow with all three business units contributing positive operating income.

To put this quarter into perspective, looking over the past several years, the Q3 FY11 consolidated operating income trials only the previous two quarters, which were unusually strong results for Westell.

During the third quarter, we recorded earnings per share of $0.04 on a fully diluted basis, essentially equal to the EPS for Q3 of last year. Our consolidated revenue increased by 13% compared with 3Q of last year. Consolidated gross margins for the quarter were 31%, slightly down from 32% last year. Consolidated net income increased modestly by 7% year-to-year. During the quarter, we also increased cash and short-term investments by $16.4 million to a total of $86.4 million.

As usual, I’ll focus the rest of my comments on the third quarter performance of our business units as compared with their performance during the last quarter.

When compared to a strong second quarter, Customer Networking Solutions still experienced a 6% increase in revenue, coupled with an increase in gross margins to 18%. Furthermore, despite a modest increase in operating expenses to support their HomeCloud initiative, CNS recorded an operating income of $642,000, a significant improvement over last quarter. The business continues to be driven by demand for our VersaLink gateways and by shipments of our remaining Verizon UltraLine Series3 inventory. In Q3, we also recognized $1.1 million in the software revenue associated with the UltraLine Series3 products at Verizon.

On the strategic front, the HomeCloud team continues to make good progress. During the quarter, we received the first production level Digital Home Manager units, and the software team prepared an excellent demonstration of HomeCloud functionality for this month’s consumer electronic show. During Q3, we announced that HomeCloud was chosen to receive one of the coveted CES Innovation Awards this year. And the private demonstrations of HomeCloud at the show were enthusiastically received by our current customers and potential partners.

Outside Plant Systems had a relatively weak quarter with revenues and operating income down when compared to last quarter. The primary reason for this slowdown was weak sales of our T1 network interface units due to the winter seasonal slowdown that is typical for this business.

In addition, we saw an unusually high level of customer reuse, refurbished equipment during the quarter. You may recall that in our last call, I said we expected the seasonal effect. But it seems more dramatic this year given the outstanding Q1 and Q2 performance at Outside Plant. The good news is that order levels have improved and we expect strong performance in Outside Plant during the current quarter.

Relative to new products, the Outside Plant team is making nice progress on the development of the Ethernet backhaul products that are designed to retrofit into existing already installed cell packing closures. Using closures are made by Westell and used for the backhaul of cellular traffic over wireline networks. This month, we released the first of these e-Smart access products, a temperature hardened Ethernet Edge switch, and we are in the process of supplying evaluation units to customers.

We are also now offering fully integrated and tested boxer cabinets for specific cellular backhaul applications. In December, we shipped the first few of these integrated cabinets to a major independent operating company.

Conference Plus experienced a Q3 that was merely a duplicated Q2 in terms of financial performance. During the quarter, Conference Plus revenue per business day increased by 8%. However due to the holidays, there were fewer business days in Q3 than in Q2, which served to offset the effect of the improved revenue per day.

In general, conferencing business has seen increased demand from new customers. The team of Conference Plus continues to execute a sales strategy are focusing on customer segments that require differentiated and high-quality services.

In summary, Westell has now completed the first three quarters of our fiscal year 2011, and during that time we have reported a total of $141 million in revenue and generated $0.18 of earnings per share. In addition, we have now successfully weathered the season in which our customers tend to manage down their year-end inventories. I’m happy to say that we enter Q4 with a positive outlook to a both near-term and long-term business, and I expect the current quarter to show revenue growth on both the year-to-year and sequential basis.

With that, I’d like to turn the call over to our CFO, Brian Cooper, who will discuss our financial results in more detail before we open the call for questions.

Brian Cooper

Thanks Rick. I will provide some commentary about our financial results for the fiscal third quarter. As already noted, our earnings press release is posted on Westell’s website. The release contains further information and detail, including year-to-date results in addition to the numbers I’ll discuss.

As Rich has described, we had a solid quarter. On a year-over-year basis, consolidated revenues were up 13%, net income was up 7%, and EPS was $0.04 per share versus $0.04 in last year’s third quarter. In addition, cash and short-term investments jumped $16 million to more than $86 million.

