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Executives

Brian Cooper - CFO

Rick Gilbert - Chairman, President and CEO

Analysts

Mike Latimore - Northland Capital

Greg Mesniaeff - Kaufman Brothers

Brian Horey - Aurelian Management

Mitchell Almy - McAdams Wright Ragen

M. Amar [ph] - BM Capital Management

Westell Technologies, Inc (WSTL) F1Q2012 Earnings Call June 21, 2011 9:30 AM ET

Operator

Welcome to the first quarter fiscal year 2012 earnings call. My name is John and I will be 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. I will now turn the call over to Mr. Brian Cooper, Chief Financial Officer. Mr. Cooper, you may begin.

Brian Cooper

Thank you, John. I want to welcome everyone to our conference call covering the results for Westell Technologies during our fiscal year 2012 first quarter which ended June 30. We issued our earnings news release last night and you can find a copy posted on our new renovated website westell.com. This morning 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 believe, expect, anticipate, estimate, plan, outlook 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, 2011 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 provided reconciliations to the most comparable GAAP measures in our earnings press release which is available on our website, westell.com.

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

Rick Gilbert

Good morning and thank you for joining Westell Technologies’ first quarter fiscal 2012 earnings conference call. I am Rick Gilbert, Westell's Chairman and CEO. During this call, I will discuss recent developments in the business and then turn the call over to Brian Cooper who will discuss the first quarter results in more detail. At the end of the call, Brian and I will answer your questions.

During the first quarter, we recorded earnings per share of $0.30 on a fully diluted basis and as compared to $0.07 for the first quarter of last year. It is important to note that our earnings included a gain from the sale of CNS and unlike the prior year, our earnings were fully tax affected. On non-GAAP basis if we renew the effects of the sale of CNS and also renew the tax benefits for the applied last year, the EPS for Q1 FY12 would have been within $0.01 of last year’s results.

During Q1, we also increased cash in short-term investments to $110.8 million and we repurchased 1.7 million shares of Westell stock under the boards authorized program at a total cost of $5.9 million. I will focus the rest of my comments from the first quarter performance of our three business units as compared with their performance during the prior quarter.

During the first quarter, Customer Networking Solutions was entirely focused on continuing the transition out of the DSL business and into the HomeCloud business. To that end, we continued to ship ProLine modem and VersaLink gateways to Verizon for our contractual agreement. We also provided some profitable product screening and rework services to Verizon associated with previously shipped UltraLine Series3 and VersaLink gateways.

Finally, we did about $1 million of residual DSL business with non-Verizon customers during the first two weeks of the quarter, prior to the closing of the NETGEAR acquisition of CNS on April 15. CNS was essentially break-even from a profit standpoint during Q1, which means the DSL profits offset the HomeCloud expenses.

The HomeCloud project continues in the development phase of an estimated cost of about $2.5 million per year. As discussed in our last call, the first production release of HomeCloud is scheduled for December of this year. Outside, Plant Systems experienced the first quarter with revenues 2% less than the prior quarter.

The good news for the quarter was that the network interface unit shipments returned to normal levels, which helped us achieve an average gross margin of 44%, up from the 42% we experienced from the prior quarter. Outside Plant operating profits were down 12% when compared to last quarter but this was primarily due to the higher cost allocations following the CNS sale and to our continued investment in the development of marketing of the Ethernet product line.

As we looked forward, it is clearly important for Outside Plant to grow its top line and revenue growth obviously depends on developing or acquiring new products and successfully taken into market. Let’s review a few of our current internal efforts. Earlier this week, we announced the first shipments of a new industrial grade Ethernet switch to all Olsson Associates.

Our ES 8100 manage Ethernet switch is included in Olsson’s Central Power Solution preparing fibre to the home optical network terminals, directly from the central office or from power distribution hubs. In this application, the Westell switch provides Ethernet connectivity with integrated remote monitoring of the input voltage, cabinet temperature, and the open or close state of the cabinet door.

Although, we still have a lot of work in front of us to finish the complete line of Ethernet products. This project represents a leading edge of what we strongly believe will be a successful new business for Outside Plant. We also released a new line of fuse panels that are direct to drop in replacements for competitive products serving this market. Our design facilitates just in time deliveries which we would believe will be a competitive advantage for Westell as other vendors struggle to meet customer deliveries given the long lead times of our overseas manufacturing.

