Westell Technologies' (WSTL) CEO Tom Gruenwald on Q3 2016 Results - Earnings Call Transcript

| About: Westell Technologies, (WSTL)

Westell Technologies Inc. (NASDAQ:WSTL)

Q3 2016 Earnings Conference Call

February 04, 2016 9:30 AM ET

Executives

Tom Minichiello – Chief Financial Officer

Tom Gruenwald – Chief Executive Officer

Analysts

Mike Latimore – NCM

Brent Morrison – Zuma Capital

Jeff Bronchick – CSC Investment Management

Operator

Good morning and welcome to the Westell Third Quarter Fiscal Year 2016 Earnings Call. My name is Brandon, and I will be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded.

And I will now turn it over to Tom Minichiello, Westell’s Chief Financial Officer. You may begin, sir.

Tom Minichiello

Thank you, Brandon. Good morning, and welcome to our conference call to discuss the fiscal year 2016 third quarter results for Westell Technologies. The news release we issued last night is posted on our website, westell.com. On this call, Tom Gruenwald, Westell’s Chief Executive Officer will begin with the discussion of our business and strategy. I will then update you on our financial results for the quarter, and we’ll conclude by taking questions.

Before we begin, please note that our presentation and discussion contains forward-looking statements about future results, performance or achievements, financial and otherwise. Words such as should, believe, expect, trend and similar expressions are intended to identify such forward-looking statements. These statements reflect management’s current expectations, estimates and assumptions. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Westell’s actual results, performance or achievements to differ materially from those discussed.

A description of the 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, 2015 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.

Please also note that we present non-GAAP financial information in our news releases because we believe that non-GAAP measures provide meaningful supplemental information to both, management and investors. The non-GAAP information reflects the company’s core ongoing operating performance and facilitates comparisons across reporting periods. Our discussion of results today will include non-GAAP financial measures. We provide our reconciliations to the most comparable GAAP measures in our news release.

I will now turn the call over to Tom Gruenwald.

Tom Gruenwald

Thank you, Tom, and good morning, everyone. Today, I’ll share my views on our fiscal third quarter financial and operating results. I’ll then hand it back to Tom for further review of our financial performance.

Westell results in the third quarter demonstrate the progress we’re making in achieving our growth and operational goals. While revenue was seasonally down as we anticipated, and as we advised investor’s last quarter, revenue was up 44%, compared to the same quarter last year. In addition within our CSG segment, the performance of ISM was particularly strong this quarter, as a result of better sales and management focus. ISM revenue rose 18% in 3Q 2016 versus 2Q 2016, achieved its highest level of revenue since the December 2013 quarter and contributed to a CSG segment gross margin above 40%.

Three quarters in the fiscal 2016, we are nearing completion of the fix phase of our three-phase, Fix, Build, Expand, Turnaround Plan. A significant part of this has been the hiring of proven results oriented executives, who were driven to win.

Following the end of this most recent quarter, we completed the build out of our management team, announcing in January the appointment of two executives. A permanent head of our IBW business, Rick Good; a seasoned and accomplished in building wireless professional. And the Senior VP of Engineering and Outside Plant, Oscar Hernandez; a top product development executive with excellent business prudential.

With the appointment earlier this fiscal year of a new head of ISM services, a news sales leader and the CTO we now have the right leaders in place for all of our key areas. I want to assure you that the team is singularly focused on returning Westell to profitability.

Next, I’ll say a few words about Westell’s quarterly business patterns. By analyzing our quarterly revenue over the last three years, including historical results of acquired business, a consistent pattern emerges. The June and September quarters which are the first and second of our fiscal year tend to be the strongest. The December quarter tends to be by far the weakest. Our fourth fiscal quarter ending in March tends to rebound exceeding 3Q but not usually achieving quite the levels of our first two quarters.

The lower December quarters are attributable to three things, first, customer budget cycles. In the past this is either provided a boost to supplier revenue due to calendar year-end budget flush or a headwinds, when carriers didn’t have much CapEx budget left for the end of the year. In recent years, we’ve seen the ladder, although we see both effects to varying degrees and varying regions and product areas.

Second, number of business days. The December quarter has fewer selling and shipping days as a result of the Thanksgiving and Christmas, New Year holidays. And third, true seasonality with respect to certain product lines. For example, carriers are less in clients to stock TMAs ahead of winter months when there are fewer scheduled installations. The same holds true for some of our IBW and outside plant solutions.

