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Executives

Brian Cooper – Chief Financial Officer

Rick Gilbert – Chairman, President and Chief Executive Office

Analysts

Greg Mesniaeff - Kaufman Brothers

Mike Latimore - North Capital

Greg Burns - Sidoti & Co

Richard Greulich - REG Capital Advisors

Brian Horey - Aurelian Management

[Jeff Menrab] – [Leading it Better]

Energen Corporation (EGN) F3Q12 Earnings Call January 25, 2012 9:30 AM ET

Operator

Welcome to the F3Q 2012 earnings conference call. My name is Sandra and I will be your operator for today’s call. (Operator instructions.) I will now turn the call over to Brian Cooper, Chief Financial officer. Mr. Cooper, you may begin.

Brian Cooper

Thank you. I want to welcome everyone to our conference call covering the results for Westell Technologies during our F3Q 2012, which ended December 31st. We issued our earnings news release last night and there was a copy posted on our website Westell.com. On this call Rick Gilbert and I will update you on the business, our strategy 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.

Forward such as believe, expect, and anticipate, estimate, plan, outlook, trend and similar expressions are intended to identify such forward looking statements. This statement reflects management’s current expectations, estimates and assumptions. These forward looking statements are not guarantees of future performance and involve risk and uncertainties that may cause Westell’s actual results, performance or achievements to differ materially from those discussed. Our descriptions of factors that may reflect our future results is provided in the company’s CSS filings including foreign 10K for the FY ending March 31st, 2011 under the section “risk factors.”

The forward looking statements made in this presentation are being as of the date and time of this conference call. Westell disclaims any obligation to update, revise any forward looking statements based on new information, future events or other factors. Our presentation today may also include non-gap financial measure. We have provided reconciliations to the most comparable gap measures in our earning press release which is available on our website, Westell.com.

I will begin this morning with a review of the financial results and related developments for our F3Q. I will then turn the call over to Rick Gilbert, Westell’s chief executive officer who will provide some comments and perspective on our strategic direction. For F3Q 2012 Westell reported revenue of $14.4 million compared with $37.9 million in the 3Q a year ago. Earnings were $0.29 per diluted share including $0.30 from discontinued operations and a $0.01 loss per share from continuing operations. In the prior year quarter earnings were $0.04 per share including $0.01 from discontinued operation and $0.03 from continuing operations.

The most important strategic event for Westell during the quarter was our sell of our conference plus subsidiary. Later during this call Rick will talk about the rationale for this transaction. The transaction closed on December 31st and results in Westell recording a gain of $32.8 million before taxes or $20 million after taxes. In addition, conference plus has reported at discontinued operation as a result of this sale. [NetAcad] proceeds from the transaction after related cost and taxes are estimated at $37.7 million. As in the CNS sale our federal tax liability for the conference plus sale is shielded by net operating loss carry forwards. We are expecting to pay approximately $1.3 million in cash for transaction related state income taxes.

A second significant event during the quarter was the complacent of shipments of new DSL modems and gateways by our CNS business unit. Westell sold the majority of CNS to Net Gear in April and has been winding down its final commitments to Verizon, our sole remaining customer for those products. CNS continues with its home cloud development project but other future activities will be extremely limited. For the quarter CNS reported $6.7 million of revenue compared with $26.2 million in the prior year quarter. As has been true over the last several quarters the current quarter included some revenues from ancillary products and services.

CNS gross margin was 24% compared with 18% in last year’s 3Q. The margin benefited from pricing improvements, mix and ancillary products. Gross profit was $1.6 million down $3.1 million versus 3Q last year. Operating expenses were $0.9 million in 3Q down $3.2 million compared to last year. Expenses continue to include funding from the development of home cloud, at a run rate at about $2.5 million per year. On this basis CNS produced operating income of $0.7 million for the quarter. The CNS and Conference Plus transaction leave Westell focused on our outside plant business. For the fiscal 3Q our outside plant systems business unit continued to experience extremely weak demand. Revenue of $7.7 million down 35% compared with last year’s 3Q. Spending by our major customers was severely constrained apparently as a result of acquisition activities, budget, inventory management and other factors.