On the revenue side, the consolidated total for the quarter was $48 million, up 13%, compared with $43 million in Q3 a year-ago. CNS revenue increased $5.7 million or 28% versus the year-ago quarter. The demand for our VersaLink wireless gateways continues to be strong and was partially offset by declining sales of modems.

UltraLine Series3 revenues were $4.5 million versus $3.8 million in the prior-year quarter. Notably, this year’s quarter includes $1.1 million of revenue related to UltraLine Series3 software projects. This software revenue is somewhat one time in nature. As we have discussed on previous calls, our sales of UltraLine Series3 are winding down, while we sell-off our remaining Verizon inventory, and UltraLine sales should be at very low levels after the end of this fiscal year.

Outside Plant revenue declined about $600,000 or 5% compared with the same quarter last year. In addition to the typical seasonal decline in Outside Plant activity, we believe that there were significant customer use of refurbished equipment during the quarter, which reduced direct demand for our products.

While refurbishment impacts the market from time to time, it is usually transitory, and we do not believe that it reflects on overall trends in our Outside Plant business. In fact, we continue to feel that Outside Plant is well positioned to benefit from robust investment in cellular backhaul. And as Rick mentioned, the outlook for the current quarter is good.

Conference Plus had a nice quarter with revenue up almost 5% over the prior year. We believe that this is in part some payback on refocused and somewhat increased sales resources.

Consolidated gross profit for the quarter was $14.8 million, up $1.1 million compared with the third quarter of last year. Gross margin was 30.7%, compared with 32.2% last year. CNS gross profit of $4.7 million was up $1.2 million year-over-year on a gross margin of 18.1%.

As we’ve already discussed, we recognized Q3 software revenue of $1.1 million at high gross margins. There were no material software project revenues during Q3 of the prior year. Outside Plant gross profit was $5.1 million down about $0.5 million. Lower revenues during the quarter account for almost all of the change. Gross margin declined 1.6 percentage points to 43.2%.

Conference Plus gross profit was $5 million, up about $400,000, and gross margin improved to 48.4% in the latest quarter from 47% in the prior-year quarter as a result of a more profitable product mix.

Moving onto expenses, consolidated operating expenses were $11.8 million during Q3, up slightly from a year-ago. However consolidated expenses a year ago included $730,000 as a one-time correction for stock-based compensation expense. Adjusting for that, expenses were about $900,000 higher than in the same quarter last year.

CNS expense has dropped $100,000 even after increased investment in HomeCloud. Outside Plant increased its spending by $700,000 as a result of marketing and R&D investment in its Ethernet-based products for cellular backhaul.

Conference Plus expense has increased about $400,000 primarily reflecting some additional sales resources. If you compare expenses to last quarter that is to Q2 of this fiscal 2011, Outside Plant and Conference Plus are virtually unchanged, and CNS is up slightly.

Consolidated operating income then was $3 million, up $900,000 versus the same quarter last year. If we exclude the one-time expense for stock-based compensation last year, this is about $200,000 better than last year’s operating income.

CNS was profitable for its second quarter. It improved $1.3 million on the strength of its $1.1 million of software revenue. Outside Plant operating income declined $1.1 million as a result of its lower revenues and higher expenses. In Conference Plus, operating income was virtually unchanged, its revenue and operating expense is both higher.

Before I got down to the bottom line, I should point out that in last year’s Q3, we had a one-time tax benefit of almost $800,000. From a net income perspective, that benefit effectively offset the one-time stock compensation expense I have already noted, so net income is pretty comparable year-to-year.

This year’s net income for the quarter was $2.9 million or $0.04 per share, which compares against net income of $2.7 million or $0.04 per share in Q3 last year.

Turning to the balance sheet, cash and short-term investments increased by $16 million during the quarter and totaled more than $86 million at December 31st. The largest factor in this cash increase was an unusually large increase of almost $11 million in accounts payable compared with the September 30th balance. This is primarily a result of the timing in terms on inventory purchases during the quarter. Consequently we anticipate that a good portion of this increase will reverse in the near term.

Among other factors they are also a proceeds of $2.3 million from option exercises during the quarter. Overall, our cash flow has remained very strong.