Finally, we continued to build out our boxer enclosures line that began with our popular 10RU cabinet. 10-RU stands for 10 rack units and height. Last quarter, we introduced and began shipping a 20RU boxer and this quarter, we are introducing an even larger 30RU version of the boxer for which we have already received initial orders.

This line of cabinet is very important to Westell as it acts as a good basis for the custom systems integration business that is a key strategic initiative for Outside Plant. In addition to these examples of internally developed projects, we continued to actively seek out acquisition opportunities to profitably grow Outside Plant revenue.

In Q1; Conference Plus experienced another solid quarter with revenues matching the fourth quarter and an 8% increase in profits compared to last quarter. We continue to have success with the manage bridge strategy. Recently two international law firms engaged Conference Plus to manage their audio and video conferencing utilizing bridges that are on their networks.

Conference Plus has also been focused on the healthcare vertical market and we had good success in managing projects for companies such as the recently announced collaboration with GE Healthcare related to physician education. We will continue to look for ways to expand our reach into this large in growing market.

Finally, we have just launched our own internally developed web conferencing platform called online meeting. This platform is a flash based web project that is easy to use and provides features and functions most commonly used in web conferencing. Online meeting has already been integrated with all of the existing Conference Plus audio and web based tools in order to simplify our customer’s conferencing experience.

With this development Conference Plus will be able to offer greater variety and flexibility in services and pricing in this expanding market. In summary, Westell has experienced a good start to the fiscal year. Now that CNS has been sold, our primary focus for the coming months will be to find ways to grow Outside Plant and Conference Plus though the addition of profitable new products and services that are either developed internally or obtained through an acquisition process.

With that I would 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, during my commentary about our financial results for the quarter our listeners may want to refer to our earnings press release which includes results and supporting information that I will reference.

Let me start with our key consolidated results under U.S. Generally Accepted Accounting Principles or GAAP, for the quarter consolidated revenue which is $34.4 million compared to $41.3 million in the fiscal first quarter last year. We also reported consolidated GAAP net income of $21.1 million or $0.30 per diluted share for the fiscal first quarter.

This compares with $4.6 million or $0.07 per diluted share in the first quarter of fiscal 2011. As most of you know, these results are greatly affected by two significant changes that occurred during the past two quarters. First, we announced the sale of CNS assets and business to NETGEAR. A transaction closes early this quarter on April 15 resulting in a significant $31.6 million gain and material changes to the CNS business going forward.

The remaining CNS business is much smaller, which is the primary reason for the year-over-year declining consolidated revenue. Second, we released the valuation allowance against our tax assets in the fourth quarter ending March 31, 2011, which means we now report earnings on a fully tax effective basis.

The effected income tax rate in our financial statements increased from a negligible level to about 39%, which means does not affect cash tax payments. These two items obviously complicates comparisons and trends, consequently we have adjusted for some of their affects in our non-GAAP numbers.

We make very limited non-GAAP adjustments. In particular the non-GAAP presentation removes the gain on the CNS sale along with some associated costs that are included in operating expenses for the quarter. The associated costs are relatively small $245,000 for severance and $167,000 relating to setting up of subways for NETGEAR.

For last year’s quarter, the non-GAAP adjustments removed the valuation allowance tax shield and a discreet income tax benefit. So those changes basically show what last year’s results looked like with comparable income taxes. This makes a large $0.03 cent difference in EPS. On that non-GAAP basis, that income for the quarter was $2.2 million or $0.03 per share compared against$ 2.6 million or $0.04 per share a year ago.

From a business unit prospective, CNS reported $8.4 million of revenue in the quarter compared with $15 million in the prior year quarter. CNS revenue after April 15, this year excludes the customers who would transfer to NETGEAR and the quarter primarily reflects continuing sales to Verizon. As we have discussed, those continuing products sales are on a committed basis and are expected to conclude by the end of our third quarter.

We also benefitted from some revenues on screening services provided to Verizon as Rick has already noted. On this post-sale basis, CNS gross margin was a very reasonable 22%. Last year’s 24% gross margin which benefitted from software project margins was slightly higher. On the lower revenues, gross profit was $1.9 million down $1.7 million versus Q1 last year.

At the same time, operating expenses were $1.9 million down to$ 2.2 million and CNS therefore was essentially break-even on the quarter. Key elements had effected operating expenses for the quarter include two weeks of full pre-closing operating expenses, reconstruction charges for severance, reimbursements from NETGEAR for transitional services and continued development of HomeCloud.