We expect demand for most products to rebound toward the norm this quarter but we anticipate continued softness in orders for our network interface units. An IU demand had shifted toward Ethernet based products and our Ethernet products are not yet qualified at major customers. Gross margin for outside plant declined at 35% versus 43% in 3Q a year ago as a result on higher overheads on lower revenue. Gross profit was $2.7 million compared to $5.1 million in last year’s 3Q. Operating expenses were $3.3 million up $0.3 million from a year ago. This spending reflects our ongoing development of new offerings such as our Ethernet products.

Outside plant therefore generated an operating loss of $0.6 million for the quarter compared with operating income in the same quarter of last year. Turning to the balance sheet in cash flow with total cash and short term investments were $149.4 million up more than $38 million during the quarter. The increase is driven primarily by the proceeds from selling Conference Plus. During the quarter we repurchased approximately 1.8 million shares of the company’s common stock at a cost of $3.7 million. This brought repurchases through nine months of the fiscal year to 4.4 million shares and there was approximately $17.3 million remaining as of December 31st for share repurchases is under existing operations.

With that over view of the results of the quarter I would now like to turn the call over to Rick Gilbert, Westell’s chairman, president and chief execute officer.

Rick Gilbert

Thanks, Brian. Given the dramatic changes in our business structure during the current fiscal year I think it’s appropriate to spend some time reviewing our tactics and strategy. First let me briefly review the changes we have already made over the past three years. Starting in April of 2009, at the beginning of our fiscal year 2010, Brian and I focused the company on exactly two goals; getting Westell back to a profitable position on a consolidated basis and growing our cash position. In order to achieve those goals we restructured the company and ran the three divisions with well defined management structures and three separate PNLs. This approach resulted in a reversal of fortunes from a consolidated loss of $0.24 per share in FY 2009 to income of $0.15 per share in FY 2010. Our cash position also improved to about $61 million.

Another advantage of this approach during our first year at Westell is that Brian and I had time to become personally familiar with the strengths and weaknesses of each business unit. In April of 2010 we deiced it was time to make targeted investments in two of our three divisions, to develop Ethernet products for outside plant and to initiate the home cloud project in CNS. At that time we felt that we would need the Ethernet products to supplement and eventually replace our T1 backhaul portfolio. We also believed that we need to focus CNS more on software and less on hardware.

Another key objective of FY 2011 was to get CNs close to break even and if possible to sell the division at an attractive price. Our efforts culminated in the sale of CNS to Net Gear closing on April 15th 2011 with the benefit of some of our [analital] assets the sale yielded about $33 million in cash. We effectively entered FY 2012 with two profitable divisions, Outside Plant and Conference Plus, along with $110 million. As we begin FY 2012 in April we focused our strategy primarily on Outside Plant which we believed to be and still believe to be the foundation for a valuable pure play business. In parallel we wanted to find a home for Conference Plus which was trapped in a difficult competitive situation. It was facing rapidly decreasing price per minute expectations for conferencing services and had insufficient scale to decrease its cost and support those services. In short, Conference Plus presented many risks and had limited potential for growth.

Therefore our next strategic step was to quietly negotiate the sale of conference plus to a company that was focused entirely on conferencing. This resulted in the sale of Conference Plus to Arkadin which closed on December 31st 2011 and yielded about $38 million in cash. Thus bringing our current cash position to about $139 million. So, Westell Technologies is now a much smaller company that is comprised of our Outside Plant division along with the remnants of CNS. We have accomplished a key strategic goal by moving from being essentially a holding company to a pure play telecom product company. We have no debt, a strong cash position and significant remaining tax assets.

That said, during the first three quarters of FY 2012 we also experienced two changes in the nature of our Outside Plant business. First, like many other telecom vendors, we saw the large North American operators scale back their wire line purchase while they focused their budgets on wireless expansion for GLT roll outs and MNA activities. Second we saw more rapid than expected shift from T1 to Ethernet for cellular traffic backhaul along with significant competition from other established vendors. We had not anticipated the extent of these changes in the FY 2012 timeframe. However despite these setbacks we are looking forward to the start of our FY13 with a well defined strategy for the future of Westell Technologies.

What then is this going forward strategy? The most important goal of our strategy is to successfully recast Westell Technologies as a pure play telecom product vendor focused on high margin business opportunities. By that I mean we want to sell differentiated products to a common set of customers through established sales channels. We want to specifically avoid selling commodity products or services as were the modem and gateways products in our CNS business unit. Commodity products simply cannot generate enough profit contribution to sustain productive RND programs while delivering acceptable returns to investors.