You will also note that we have some short-term investments on the latest balance sheet. These are high-quality financial instruments that have maturities beyond 90 days. We consider them highly liquid and part of our liquidity reserves along with cash and equivalents.

Finally, there were no share repurchases during Q3. As of December 31st, we therefore still have $9.4 million remaining for share repurchases under our existing Board authorization. We believe that share repurchases are one of the best uses of our cash, and overtime we expect to act on this authorization.

With that overview of the quarter, we’re ready to open the lines for questions. Christine.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Jeff Linroth with Leaving It Better, LLC is on line with the question. Please go ahead.

Jeff Linroth – Leaving It Better, LLC

Good morning.

Brian Cooper

Good morning, Jeff.

Rick Gilbert

Good morning, Jeff.

Jeff Linroth – Leaving It Better, LLC

I didn’t see it in the release, and forgive me Brian if you mentioned it, what was the cash provided by operations in the quarter?

Brian Cooper

I didn’t discuss that, but in the cash flow statement that’s attached, it was $23.6 million. That includes the working capital changes of course.

Jeff Linroth – Leaving It Better, LLC

Thank you. And, well, what was CapEx?

Brian Cooper

Very small. About a $0.5 million.

Jeff Linroth – Leaving It Better, LLC

Thank you. Then, let’s see, the – what’s the – what would be your outlook for the upcoming quarter for CapEx and R&D, and how much of that would be HomeCloud and how much of that would be other things?

Rick Gilbert

CapEx won’t change much at all in the coming quarter. And we’ve been making a slowly ramped investments in HomeCloud and in the Ethernet products for Outside Plant as we’ve discussed in the past. And I think over the whole fiscal year, we’ll have invested about $3 million in those programs and they are seemed to be paying off for us quite well. They’re pretty happy with the progress of those programs.

Brian Cooper

And, Jeff, this is Brian again. Just to make it clear, the cash flow statement I’m referring to is our nine months year-to-date numbers.

Jeff Linroth – Leaving It Better, LLC

Yes, I was wondering if you had a three-month figure.

Brian Cooper

You know, I can come up with that. I – if you compare it to our last press release, you can get the same effects, but you have to give me a minute. I didn’t have one prepared on that basis sitting here.

Jeff Linroth – Leaving It Better, LLC

Okay. Let’s see, okay, thank you for that, Rick. Then, let me talk about in general terms, one of the – and I’ll let someone else get the turn. One the last – one the risks that you face that is, of course, well documented in the risk list in the annual reports near the top is that you serve a small number of large customers and you have numerous competitors. Rick would you say whether or how your emphasis on software in the HomeCloud in particular, whether that might better differentiate you from your numerous competitors, and do you expect that in the extent that’s going to mitigate this risk?

Rick Gilbert

Sure, Jeff. First if I can just a couple of points. Over the last two years, we have diversified our risk fairly significantly especially in places like Conference Plus where they have added lot of small customers and avoided being dependent on just a few large customers. But even in CNS and Outside Plant, our dependence on specific large customers has decreased to some extent, so that’s good news for us, our two largest customers which are obviously Verizon and AT&T currently account for less than 50% of the business.

In terms of HomeCloud, it depends on which channel is the successful channel for HomeCloud. We’re going to explore both direct sales and sales through carriers. And, obviously, if the sales go through the carriers, which is obviously where we’d like to them, then that would increase our dependence on the large carriers, but in a very nice, because there would be a whole new product line and a new type of product. But we expect to explore both channels fully.

Jeff Linroth – Leaving It Better, LLC

Yes, and where I’m going with that is it seems to me that this HomeCloud offering is going to – will make everybody including those large customers look at you as, well certainly slightly – slightly more differentiated from your competitors. Is that the way you see it?

Rick Gilbert

Well, absolutely, because remember HomeCloud is not just a another DSL gateway or modem. In fact, there is no DSL port on it. It’s designed for going into any broadband connected home whether it’s cable or DSL or satellite feeds or whatever, and it is a software-specific device. So it’s a lot of differentiation. And one of the things we saw at the CES show which was very, very good news is I think we really differentiated ourselves a lot not only from those kind of devices but from other competitive devices such as some of the smart network addressable storage units that are coming out. I think HomeCloud has really demonstrated that it’s on a very interesting path to a new type of network appliance and it’s got a lot of attention considering the fact that we were in a private suite and had a limited visibility, and it got a lot of attention to that show. In fact, it was named one of the top 25 things of the show, even though we weren’t on the floor.