The Outside Plant Systems Business Unit experienced some softness in demand with revenue up $14.8 million in the quarter that is down 6% compared with last year’s Q1. As we had anticipated, product mix which had been unfavourable in Q4 returned to normal and gross margin was 44% about the same as a year ago.

On the lower revenue gross profit of $6.5 million was $400,000 lower than year’s Q1. Operating expenses of $3.7 million were up $0.5 million, in part because of our ongoing investments in new Ethernet products. There are also increased allocations of operating expenses that had insured with CNS amounting to more than $300,000 in the quarter.

Bottom line, Outside Plant Operating income was $2.8 million for the quarter down $900,000 against the same quarter of last year. Conference Plus continued its improving top line performance with $11.2 million of revenue for the quarter, up 6% versus Q1 last year. Gross profit was $5.5 million up $400,000 on good margins, expenses increased about $300,000.

Operating income of $1.5 million was therefore up $100,000 versus last year’s first quarter. On our last call, I talked about anticipated changes in our consolidated operating expenses following the CNS transaction and I would like to provide a very brief update. We estimated a $6.5 to $7 million reduction in the annual run rate of operating costs.

We also noted that with transitions and CNS’s continuing Verizon business, would likely take a couple of quarters to achieve the full expense reduction. Actual consolidated operating expenses for the first quarter were $10.6 million, down to about a $1 million versus last year’s quarter.

Without the severance and lease costs, operating, expenses were down $1.4 million. At this point, we believe we on track to the $6.5 to $ 7 million reduction that we estimated. Looking at the balance sheet, total cash and short-term investments increased $24 million during the quarter to a $111 million. Obviously, proceeds from the CNS sale were the biggest driver of the increase, offsetting this impact; the share repurchases and changes in working capital.

As Rick already commented we spent $5.9 million during the quarter to purchase 1.7 million of our shares on our existing board authorization. As of June 30 that leaves approximately $3.5 million for purchases under the authorization. With that as an overview of the quarter, we are ready to open the lines for questions. John.

Question-and-Answer Session

Operator

Thank you we will now begin the question and answer session (Operator instructions). Our first question comes from Mike Latimore from Northland Capital. Please go ahead.

Mike Latimore - Northland Capital

Hi good morning.

Rick Gilbert

Good morning Mike.

Mike Latimore - Northland Capital

Just a question. That is question about Outside Plants, you talked about a little bit of demand softness in the quarter, what do you think the reason for the demand softness was?

Rick Gilbert

I think, basically we are a telecom company, telecom equipment company that is supplying equipments to large North American carriers and they buy equipment when they decide to by equipment as you know. It is also an interesting economic time for them and they are watching their inventories pretty closely.

One thing we did see and we commented it on is that if you recall last quarter, we were selling a lot of enclosures and we were looking for an uptick in the NIUs the interface cars that go into those enclosures and we did see an uptick closer to normal levels as I said. But, what we still see which is interesting are very high sales of enclosures versus NIUs and those enclosures take NIUs. So we are still looking for a significant shift in NIUs sales going forward, kind of thing we saw in Q1 and Q2 of last year was very high sales of NIUs and so as I said, I think the main effect we saw in this quarter was fewer NIU sales and then were indicated by the enclosures.

Mike Latimore - Northland Capital

Alright, okay and are the - you are talking about continuing the enclosure sale as the end application for those enclosure sales mostly wireless backhaul or other areas.

Rick Gilbert

Lot of its wireless backhaul in one way or another and again we see enclosures as a leading indicator and we are seeing very strong sales of enclosures, just would be nice to see the concomitant sales of NIUs at the same time, but we expect those to come and you know at this point, I firmly believe that we are going to see a better Outside Plant have a better quarter next quarter next quarter than they have this quarter.

Brian Cooper

And then Mike, I would just add, I don’t think we have seen any real shift in customer buying patterns. There is not a change in what we see as far as where the enclosures are going at the market place.

Rick Gilbert

Other than a certain amount of tight inventory controls, which we commented on the previous calls. I think they are being pretty careful by the inventories right now.

Mike Latimore - Northland Capital

Rick, I think in the past, we talked about our Outside Plant maybe being around 10% to 15% kind of organic like growth entity, is that still how you view it?

Rick Gilbert

Well, I still see a growing with good organic growth. Of course we are focused on both organic and inorganic growth as I said, it’s - the whole reason we have made this strategic news we have as what we believe Outside Plant in the good growth vehicle.