We also want to carefully avoid selling products or services that are unrelated to or even in some cases, competitive with our core customers. The conferencing services offered by the recently sold Conference Plus business unit fell into this category. Finally we want to avoid unwinnable battles with huge competitors. For example, it would be absurd to compete directly Erikson and Alcatel in the radio base station market or to sell multi protocol routes against Cisco and Juniper. On the other hand the products currently developed and sold by Westell’s Outside Plant group typically fall into the desirable high margin category due to the fact that they are either customized or attract limited competition in the marketplace.

We have historically maintained gross margins in the 40 to 45% range in this business unit. We have also a well established reputation for quality products and responsiveness to customers, which has translated into valuable customer relationships and an established Westell brand in the telecom equipments space. To date Outside Plants has focused products to fall primarily into the wire line business area for large operators but in a reasonable proximity to the wireless business activities as well. Therefore we see outside plant as an appropriate core of new Westell technologies that we can leverage into a much broader set of opportunities with our current customers.

At this point I should point out that our first tactical action in 2012 has been to drop the use of Outside Plant to describe our product lines and our company. We are now Westell Technologies and you will already see this change reflected on our website. The reason for the change is that the term “Outside Plant” seems to evoke an association with association with Legacy wire line products and we intend to sell a much broader product portfolio. In fact, we see two keep product categories going forward; wire line and wireless.

As stated above the wire line area gets a good start from our existing product areas including cabinets and enclosures, power management, fuse panels, T1NIUs, Ethernet NIUs, industrial Ethernet switches and custom system integration services. The wireless category is newer to Westell and we find it exciting as most of the current budgets and large carriers are already focused on wireless investment. To date much of that investment has been used for expansion of wireless networks but we expect future investments to increasingly emphasize optimization of wireless networks and sale sites.

We have a previously unannounced product activity underway in this category which is related to distributed antenna system installation and operation. We also have some overlap with existing products from the wire line area. For example, our fuse panels are used in both wire line and wireless applications. However, we want to aggressively seek out other niche products in the wireless space that we can enter with competitive products that we develop ourselves, obtain through partnerships or acquire outright using our cash.

We like this approach for several reasons; first it satisfied the prime directive of our strategy to sell differentiated products to common customers to establish channels. Second if successfully implemented this strategy will significantly diversify risk by mitigating the effects of the kind of targeted budget cuts we’ve experienced in the wire line area over the past few quarters. In theory if wire line loses then wireless gains and vice versa.

Finally as purely a tactical step we intend to maintain a small home cloud team to continue developing a very promising technology until we can justify additional investments based on the customer reception of our initial product offering. The primary challenge in implementing this strategy will be to acquire new products, skill sets that are absent in the current substantiation of Westell. To that end we have hired a transaction consultant who has extensive experience in the wireless space and we are actively seeking a senior executive for corporate and business development with a mandate to aggressively seek out and execute M&A events to augment both the wire line and wireless product areas with a clear focus on the wireless side. We also expect to forge business partnerships, possibly including direct investments to acquire exclusive rights to sell specific product lines.

Finally we will continue to develop our own products here in Aurora and may increase both RND and sales staffing to support those efforts. As a result of this strategy investors should expect that we will invest in acquisitions, partnerships and organic growth opportunities beginning immediately. We expect to successfully execute this strategy and emerge as a larger and stronger entity, a company to be reckoned with in the telecom equipment space. With that I’d like to open the call for your questions.

Question-and-Answer Session

Operator

Thank you, we will now begin the question and answer section. (Operator instructions.) The first question is from Greg Mesniaeff from Kaufman Brothers. Please go ahead.

Greg Mesniaeff - Kaufman Brothers

Hi, guys. How are you? I have a question on the NIU timeline that you described, namely that your next generation Ethernet based NIU products have not yet been qualified with your major customers. Can you give us some color as to what the timeline for that qualification is at this point?

Rick Gilbert

Greg as you know, with large carriers, especially large carriers it’s extremely hard to predict timelines. We have our Ethernet NIUs in labs. We are obviously interested in getting the qualified by large carriers and that certainly hasn’t happened yet. In the meantime there are roll outs of Ethernet going on for backhaul and other vendors are getting that business. It has a definite effect on our basic business.

Greg Mesniaeff - Kaufman Brothers

I’m assuming that the qualification process is well underway or has started some time ago, is that correct?