Jeff Linroth – Leaving It Better, LLC

Thank you very much for all those answers, and I do appreciate that differentiation.

Operator

The next question comes from Steve White from RMB Capital Management. Please go ahead.

Steven White – RMB Capital Management

Good morning, guys.

Brian Cooper

Hi Steven.

Rick Gilbert

Hi Steve.

Steven White – RMB Capital Management

How much did the refurbishment impact and I was wondering if you could quantify it. And was there anything specific going on this quarter that you think caused the increase in the refurbishment activity?

Rick Gilbert

No, basically as we said in the last earning’s call, and in fact in the call before that, this – the quarter we just completed is the quarter that you typically see especially the large carriers being very, very careful with their year-end inventory levels. And so what they do is they try to empty out their inventories as much as possible, they try to reuse as much as possible in terms of refurbished equipment. Refurbishing equipment is not anything new. It happens on a continuous basis. But for some reason at the end of the budget years and the calendar years for the large carriers, they refocus on this kind of stuff.

The only thing I would say was a surprise to us is that we expected the seasonal nature of the business. It was a little deeper this year than usual and it wasn’t because of the refurbishment, it was just deeper in general. But as I said and I think the important thing is that as we expected order levels have bounced right back in this quarter and we’re very confident about the current quarter, and that’s what we also expected.

Steven White – RMB Capital Management

Do you have a lot of visibility into customers’ inventory levels? Were you caught off-guard by this or how much visibility do you have on this?

Rick Gilbert

No, again, like we weren’t caught off-guard. In fact, we commented on – we in the last two earnings calls we said this is something we expect, there will be seasonality, it is expected. And if you go back and look at historically at the previous quarters for Westell, it’s happened every year into one degree or another.

It was a little deeper than we would have predicted, but the good news is that we had a very solid quarter independently of that, because of the other businesses. And Outside Plant is doing just what it’s expected to do.

Steven White – RMB Capital Management

And could you maybe expand a little bit or if possible even quantify when you say, OSP it’s having a strong performance already in the current quarter. And maybe along with that, if you could just update what you think are maybe the normalized growth rate and just sort of what are the underlying trends you are seeing in OSP and specifically the mobile backhaul?

Rick Gilbert

Okay. The underlying trends first of all haven’t changed in backhaul of cellular traffic. I mean we have a strong trends in that area over a long period of time. Again, it varies quarter-by-quarter, we don’t tell our customers when to buy equipment, they buy when they need it, but we see no fundamental change in that trend.

In terms of your first question, we don’t give specific guidance, but I have made a statement in this earnings call that I expect the revenue to be significantly higher on a year-to-year basis and higher on a quarter-to-quarter basis, sequential quarter basis this current quarter. And that will be driven by all three divisions, but significantly Outside Plant will be there.

Steven White – RMB Capital Management

And do you have any expectations for the timing of some of the new Ethernet products you mentioned? Some of them have started shipping recently. Are there any like trial periods to be aware of? And how are you thinking about it for the calendar year?

Rick Gilbert

Well, we said in the past that we did expect we’d start seeing revenue. But revenue will ramp up slowly as those products get out there. And remember, these products are also use in existing cell pack cabinets that are out there. So it just depends on how fast the carriers decide to start switching to the Ethernet products.

The first product that is in production and as I said going to customers for trials, and these are been requested by customers was actually a stand-alone Ethernet hardened switch which will be going to, for instance, utility companies. And it was very clever of the team to deliver that first, because we were able to fully develop the Ethernet product that we wanted and now they are currently working on putting the e-Smart jack out as our next product, and that’s the one that plugs right into the cell packs and that one is not yet production released, but recently will be this fiscal year.