Now, let me give you an update on ClearLink DAS. Development work is progressing and we are working with customers on trials, performing file testing and gaining regulatory approvals as well as determining beta sites. This should continue throughout the fiscal fourth quarter and we anticipate our first shipments to take place sometime during the June quarter. At the same time, we plan to begin our R&D expense paper.

In other product news, our cell site optimization line of business introduced a new TMA product shortly after the close of the most recent quarter, as well as a slippery monitoring fixture for use at macro cell sites. We’re also updating our repeater product line this quarter. With respect to outside plant solutions, we’re finally seeing customer spending uptick, as part two of the Connect America Fund or CAF2 kicks in.

Looking ahead, we expect and feel confident that revenue can increase in 4Q. We also anticipate reducing operating expenses effective the first quarter of fiscal 2017, as we begin the aforementioned R&D paper, as well as implementing other operational efficiencies.

So, let me sum up with three quarters reported this fiscal year. We’ve made important changes to Westell senior leadership team. We’re calling on more customers with better sales focus. Our ISM and outside plant lines are gaining momentum and we’ve had an active DAS conditioner, the Universal DAS Interface Tray or UDIT, product that has gained excellent traction and customer acceptance. And now a second product, ClearLink DAS that’s near roll out.

We continue to be relentlessly focused on returning Westell to profitability, by both driving revenue growth through product development and better sales execution and managing expenses. We’re encouraged by the progress we’ve made to-date, which positions us favorably for the last quarter of fiscal year 2016 and into fiscal 2017.

With that, let me turn it over to Tom Minichiello for the financial review.

Tom Minichiello

Thank you, Tom. Let me provide additional color on the financial information for the quarter. We reported a consolidated GAAP net loss for 3Q 2016 of $4.8 million or $0.08 per share, and a consolidated non-GAAP net loss of $3 million or $0.05 per share. Our 3Q 2016 results compared favorably to the same quarter last year, when we reported a GAAP net loss of $27.5 million or $0.46 per share, and a non-GAAP net loss of $4.8 million or $0.08 per share. And unfavorably to the prior quarter, when we reported a GAAP net loss of $2.5 million or $0.04 per share, and a non-GAAP net loss of $700,000 or $0.01 per share.

The favorable year-over-year comparisons were driven by 44% revenue growth and a significantly improved gross margin. And for the GAAP results only, a non-recurring impairment charge included in last year’s results. The unfavorable sequential comparisons were driven primarily by the expected seasonally lower revenue. Our consolidated non-GAAP gross margin was 39.7%, compared to 40.3% in the prior quarter, while seasonally lower revenue affected the sequential gross margin change, this was partly offset by a more favorable mix, including as Tom Gruenwald just mentioned, the highest quarterly ISM revenue in two years. In addition, our fiscal year-to-date non-GAAP gross margin of 39.8% is well above the comparable 35%, a year ago.

Turning to operating expenses, consolidated non-GAAP OpEx was $11.2 million this quarter, compared to $10.9 million last quarter. The higher non-GAAP OpEx was driven primarily by CSG product development activities associated with enhancements to our ISM Optima management system. And with prototype builds of integrating cabinets as we prepare for an expected increase in cabinet business going forward. In the coming weeks we will finalize our fiscal year 2017 plans with as Tom Gruenwald also noted the intention of lowering our operating expenses effective in the June were first fiscal quarter of 2017.

Moving to the balance sheet, we used $1.6 million of cash in the third quarter, bringing our total cash and short-term investments to $34.8 million at December 31, 2015 and no debt. $1 million of the cash was used for operating activities, which was primarily the result of the net loss in the quarter, party offset by favorable working capital.

Now let’s take a deeper look at the third quarter segment results. Revenue for the IBW segment was $8.7 million in 3Q 2016, up 60% compared to the year ago quarter and lower by 20% compared to the prior quarter. The year-over-year improvement was due largely to increase demand for passive DAS conditioners. The sequential decrease was driven by a seasonal slow down in sales of UDIT.

IBW segment gross profit was $3.3 million and gross margin was 38.2%, compared to $1.9 million and 35.3% last year, and $4.5 million and 42% in the prior quarter. Gross profit and gross margin were in line with changes in segment revenue. IBW segment R&D expenses were $2.7 million, compared to $2.3 million in the year ago quarter and $2.8 million in the prior quarter. As a result, IBW segment profit was $600,000, compared to $400,000 loss last year, and a $1.8 million profit in the prior quarter.