Rick Gilbert

We are moving as fast as we can, Greg.

Greg Mesniaeff - Kaufman Brothers

Any color you can give us on some more tier two and tier three carrier customers? What kind of activity you have going on in those customer areas?

Rick Gilbert

Specifically on the Ethernet side?

Greg Mesniaeff - Kaufman Brothers

Yes, in the outside what you were calling the outside plant business.

Rick Gilbert

Getting back to your Ethernet NIU side, obviously it’s a qualification that is faster with smaller players but there is a lot less business available with smaller players. We don’t really focus much on that although some of the stud in labs is with smaller carriers. Remember, we have other aspects of our Ethernet program too. We also built a whole line of switches for the industrial markets and we have two sales guys focus specifically on those markets. So we are seeing some progress in terms of trials in that area as well.

Operator

The next question is from Mike Latimore from North Capital.

Mike Latimore - North Capital

Thanks a lot, just on the (inaudible) you said the Outside Plant business; Westell Technologies might see some rebound signs of you getting to that will occur. Do you have orders in hand already? Just a little more color around that would be good.

Rick Gilbert

It’s still very early in the quarter. I would say that we probably will see sequential improvement quarter to quarter but we are only three weeks into the quarter and as you know Outside Plant visibility has been limited all along and has certainly been limited in the last few quarters in terms of actually predicting the end of the quarter when you’re less than one month into it. We don’t give guidance but we probably will see a better quarter sequentially here.

Mike Latimore - North Capital

Within the Outside Plant revenues in the December quarter, how much of those revenues came from say a wireless backhaul kind application?

Brian Cooper

It’s pretty limited actually. We did see a dramatic shift as we said from T1 to Ethernet in terms of all the large carriers. Our backhaul business really slowed down very dramatically. Unfortunately coupled with that, as I know you guys have seen with other telecom vendors, the large carriers especially in 4Q but even in 3Q had really put the brakes on spending in the wire line in general. It was sort of a double effect for us as we said in the formal remarks. T1 to Ethernet shift certainly had a big part to play but just a big part was the slowdown in spending that the carriers went through in the 4Q at the end of the fourth calendar quarter.

Mike Latimore - North Capital

What does your NOL level now?

Brian Cooper

The actual NOL, the asset I think is $34 million or so. The NOL on the federal level is about $64 million.

Operator

The next question is from Greg Burns from Sidoti & Co

Greg Burns - Sidoti & Co

Good morning, thanks for taking my question. In terms of home cloud, do you have some update on the timeline of bringing that to market?

Rick Gilbert

To be honest every time I’ve given you an update on the timeline I’ve been wrong. Basically the home cloud software has proven to be a pretty tough nut to crack so far. We are very close to beta level at this point. The hardware has been done for a long time. They are ready to build significant numbers of these units in China. We’re simply not going to put a product out that doesn’t meet our traditional quality. I am personally focused on this program on a daily basis and we are trying to move it as fast as we can. I don’t think we are far behind where we stated before. We had wanted to be in beta in December and have first customer ship in the current quarter. But there has been a little more delay. We are going to get this product done in a high quality manner. That is basically what I can say.

Greg Burns - Sidoti & Co

In terms of the [out backs] you’re at about 0.5 in the development phase. Do you have any range or idea of what that goes to once you start to market this product?

Brian Cooper

It depends on the reception of the product to be quite frank. The current team is slightly smaller than the team we started with on home cloud but we still are using about 12 people which is a little less that 10% of our total workforce currently on cloud.

Greg Burns - Sidoti & Co

When you think about the overall market for home cloud what does the competitive landscape look like? Doesn’t this kind of fall into the category of highly competitive market you’re entering?

Brian Cooper

It is a highly competitive market but we’re doing something that is very unusual in the market. Most of the offerings that are in the market depend on the macro cloud for the services that are being offered and they do it well. When you look at offerings like iCloud and DropBox and others, they do a good job but they do require the cloud and there are privacy and security concerns relative to the cloud. That’s where the home cloud idea originally came from. We are focused on that. We think it makes a lot of sense. That said you made a really good point. It’s a highly competitive market place and as we’ve told investors all along. This is a high risk, high return kind of play and I certainly hope investors are not betting their entire evaluation of this company on home cloud because frankly our main focus is in telecom products. And as I said, going forward in both the wire line and wireless space, that’s where most of our future is going to be.