Steven White – RMB Capital Management

And then, finally, does the lack of the buyback, does in anyway reflect the lack of confidence in the business? And – I mean, how are you guys thinking about this, because I know you’ve said before, it’s the number one priority for the cash, but today we’ve still only seen $600,000 skewed to repurchase stocks. So maybe if you can update there?

Brian Cooper

Yes, Steven, it certainly doesn’t reflect anything on our confidence in the business. We feel cash flow is very strong. We’ve got a lot of confidence that the businesses are doing very well. What it really reflects and call it poor management on my part, but we operate through 10b5 plans, we set perimeters and let them go, and there just weren’t opportunities in this quarter to pickup shares, we still feel it is a great investment for us, a great use of our cash, and we intend to carry on with that and trying to do a little better going forward.

Steven White – RMB Capital Management

Okay. Thank you very much, guys.

Rick Gilbert

Thanks Steve.

Operator

(Operator Instructions). The next question comes from Brad Evans from Heartland.

Brad Evans – Heartland

Good morning, guys.

Rick Gilbert

Hi Brad.

Brad Evans – Heartland

Thanks for taking the question. Congratulation on the CES Award by the way. I was – Rick, I was hoping you could maybe define for us a little bit the market size for the Digital Home Manager application that you referred to. I did notice that Wall Street Journal has run a couple of stories talking about smart network appliances. I think Sony has – is angling in that direction amongst others. Maybe you just give us your current thinking of the current market opportunity that you’d be addressing with that particular application please.

Rick Gilbert

Yes, sure, Brad. That’s probably the hardest question I’ve had in all the – in all the calls up till now. And the problem, Brad, is it’s a new – fundamentally new type of product that we build. And actually when we started building HomeCloud, we didn’t know of any competitors out there that were working on exactly the same thing. And, now, one of the things that was clear at the CES show there is another number of competitors like Iomega and Sony and others that are essentially coming from the network addressable storage space toward this kind of HomeCloud space. And the problem is there aren’t any good numbers out there yet on the size of this market.

Now, one of the things we did – we need to do internally here is some marketing effort to try to size the market ourselves. And we haven’t completed that test, so I can’t give you any specific numbers. The fact of the matter is though it will be driven by first of all broadband penetration, because you need to have broadband in the home to do this. And so it’s clear that the focused markets should be US and Europe, and the developed countries first. And the good news about it as I said before is it’s not limited to DSL broadband, which means that we’ve opened the entire cable broadband market as well. So it should be a fairly interesting market, but it is also somewhat high end in the sense that for the home to need this kind of a capability, it has to have a number of network connectivity devices within the home and different brands and different types of computers and devices that the users need synced and backed up.

That said, I think the market is going to be a reasonable sized market, and we’ll be exploring it. And I will be providing information on market sizes as soon as we have confidence that we know the size. But this is pretty much the nature of fundamental new areas you’d have to develop the size of the market as the market develops.

Brad Evans – Heartland

Yes sir, I understand. Maybe just help us over the next few quarters, I mean what are the key sign posts that we should be watching for to determine your success out of the HomeCloud initiative? What should we be watching for as we monitor your progress going forward?

Rick Gilbert

Well, we’ve said in the last call I believe that we expected the HomeCloud actually to be released as a production-release product in the June-July timeframe. I hope it’s released in that timeframe. It’s a very complex product and we don’t want to put it on the market till it’s perfect.

So I would watch for our production release first of all, and that should happen in roughly that timeframe. And we might also look at the channels that we initially opened up and the response we get from those channels.

Brad Evans – Heartland

Great, good luck. I appreciate the answers. Thank you.

Brian Cooper

Yes.

Rick Gilbert

And just to Brad, just to expand on that by channels I mean you should look at the partners that we announce.

Brad Evans – Heartland

That’s what I assumed. Thank you very much.

Operator

The next question comes from Brian Horey from Aurelian Management. Please go ahead.

Brian Horey – Aurelian Management

Thanks for taking my question. It’s clear that there is a strong seasonal pattern for Outside Plant as you guys have referenced, then obviously you can see from looking at the historical numbers. Having said that, listening to ADTRAN and other people in the market, it seems that the backhaul business in particular, but I think the access markets have been particularly for the DSL technologies have been stronger than people have expected, you guys seemed to have a lot of customer overlap with ADTRAN. Can you comment at all on why your results seemed to be in a variance from what they have been reporting for the last – at least the last quarter?