Revenue for the CSG segment was a $11.5 million in 3Q 2016, up 34% compared to a year ago quarter and lower by 22% compared to the prior quarter. The year-over-year improvement was due to higher revenues across all product categories, ISM, TMAs and outside plant. The sequential revenue decrease was driven by the typical seasonal slowdown in sales of TMAs.

CSG segment gross profit was $4.6 million and gross margin was 40.3%, compared to $2.5 million and 28.8% last year, and $5.7 million and 38.7% in the prior quarter. The year-over-year gross profit and gross margin increases were due to 34% revenue growth and lower excess and obsolete inventory costs.

Sequentially the gross profit decrease was driven by the seasonally lower revenue, while the gross margin increased primarily result – as a result of the more favorable mix. CSG segment R&D expenses were $2.2 million, compared to $2 million in the year ago quarter, and $1.9 million in the prior quarter. As a result, CSG segment profit was $2.5 million, compared to $500,000 last year, and $3.8 million in the prior quarter.

As our new team progresses on the growth and turnaround plan, we will also continue working to expand the visibility of Westell with investors, including marketing our story with new analysts and investors. This will include participating in the Northland Capital Markets Growth Conference on March 9 in New York City, as well as additional yet to be determined events. Look for future announcements, and we hope to see some of you in attendance.

So with that we’d now like to open up the call for your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And from NCM, we have Mike Latimore on line. Please go ahead.

Mike Latimore

Yes, good morning, guys. On the intelligent site management business here, can you talk a little bit more about that? Did you have both hardware and software purchases? And then was it more U.S. or international?

Tom Gruenwald

The uptick was primarily U.S. but we did have some international uptick as well. It’s primarily hardware, as well as service agreements that we have.

Mike Latimore

Fair enough. And then, sometimes like carriers will put in order, but after shipment, putting orders in December, but after shipment, starting in January, their next fiscal year. Did you see any of that dynamic this front?

Tom Gruenwald

We did see some of that, it wasn’t – there wasn’t a lot of it, but there was certainly some. Again, things that they place, say, in the month of December are typically going to be shipped for us the next quarter.

Mike Latimore

Are those kind of a normal pattern?

Tom Gruenwald

Yes, it was a normal pattern. We didn’t see anything unusual.

Mike Latimore

Okay. And then, on the DAS, I guess you mentioned maybe some shipments for ClearLink DAS in the June quarter, I guess. What are the more visible customers there? Are they Tier 1s? Are they the neutral host, the channel? Can you talk a little bit more about that?

Tom Gruenwald

The initial customers will probably be neutral hosts or possibly some customers like for instance, National Labs and things of that sort.

Mike Latimore

Okay. And then just on the OpEx, you said maybe it come above a little in the June quarter. I guess should we assume the March quarter OpEx similar to the December quarter OpEx?

Tom Minichiello

Yes, that would be a good assumption. Mike, it’s probably going to not change all that dramatically in the fourth fiscal quarter, but certainly in the first quarter of fiscal 2017 or the June quarter. We plan on taking actions that would change that number in a significant way.

Mike Latimore

Got it, okay. And then just last on gross margin, what’s the – any new view on what’s the sort of consistent target gross margin of the year?

Tom Minichiello

Well, again 40% or better is what we need to do as a business, Mike, and that’s our goal. And year-to-date we’re at 39.8% as I mentioned. So we’re right there, volume is an important ingredient, but as you also saw this quarter and the CSG results, the mix can play a equally important factor and certainly the ISM business increasing as it did in this past quarter, is a big help.

Mike Latimore

Okay. Thank you.

Operator

From Zuma Capital we have Brent Morrison on line. Please go ahead.

Brent Morrison

Hi, guys. Thanks for taking my call. Where there any 10% customers in the quarter?

Tom Minichiello

Yes, Brent, there were actually three 10% or greater customers in the third quarter.

Brent Morrison

Okay. And any new – were those any new customers or recurring?

Tom Minichiello

No, there was one that hasn’t been a 10% customer in quite sometime. And there is another that’s been a 10% customer in certain other previous quarters. And then the other one was – has been pretty consistent.

Brent Morrison

Okay, great. And that leads into my next question. Last quarter you mentioned with the newly built sales force, you were seeing new revenue opportunities. Can you maybe elaborate on that and was this new customer a product of that?

Tom Gruenwald

Yes, certainly the new customers are product of that. I think we’re adding one or two new customers a quarter and we also have seen some – we’re starting to get some traction in Latin America as well that we haven’t seen before. Again that’s because of renewed sales focus.