Greg Burns - Sidoti & Co

In terms of the deployment of the product, how much long of a leash do you give this and what kind of sign posts do you look for that it’s something you can move forward?

Brian Cooper

We have certainly funded it through the current fiscal year which as you know end on March 31st. By that time we should have a product. Again it depends a lot on the reception of the product in terms of how much and how long we continue to fund the product. Depending on the reception we may increase funding. Depending on the reception we may decrease funding. It’s as simple as that.

Operator

Thank you the next question is from Brian Horey from Aurelian Management

Brian Horey - Aurelian Management

Hi, thanks for taking my question. In terms of Outside Plant can you give us, in terms of the sales drop off, how much of that was due to what you call [in constrained] demand by the carriers versus the lack of having the Ethernet product available.

Rick Gilbert

I don’t have the numbers directly in front of me to exactly quantify it. I would say it was about a 50/50 thing from my perspective. We saw a slow down across the entire product lines in terms of purchasing. There may have been one or two product areas where we saw actual increases sequentially in sales last quarter. The T1 backhaul which represented a significant part of the business effectively stopped. That was unfortunately coupled with a slow down on the rest of the products which is completely unrelated to backhaul but related to the budget management by the large carriers.

Relative to the earlier question where somebody said “What about sequential now?” One of the reasons we are more positive about the sequential quarter to quarter growth is that while the T1 effect, the T1 Ethernet backhaul effect is still there we are seeing carriers change their bad buying habits, again at the beginning of the quarter in a more positive direction.

Brian Horey - Aurelian Management

With regard to the Ethernet product carrier qualification, I know it’s impossible to predict these things with any accuracy but based on their historical behavior and the amount of time that you guys have been working on it would it be reasonable that some time in this quarter we would get qualification for at least one of the big carriers?

Rick Gilbert

No, I think that would be unreasonable. I think it’s going to be longer than that.

Brian Horey - Aurelian Management

The last question is with regard to capital allocation, given the stock prices this morning; you guys are kind of the bank of Westell with not much credit given to the actually operating business of the company. Have you guys thought about the buyback effort in any greater detail, whether the current authorizations still make sense?

Rick Gilbert

You’re right. Effectively zero value of enterprises is not much value. We have done $3.7 million last quarter for 1.8 million shares which is a pretty aggressive buy back from out perspective and we still have 17.3 million. Brian do you want to comment on where you think it’s going to go?

Brian Cooper

We think that, we said this before; we don’t think a much more aggressive approach would be a good fit for us right now because we’re trying to grow the company. But we do like what we’ve done. We feel like it’s been a good program and we think the page we have been on is the right balance for us among our confidence and our strategy, recognizing the value in the stock and at the same time keeping (inaudible) for pursuing growth.

Rick Gilbert

Frankly, given the volumes we probably couldn’t have bought 20 more shares last quarter.

Brian Cooper

In an open market program we pretty much did what we could do.

Operator

The next question is from Richard Greulich from REG Capital Advisors

Richard Greulich - REG Capital Advisors

Good morning. A couple of questions, it sounds like there is another million in cash to come in from the conference plus sale?

Brian Cooper

We actually have about a million dollars of taxes to pay so that cash has not gone out the door.

Richard Greulich - REG Capital Advisors

What is the effect now of taking in the allocated share costs that Conference Plus, how much of that was allocated Conference Plus and now come back to the remaining company?

Brian Cooper

I assume you’re asking about allocated expenses and so forth?

Richard Greulich - REG Capital Advisors

Yes.

Brian Cooper

Conference Plus was an extremely stand alone operation. We shared some things between the Westell operations here in Aurora and the Conference Plus operations in [Chamburg] but not very many. The segment reporting that we’ve given over the years has been a very good indication of exactly what costs go with that business. I think a good predictor of what the change is also going forward. There really are not additional costs to be picked up versus what was in the segment. There is no reallocation from conference plus.

Richard Greulich - REG Capital Advisors

Is that also the case with the CNS business as that winds down?

Brian Cooper

No, that is a different siatuion. We talked about that, it’s even a little hard for us sometimes to see exactly which costs shift. Those businesses have shared quite a bit of common costs including things like the lease of the building we occupy and some of the people and so forth. I would say going forward you won’t see much more spending in CNS other than what we spend in home cloud. If you look at the operating expense level for the recent quarter it is probably a little low because our activity level is low but the operating expense for continuing operations is a pretty good indication for what our ongoing operating expense pace is.