Rick Gilbert

I haven’t read, frankly analyzed the ADTRAN results. So – but I will say that we actually partner with ADTRAN on some cellular backhaul stuff. So I’d be surprised that the things are fundamentally different. I mean we did have some season now perhaps because of exactly where our products hit the network and the amount of inventory that our customers had on line.

Remember, we had two outstanding quarters from Outside Plant in Q1 and in Q2. It’s possible that our customers overbought a bit in that timeframe we don’t know. All we know is that we have seasonality a bit deeper than we expected and we’re back – bringing back where we expected to be this quarter. So I can’t get too concerned. I don’t see any indication of a negative trend on either the general market for cellular backhaul or our participation in the market.

I hope that helps to answer your question.

Brian Horey – Aurelian Management

Okay. And your confidence in a bounce back in the March quarter, is that based on orders that you’ve actually that you’ve got in hand at the moment?

Rick Gilbert

In part, I mean there is a – you have a certain amount of backlog and we have pretty accurate forecast. And I will say this I don’t normally give any guidance and I came as close as I’ve ever come in a call and giving guidance here by saying that I’m confident we’re going to have a year-to-year and sequential quarter higher revenue for the company. So we’re pretty confident.

Brian Horey – Aurelian Management

Okay. And then on HomeCloud, it’s obviously very early days, but can you put the products such as it is in the hands of any customers yet for them to kick around in the lab?

Rick Gilbert

I had one installed and it’s still in development. The hardware is finished which is great news and looks really good and works great. The router elements of the product are effectively finished and the network is fine. The part that is the trickiest part of the product obviously are all the synchronization of backup protocols and to do what we’re trying to do which is really a departure what other people have, there is some very complex algorithms that are still under development and so I’m satisfied that the team has done a great job. They were able to demonstrate those elements at CES and we saw the results and the excitement. But they still have a fair amount of work to do to get it to production level. And you’re right, as we get to beta level, we’ll certainly be talking about that in the future calls.

Brian Horey – Aurelian Management

Okay. Would you expect to get some kind of a beta product together this quarter that we are now?

Rick Gilbert

No, I think it will be next question.

Brian Horey – Aurelian Management

Okay. And, given the press and the industry attention that was focused on the product, I mean it sounds – historically you’ve said this was kind of a speculative development effort which it sounds like at least in the initial stages paid off, but I obviously now it’s got to be productized, and presumably there is going to be some increasing resources spent to finish the development and then you’re going to have to get into marketing and selling it. Can you give us any sense as to what kind of resources is going to be required over the balance of the year to support that effort presumably having more than you spent last year?

Rick Gilbert

Yes, there will be some ramping, but we have a lot of investment in order to get to the actual production level product. We have the people we think need to be in place. Probably where the investment will be is in some of the marketing sales people that will focus specifically on the partnerships and the business development opportunities which are already appearing and we’re sort of drinking from a bit of a fire hose on that. So we probably we’ll have to go put BD and marketing people in place. But still it’s a fairly small team. If you guys can view this much the way you would view a startup in the sense of a – in terms of the engineering resources that are working on the team it’s still a little less than 20 people.

Brian Horey – Aurelian Management

Okay. And then, lastly, in Conference Plus, the last – if you look over the last couple of quarters, OpEx is up about – I guess it’s up about $300,000 or $400,000. Is that primarily in the sales organization for that unit?

Brian Cooper

I mean it really is, Brian. We have some additional headcount there in the sales side, but we also sort of refocused how Conference Plus is running that function, so they’ve taken a little more of an inside sales focus with some of the resources. It’s almost all in that area.

Brian Horey – Aurelian Management

Okay. All right, thank you.

Rick Gilbert

Thanks Brian.

Brian Cooper

Thanks Brian.

Operator

The next question comes from Richard Greulich from REG Capital. Please go ahead.

Richard Greulich – REG Capital

Hi.

Rick Gilbert

Good morning.

Richard Greulich – REG Capital

Within the CNS area, and maybe it was my estimate, because I was surprised revenue was as strong as it was. Was that fixed by you?