Brent Morrison

Would that be Mexico, Latin America?

Tom Gruenwald

Well, there’s – we do business in a couple of different countries in Latin America.

Brent Morrison

Okay. And then how should we think about R&D between the two segments. IBD, it’s much higher as a percent of revenue. Should we see – okay, IBW, should we see the R&D in IBW come down to roughly in line with the percent of revenues equal to CSG?

Tom Gruenwald

I think over time you’ll see that, yes, I mean, that’s where we have to shoot.

Brent Morrison

Okay.

Tom Gruenwald

It’s been high because we’ve done a lot of the new product development. But over time, we’re going to shoot for a pretty consistent operating model between the three segments.

Brent Morrison

Okay, that’s all I have. Thank you, guys.

Tom Gruenwald

Sure.

Operator

From CSC Investment Management, we have Jeff Bronchick on line. Please go ahead.

Tom Gruenwald

Hi, Jeff.

Jeff Bronchick

Hi, good morning.

Tom Gruenwald

Good morning.

Jeff Bronchick

Just two questions, what you’re saying is that at the quarter – in the Q1 of your new fiscal year, you are going to announce a restructuring program that will reduce operating expenses, is that what you’re trying to say?

Tom Minichiello

Yes, Jeff, what we’re doing is planning for fiscal 2017 and in that plan – we’re in the midst of that now, it’s the middle of February. The year starts April 1, so as we finalize that plan it will include expense reductions and – and probably all the areas, but certainly in the R&D area, as we get the product – the ClearLink DAS product out into the market will be through the initial, first 1.0 release of that product. And we’ll be able to do that late this quarter and have it in position where we can have lower operating expenses in the June quarter.

Jeff Bronchick

It’s just, as a quicker question, is there – where is the status of that lease on the building? Is that – doesn’t that come up next year?

Tom Minichiello

Yes, it comes up in late summer of 2017.

Jeff Bronchick

Got it, okay. So, that would be part of the plan?

Tom Minichiello

Well, late summer of calendar 2017. It’s – that’s 18 months away. Yes, it would be fiscal 2018.

Jeff Bronchick

Got it. And just as so we need know, obviously, there is seasonal issues and obviously there’s to-and-fro of big customers, which difficult, whatever have visibility in them sometimes, but when you look at the revenue increases you’re starting to see both by being more effective, by having the bodies there, I mean, is the increase that you’re seeing, are these – we had a great quarter and we have to fight it out for next quarter again or is there some contracts or pace of building or I [indiscernible] is that – this is legs that you can look out, maybe not five years, but you might get 18 months of improvement based upon the kinds of work you’re doing now.

Tom Minichiello

Yes. It’s not happening to the extent that we want, but it’s certainly better than it was last year, primarily among the customers that are big in the outside plant area. There is the program that’s called CAF2, the Connect America Fund and that funding precipitates build outs over a number of years. And some of those folks are good customers of ours and so we’re starting to see that revenue come in and we know that revenue will last over time. And it helps us a lot because it lets us manage our supply chain better. And again, lets us plan over the – out into the future.

So we are actively working on getting more of the type of repeatable revenue that you’re talking about. The other area where we’re focusing – just starting to focuses in the services area because again that leads usually to recurring revenue.

Jeff Bronchick

And when you look at sort of the capacity of both the organization and your manufacturing, I mean, and maybe the addressable market and your relative side, I mean how do you look at, you look at the company just as terribly under utilized and sort of just getting going with sort of the new efforts and the new team or – even I’m trying to say it’s like you look at addressable markets or look at the revenue of this company. But they run what a great quarter, but it seems like there is enormous under utilization and the company could be two or three times its size, properly executed in the decent environment. How do you look at that?

Tom Gruenwald

Well, that’s exactly our thesis coming in here last year that the company suffered from both lack of execution and under utilization. And we’ve made a lot of progress in execution. We’ve made a lot of progress in moving the culture to one of execution oriented and accountability. And it is under utilized and that’s our plan, that’s why we initially focused on sales because a lot of the fundamental processes in the company could support a bigger company.

Jeff Bronchick

Great. All right, thank you.

Tom Gruenwald

Sure.

Operator

[Operator Instructions] And we have no further questions at this time. I will now turn it back to Tom Minichiello for closing remarks.

Tom Minichiello

Well, thank you everyone for joining us today. We look forward to speaking with you again in the near future. Thanks.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for joining. You may now disconnect.

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