With that said anyone who believes that in this kind of a business were simply going to see monotonic growth in revenue and profit with every quarter being better than the previous quarter, really does not know the nature of telecom. I mean, we are going to see ups and downs and as Brian said the Outside Plant is little softer than we had expected or hope for in the first quarter, but we see no reason to change our view of the overall growth pattern.

Brian Cooper

And when we talk to our business people, what they confirm is we really did see a significant increase investment in backhaul last year. What we are seeing this year is that they are maintaining that investment, but a lot of the carriers are not necessarily increasing their investment as much, so it’s the growth last year is still there, but not repeating at the same rate.

Mike Latimore - Northland Capital

Got it. And just on CNS, is the revenue pattern here, with your remaining customer, is it going to be fairly consistent for the next couple of quarters and then go to zero or is it sort of scale down. How should we think about just kind of the CNS revenues there?

Brian Cooper

So we really have just a couple more quarters with material revenue from Verizon. We originally had that scheduled that on a fairly smooth basis, they have moved orders around, so it may it may be a little lumpy. I do not know how to tell you right now. I think it would be relatively smooth.

Mike Latimore - Northland Capital

And just one last question, if you stay on track to getting the cost synergies from the CNS sale, what kind of OpEx reduction what do we see in the September quarter.

Brian Cooper

In September, we will still be serving Verizon still has a fair amount of other activity. I would guess would be three quarters of the way to that to our $6.5, $7 million expectation.

Mike Latimore - Northland Capital

All right, thanks a lot.

Operator

All right, next question comes from Greg Mesniaeff from Kaufman Brothers. Please go ahead.

Greg Mesniaeff - Kaufman Brothers

Yes, thank you. Good morning guys. Two questions, one let me start with the OSP segment. You had mentioned that, demand was a little bit softer in the quarter and a relatively high percentage of sales were for enclosures. I am wondering when you look at the installed base of enclosures that you have out there. What is your best take on - given the current transition towards carrier Ethernet, you know for a backhaul. Do you anticipate a replacement cycle of NIUs within those that installed base of enclosures that you have out there.

Rick Gilbert

Well Greg, it’s a good question. We obviously believe in our replacement cycle, because we built an Ethernet Product Line including in an Ethernet jack that plugs into the same enclosures that we sell for the NIUs. That products, goes into production in September and then of course you have all the people like AT&T and Verizon, and others we have all the qualification labs and all that stuff, you have to go through to before it actually gets rolled out.

What we are seeing is a lot of interest in the concept of utilizing all the cabinets who are out there that have copper based NIUs and the concept of being able to plug in a plug compatible Ethernet card is definitely intriguing to our large customers.

So, we do expect over time for that to happen. I do not think it happens instantaneously; obviously we have to go through finishing the Ethernet jack product and getting it through all the qualifications that were required and there are lot of qualifications as you know Greg because of the metro Ethernet standards and such.

The other point, I think that is important is that they are still buying a lot of enclosures and those enclosures right now, the one thing that plugs into those enclosures are copper NIUs and so unless they are planning way ahead to put a lot of Ethernet on those empty enclosures. We still expect to see a lot of NIU sales to fill those.

Greg Mesniaeff - Kaufman Brothers

So, I guess it is fair to say that you are anticipating essentially two revenue streams going forward, one is more traditional enclosure based sale with current product and then perhaps, you know, a replacement cycle of a copper for Ethernet, which would be a nice sort of kicker to the existing sales model.

Rick Gilbert

Yes, there will definitely be two revenues streams on the interface cards, but you know the transition timing and how fast on ramps up versus the other one ramping down is of course the interesting thing to try to predict exactly.

Greg Mesniaeff - Kaufman Brothers

When you look at the Ethernet NIU products, that you are anticipating, any thoughts you can give us on the margin profile of that product and how that may, affect the margin profile of OSP down the road?

Brian Cooper

Yes, Greg it is the way we have approached in the market place we would expect it at similar margins to our existing products.

Greg Mesniaeff - Kaufman Brothers

Got you. And my other question was on HomeCloud. I wanted you to give us a little bit more color on what kind of sales and distribution model you are envisioning for the product going forward. Will be similar to the DSL products that got sold to NETGEAR or do you envision more of a retail consumer kind of a sale?

Rick Gilbert

We are exploring both basically when we introduce HomeCloud, it would be through retail. Alright, and we have to do that in part to get it out there, make sure everything works exactly the way we want and get enough of a customer base, where can really get some good feedback on the product.