Rick Gilbert

I’m sorry, could you repeat the last part of that. You cut out at the very last part.

Richard Greulich – REG Capital

I’m sorry. In the CNS area the revenue was higher than what I thought would happen. Was that expected by the company or?

Rick Gilbert

That’s about where we – that’s about where we expected it to be. We have a lot of a working parts in CNS. And basically what we’ve seen hasn’t changed dramatically. I mean, there is more sales of gateways which are higher priced products than the modems, they’re superior sales than modems going on, which is an industry trend that pretty much everyone seen.

Our – over the fiscal year, we gained in market share on the gateways and the modems. And so we have some very robust customers not just – not just the two I mentioned before, but other large carriers in the US are using our stuff pretty exclusively. And so it’s – so it’s been good for us in that front.

We also have some inventory on the UltraLine Series3 at Verizon that we’re settling through and that certainly adds to the revenue side of the line. And we have over the last several quarters had opportunities to sell software related stuff at higher margins which has been nice from a margin standpoint for us, and obviously supplements the top line.

But I will say this, if you look historically at CNS, CNS has made continuous progress. Last quarter, I think they did a little over a $100,000 in our profit for the time. In this quarter, they did $642,000 which was a very strong quarter for CNS, and they did a great job.

Richard Greulich – REG Capital

I’m wondering, if I take away the software revenues and profits and then look at the profitability level at that point, is there a room for that to improve over the next year to two?

Rick Gilbert

There is in a sense that you are continually utilizing the new chips on the market and redesigning products. And so what we always try to do is take advantage of that to lower our cost and at least maintain prices to the best of our ability. But it’s contract-by-contract, and the CNS team has done a pretty good job of avoiding business that they think is not profitable literally and focusing on the more profitable comp tracks. And that said, the underlying margins, the best underlying margins you can really achieve these days in the modem and the gateway area are in the mid teens. So software adds a lot when you can add the software.

Richard Greulich – REG Capital

In the – and in the Outside Plant area, although it takes time as you noted to – as you introduce the products to ramp up bench for people to test them and then decide to go with them, when it’s seemed likely that over the next, I would say two years, the growth rate should actually begin to accelerate there.

Rick Gilbert

Yes, sure, because there is a whole line of products that we are developing that we don’t have on the market yet, right? I mean there is the e-Smart access product line has several products in the pipeline than the first which was released in this quarter. But as the others get out there, we are going to – we are going to see, we think some growth based on those products.

Some and one of those products are designed at part of the market that we currently sell T1 network interface units, so there is going to be some overlap and transfer between instead of selling the T1 network interface unit you sell an e-Smart jack for instance. But we also think there will be some net growth as well and that’s why we invested in program.

Richard Greulich – REG Capital

And finally, in the Conference Plus, is there any opportunity for what you might consider accelerating or transformative kind of growth opportunities in terms of acquisitions?

Rick Gilbert

There are periodically opportunities to by people’s customer list or by small conferencing units or by brands, and we do look at those on a periodic basis. But we – if we were to do those kind of acquisitions, we’d have to make sure they were pretty instantaneously accretive, because of the nature of that business. We don’t want to do an investment that takes years to payoff. So we’re pretty conservative, I would say, with sort of the concept that a delay in an acquisition is better than the disaster.

Richard Greulich – REG Capital

And are there any opportunities for acquisitions in the Outside Plant area that makes sense?

Rick Gilbert

There absolute are and we have a list that we are interested in and we – and again we’re very conservative as we go through it. But if you were – if I were to guess where our first acquisitions would be using some of this cash that we have, it would be in the Outside Plant area certainly first.

Richard Greulich – REG Capital

Thank you very much.

Rick Gilbert

Thanks.

Operator

The next question comes from Brad Evans from Heartland. Please go ahead.

Brad Evans – Heartland

Just a follow-on question on the Conference Plus side of the business in terms of sales funnel there, business has been as you noted at least on a reported basis pretty flat to last few quarter result though I guess on a sales per day here last quarter showing some improvement. Just curious what you’re seeing there in terms of new sales, customer retention and new customer acquisition activity there.