As Rick said earlier, we may invest a little bit more in to the organization so that we can pursue opportunities but that is still a pretty good indication of where our expense pace is. Doe that help?

Richard Greulich - REG Capital Advisors

Yes and just out of curiosity what is the tax (inaudible)?

Brian Cooper

I don’t think I can give you that right off the type of my head but if you’re asking because you’re looking at a sale of it, we’re not actually considering that in any way.

Richard Greulich - REG Capital Advisors

I applaud everything you guys have done in terms of sales, in terms of the buy back and in terms of reenergizing the new product flow. At this point, particularly given to evaluation of stock, it seems like there is a pretty certain upside if you would consider the sale of Outside Plant and there is risk if you don’t in terms of if you take the money and you make an acquisition. It’s very unlikely you will be able to buy something cheaper than what you can buy your own stock at, at this point. I understand you’re trying to grow it but that entails a fair amount of risk.

Rick Gilbert

I’m happy to answer that question. Let me make it clear, we believe in strategic plan and this plan believes in executing strategic plans. I think those of you, who have watched the company over the last three years, we’ve done exactly what we said we were going to do. Basically when Brian and I came to the company we had a company with very little cash that was in a situation with lots of risk. Over the last three years we essentially converted risk to cash, if you want to do it in a nutshell. But that isn’t the end of our strategic plan. Our strategic plan that the board bought off on and this team bought off on is not to take that cash and convert it to value.

To do that we are going to do the kinds of things we have already started doing. I’m surprised no one has asked about or new [DAS] products for instance. We are building products internally. We are shifting our balance between wire line and wireless which gives us more—it actually mitigates risk and we believe through internal investment and partnerships and outright acquisitions that we can convert that cash into a much more valuable company. That is the second half our strategic plan and frankly, with this team I wouldn’t bet against it.

Richard Greulich - REG Capital Advisors

You realize, I’m sure, it’s not just a matter of converting cash to value but it’s also cash back to risk, which can be positive or negative.

Rick Gilbert

Yes, but we get to choose our risk. That’s the hard part of the game, choosing the risk. I’ll tell you right now, a pure played telecom product company has a hell of a lot less risk than a holding company with disassociated businesses from my perspective.

Brian Cooper

Just to emphasize again, we like our business. We like our telecom equipment business. We think we have some really good advantages in that business. We also know, as Rick said, we’re not going to be a Cisco or Juniper or and Emerson. But we know the kinds of things we are good at and we think we can build value on that.

Richard Greulich - REG Capital Advisors

Rick, now that you mentioned it I will ask about the (inaudible). I have a couple of other investments involved in that and I happen to think it’s one of the more attractive areas to be in. What areas are you involved with there? And certainly it wouldn’t be the antenna itself I’m assuming.

Rick Gilbert

There are plenty of players in the antenna. Basically what we have done is we were asked by a large carrier to specifically build a product related to DAS installation and operation. We have built that product. It is in labs and it seems to be on a fairly fast path to approval. That as you know in the DAS area, those are reasonable margin, high value products and it’s a very hot area for the large carriers and so with all of the focus people have put on the T1 Ethernet shift and the effect on our business. If we were a one product company that would be bad but we have lot of products including new products that are in the pipeline. We are pretty confident that we are going to be able to move forward well here.

Richard Greulich - REG Capital Advisors

When would you expect to see revenue from that product development?

Rick Gilbert

I think we’re going to see the first sale of that product this quarter.

Richard Greulich - REG Capital Advisors

And this is from an existing customer you’ve already been working with some of your other products?

Rick Gilbert

Yes because one of the advantages that we have, having the reputation that we have in the market place, is we have solid relationships with large carriers. Unlike many companies we do have the opportunity periodically to build products effectively, custom products for large carriers. This is one of those examples.

Operator

We do have a follow up question from Greg Mesniaeff from Kaufman Brothers, please go ahead.

Greg Mesniaeff - Kaufman Brothers

Just to shift back to the home cloud product, once that product is finished and ready to go what kind of sales and marketing strategy are you envisioning for the product? Are you envisioning using the more traditional Westell distribution model through large carriers with their branding? Or do you envision more of a retail type of distribution model? Can you give us some color as to what your thinking is?