The other place we expect early activity would be trials, controlled trials at carriers which would be 500 to 1000 users or something kind of thing where you are trying the stuff out. I do not expect instantaneous high volume; sales through carrier channels that will take a significant period of time to get to that point and to be frank the retail channels look pretty intriguing to us. We are not experts on retail, but this is kind of product that fits the retail channel pretty well.

Greg Mesniaeff - Kaufman Brothers

So, this is you’re envision that's really starting out as a Best Buy’s type of a sale product initially any way.

Rick Gilbert

Well, I wouldn’t want to talk about which retail channel, but definitely we are going to start it out through retail.

Greg Mesniaeff - Kaufman Brothers

Got it, thank you very much.

Operator

(Operator Instructions). And our next question comes from Brian Horey from Aurelian Management. Please go ahead.

Brian Horey - Aurelian Management

Thanks for taking my questions. I was wondering if you could give us any sense as to what if you could help us the replacement opportunity on the Ethernet side and if you just look at ASP’s in the number of you know boxes that are out there, if you kind of total that up what is that come up to kind of ball park number.

Rick Gilbert

Well, the kind of boxes that we have out there are the sell packs that we have out, they are something like 80,000 other than we have out - something in that range. A large number of those are upgradeable to use the Ethernet retrofit kits and Ethernet cards. In terms of taking it beyond that point in terms of how many Ethernet cards we put into each unit and how many of those units will be actually migrated from copper to Ethernet or kept on copper.

That is much harder to predict and so again what our strategy is been is to make sure that our customers have available to them both options and all the right enclosures and retrofit kits to carry out the strategies they choose to take forward and what we have seen in talking to our customers is that there is a general push to move towards more Ethernet overtime and they are intrigued by the solution relative to the cabins they already have installed in the field and obviously the ones that you find, but it is hard to take it much beyond that point Brian because each customer has a different strategy and different timeframes and unfortunately, they change all the time.

Brian Horey - Aurelian Management

Okay fair enough and the similarly on the fuse panel product, can you just you know just give us a sense that what you think that market opportunity is?

Rick Gilbert

Yes, that’s an interesting product , the guys here observe that there were people like ADC and Ex-ADC and Telect and others that were building these fuse panels that essentially were doing surge protection and isolation relative to some of the multiplexor units throughout there in the backhaul space for instance and what they design is something that literally drops in the exact same spot without any changes relative to these competitors, but they also design in a way where we can literally stock parts to quickly migrate to different particular SKUs that are required for different costumers and where I was talking about the competitive advantage it appears to us that the competitors are actually building specific SKUs in China, which takes a long lead time to get here where we can do it, we can do it a much quicker and get it to the field and so it is a pretty attractive product and our guys are out selling it and getting good response.

Brian Horey - Aurelian Management

And how do you think the margins on that product will shake out relative to the rest of the OSP product line?

Brian Cooper

I don’t know, what I do know is that our pricing strategy across products, for good or bad is very consistent so we tend to get pretty consistent margins. I wouldn’t think it would be any lower than what we are doing with our current product line.

Brian Horey - Aurelian Management

Okay, and then on Conference Plus, It started to started show an interesting uptake in terms of rate of growth over prior year, the last couple of quarters. How much of that do you think is attributable to just better economic environment and more employment versus either you guys taking share or the market growing again or new products driving demand? Can you just give us some color on that?

Rick Gilbert

I think it is attributable - frankly attributable to better sales. Efforts that Conference Plus has been doing a good job going after the market share there and you have to remember that to do that top line, they have to sell more and more minutes every quarter because there is fairly continuous price compression in the whole conferencing industry, so they are doing a hell of a job selling.

Brian Horey - Aurelian Management

Okay, thanks very much.

Operator

Our next question comes from Mitchell Almy from McAdams Wright Ragen, please go-ahead.

Mitchell Almy - McAdams Wright Ragen

Good morning. I just had a question - sort of a strategic question if you are facing a somewhat challenging scenario for growth without an acquisition and if there is uncertainty regarding whether there might be an acquisition target available and the price would be accretive to shareholders and you have slimmed down your business with the sale of CNS are in a highly liquid position might as strategically makes sense to instead of just buying that stock, look at finding if there is somebody interested in the entire enterprise at this time.