Rick Gilbert

Well, I think the teams worked very hard. As I said over the past couple of years, to diversify their risk by having bringing on more new customers that are smaller customers rather than being focused on a few larger customers, and they’ve managed to increase their customer account to more than 7,000 individual customers which is good.

But there are a lot of working parts on Conference Plus. You certainly have the cost of the underlying telecom services, we talked about that in the past. You have in the whole conferencing industry some continuing price compression is going on. And so the fact that they’ve been able to hold their own indicates that they have been successful in increasing sales in terms of offsetting the priced compression aspect of the other stuff.

One of the things they are trying to do and I think have been moderately successful at is get into other areas. We mentioned managed bridging before that’s turned out to be a – our experiment there has turned out to be unqualified success. And what we really need to do is to duplicate that elsewhere and we have our first opportunity is to do that in the last quarter have started showing up. And so I think they are trying to focus on those differentiated services more and more now that they feel that they’ve already diversified their risk in terms of a customer set.

Brad Evans – Heartland

Rick, just to follow on that topic, on the revenue per day, the 8% increase, is there a trend developing there or is it too soon to determine whether there is something more positive underlying the net business at this point?

Rick Gilbert

I think it’s too early to call it a trend. It was certainly a positive development and we’ll be watching it carefully for next quarter and probably be talking about on the next call.

Brad Evans – Heartland

Okay, thank you.

Rick Gilbert

Thanks Brad.

Operator

The last question comes from Ted Moreau from WJB Capital. Please go ahead.

Ted Moreau – WJB Capital

Good morning.

Rick Gilbert

Good morning, Ted.

Ted Moreau – WJB Capital

Here’s a question from a guy who’s been around too long. But just to get back to the seasonality and guidance, it used to be that the telecom companies were – had their budget flush in the December quarter and things slowed down, and it was both because of the weather issues it’s just getting their budgets together. Is that part of any near-term issues and is that changing the changing nature of their business or they’ve got their committed to build out some fiber and broadband and maybe the seasonality isn’t what it used to be? I just wonder how much of that is playing into you.

Rick Gilbert

Well, Ted, the experience I have had – that we’ve had, I should say, is that the seasonal quarter is the one that ends December 31st.

Ted Moreau – WJB Capital

Right.

Rick Gilbert

And the reason for that is two fold. One is, is most of the carriers are on a – in fact all of the carriers that we deal with are on a fiscal year that matches the calendar year.

Ted Moreau – WJB Capital

Right.

Rick Gilbert

And they get to be just adamant about controlling inventories at the end of the year as you know.

Ted Moreau – WJB Capital

Yes.

Rick Gilbert

The other factor is the lead times, since much of the stuff is built in China now, the lead times have increased to the point where they have to buy a head, all right?

Ted Moreau – WJB Capital

Yes.

Rick Gilbert

And so the seasonal has sort of moved from – to be solidly in that December quarter. And as we are now in the middle of winter still, I can tell you in Chicago, we’re definitely in the middle of winter.

Ted Moreau – WJB Capital

Yes.

Rick Gilbert

But what we see is buying picks up pretty rapidly now as they plan for the construction season post-winter, because they have to buy relative to lead times.

Ted Moreau – WJB Capital

So the seasonality we used to have years ago is starting to smooth out a little bit, that is sort of what I see, but it will never be totally that way.

Rick Gilbert

I think years ago when everybody had their own factory the seasonal quarters were sort of spread out in the December and January quarters, that’s changed.

Ted Moreau – WJB Capital

Yes.

Rick Gilbert

The December quarter and the quarter that we are right now tends to be a pretty robust usually.

Ted Moreau – WJB Capital

Yes, And of course you've got other carriers that have different agendas and probably more enterprise that maybe isn't tied to that seasonality, would be my guess.

Rick Gilbert

True.

Ted Moreau – WJB Capital

Right, thanks.

Rick Gilbert

Thanks Ted. Thank you very much for joining us. We look forward to our earnings conference call and we’ll see you there. Thank you.

Operator

Thank you for participating in the Westell Technologies’ third quarter fiscal year 2011 earnings conference call. This concludes the conference for today. You may all disconnect at this time.

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