Rick Gilbert

I think I said in the last call, our first product; we have to get the product into the marketplace, into the hands of people so we can get the reactions and do any adjustments we need to do. Our first product we sold through our website fulfilled by Amazon. We’ll put enough units up there we know how well it works. Then we have to make some additional decisions about which channels we take it to. I suspect the wide retail channels are not the initial ones. The more interesting ones of course would be going to our carrier customers and seeing if the product can be taken too carrier channels.

Greg Mesniaeff - Kaufman Brothers

Is the risk to that approach that the carriers were over dictate the feature functionality and the branding of the product?

Rick Gilbert

That is certainly one of many, many risks with trying to take it through the carrier channels. To be honest, our first foyer into the market is to get the better part of 1,000 or around 1,000 units out into the field to see what the reaction is to what we built. I think we can do that without carriers and without Best Buy, for instance.

Operator

The next question is from Jeff [Menrab] from [Leading It Better].

[Jeff Menrab] - [Leading It Better]

One of the interesting things to consider this new direction is the (inaudible) of your customers. What do you think about the new shape that you anticipate your (inaudible) over the next five years? Do you anticipate a customer concentration of something like what we’ve had with one or two or three very large customers? Or is it your intention and also your forecast that concentration might decrease?

Rick Gilbert

That’s an excellent question and obviously one of the risks in any telecom equipment provider if your focus, for instance the way we are in North America, there are only a certain number of large scale customers that can really make a [miniell] swing fast. We sell to those customers. There are a lot of independent operating companies that we don’t sell too that are too small to make much change for us. That does lead to customer concentration issues.

One of the things we want to do as we move forward, especially on the acquisition front is to look for more balance between wire line and wireless products. Perhaps balance between domestic channels and international channels that we don’t currently have. Possibly even balance between carrier and enterprise telecom. One of the nice things about being able to look now at acquisitions instead of divestures is that we can now look for things that compliment what we have now. We can leverage our brand with product areas, possibly even channels that are already established but complimentary with what we have. Obviously mitigating risk by concentration is a question for those kinds of balances. Does that make since?

[Jeff Menrab] - [Leading It Better]

I think it’s a really great opportunity to mitigate that by decree. Not necessarily make a seismic shift but you make a good point about the breadth and the synergies that are possible among products. I hadn’t really considered that. It’s been concerning to me that yes the needle can move fast—

Rick Gilbert

Can move fast in either direction is what you’re thinking or you’re right.

[Jeff Menrab] - [Leading It Better]

My sensation is it takes some of the control out of your hands in some sense. What is your reaction to that notion?

Brian Cooper

The other thing to think about here, Jeff, is that in the last couple of years we have already made a fairly big difference is what you’re looking at. Conference Plus is a well diversified business but a completely different business for us. The sale of CNS made a huge difference in our concentration. Outside Plant has a much wider array of customers with a wider array of product. CNS was selling large volumes of just a couple of products to just a couple of players. We’ve always had a high concentration with Verizon and AT&T. I think everyone knows that. They are the big players here and we will still have some of that. As Rick said we will be able to diversify it with products and we are diversified than we were a few years ago.

Rick Gilbert

Even if you go back to that central argument about wire line and wireless virtually simply wire line you get a lot of diversification risk right there, Jeff. Even at AT&T there are separate buying communities and budgets for the wire line side and the wireless side, so we’re opening up whole new areas of customers that we have great reputations with. We’re very excited about this shift to be honest.

[Jeff Menrab] - [Leading It Better]

I appreciate that color and I’d like to take a second to recognize what has happened. Two gentlemen came here and in my opinion it has certainly been positive at this point, so thanks for that and continue good fortunate going forward.

Operator

The next question is a follow-up question Greg Burns from Sidoti and Company. Please go ahead

Greg Burns - Sidoti & Co

Hi, just wanted to follow-up on the wireless antenna systems. In terms of your outlook for growth; is that being factored in to the additional sales that you’re expecting from this product?

Rick Gilbert

In our internal forecast, again we don’t publish our forecast but our internal forecast does have revenue from that product in upcoming quarters.

Operator

Thank you and that was our last question.

Rick Gilbert

Thank you very much and we look forward to the call next quarter. Thank you.

Operator

Thank you ladies and gentleman. This concludes today’s conference.

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