Rick Gilbert

Well Mitchell. We are a public company and so if somebody is interested in the entire enterprise they can always approach the company and we have a responsibility to look at anything seriously that comes our way, that said. I do want to point out that, we do believe that we’ll be able to find over time the right acquisitions at the right price and that was our fundamental strategy from day one and we have been pretty open about it, I mean essentially migrate out of the CNS business which when we started had 9% gross margins into businesses that had made 40% as gross margins and that is where we are now, but we have also said very clearly is that we are not willing to be - just patiently grow at the organic growth rate of these businesses.

What we have to do is find acquisitions to grow more rapidly. Now, the problem and I think your probably are thinking about this. The problem in this current economy is that we have seen pricing relative to some of the stuff we have looked at has been pretty steep and our goal like any consumer frankly is to find the right product at the right price and we are going to take our time and do that. It is hard to predict the exact timing, but that is our primary strategy versus selling the rest of our business because we think this is a great business going forward.

Mitchell Almy - McAdams Wright Ragen

Sure, can you give us any idea of - on a price metric relative to your own, what you have done, what you’ll be looking for, if you could in terms of sales what type of size of revenues are you looking to buy.

Rick Gilbert

That is a great question. One thing, we don’t want to do is to have to buy five or six little companies and try to put them together to make a meaningful chunk of revenue for Outside Plant. We’d rather look at something that is frankly similar sized, even larger sized in terms of revenue to the current Outside Plant and try to do a larger transaction rather than a bunch of small ones, that’s said. If we find a perfect fit, something very adjacent that gives us a real one plus one equals three kind of thing. We won’t necessarily shy away from doing a smaller one, but our primary target is bigger.

Mitchell Almy - McAdams Wright Ragen

Super, okay. Thank you very much.

Rick Gilbert

Thanks.

Operator

Our next question comes from M. Amar [ph] from BM Capital Management, please go ahead.

M. Amar - BM Capital Management

Hi. Good morning gentlemen. Question about HomeCloud, you had mentioned that you are on schedule for a production one in December if I had got that correctly, now does that mean that given lead time and the production cycle you are going to go to market with a product or should we expect any revenues in calendar Q1 2012 or it is more like calendar Q2 2012?

Rick Gilbert

Well. If we go to production on schedule in December which of course assumes that they finish all the development on-time and we get through all the testing well and such, although relative to they are making good progress. Obviously, when we go to production, we would expect to start seeing small amounts of revenue from HomeCloud in calendar Q1 of next year, alright because - but probably very small to start with, because we will be introducing it into the market place.

Brian Cooper

We don’t have the bunch of trucks ready to backup and take larger volumes of product at day one.

M. Amar - BM Capital Management

Got you.

Rick Gilbert

Exactly.

M. Amar - BM Capital Management

And the second question which is actually a follow-up on the previous question regarding size of potential acquisition you are looking for and given the fact that your initial preference or initial thinking is for HomeCloud to be a consumer marketed product. Given your cash on size and given the nature of a consumer product something that is marketed through consumer channels rather than through traditional channels for your DSL modems.

Do you think that you will have, I am sure you are keeping in mind the need for a greater marketing resources to push ahead with such a product. So, I guess the question is you taking that into consideration when looking at preference for a large acquisition given your $100 million only in cash.

Rick Gilbert

Yes, it is a good point. I mean certainly retail marketing and support of retail channels we will take some cash. We want to be a little careful as we try to ramp-up HomeCloud that we do it in a controlled fashion and I wanted to reiterate something I said earlier, somebody in the earlier question was about channels and I said we will start on a small scale on the retail side so that we make sure the product we want and it works the way we want in the market place.

I just want to make sure no one thinks that’s what we are going to hit the market with 200,000 units in December through four retail channels that is not our goal. Our goal is to get some units out there and also at the same time try to go through some of the trials at carriers because we like both of the channels. But, you’re right if it turns out the retail channels are the one we really need to focus on.

We are going to have to spend some significant funds on marketing and sales through that channel, but we are not doing that at this point. We are really running primarily a development effort.

Brian Cooper

And I guess I would add that we would probably look to partners who could help us. We will make some investment ourselves in this controlled way that Rick was talking about, but I don’t think we are considering that as part of our acquisition strategy that we focus something we - a company that we would be interested in primarily because they could help us with HomeCloud. I think our main focus will remain on the Outside Plant business and that is where the key elements would be.

M. Amar - BM Capital Management

Thanks.

Brian Cooper

Thanks

Operator

We have no further questions at this time.

Rick Gilbert

In that case, thank you very much for joining us and we would look forward to reporting next quarter

Operator

Thank you ladies and gentleman. This concludes today’s conference, thank you for participating. You may now disconnect.

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