Westell Technologies Inc (WSTL) designs and distributes telecommunications products primarily to major telephone companies.
WSTL has been going through a transformation in the past year, and has sold off two of its major business units. It sold the Customer Networking Solutions (CNS) division on March 17th, 2011 to NETGEARInc. for a gain of $31.7M. The transaction transferred associated assets and liabilities to NETGEAR except for the assets of the Homecloud product family. The Homecloud product is being kept, and will be part of the growth strategy of the company going forward.
WSTL sold the ConferencePlus division on On December 31st, 2011 to Arkadin S.A.S. for $41.0M in cash. The result of the two sales leaves WSTL with the Outside Plant Systems (OSP) division. The OSP division designs and distributes next-generation cabinets, enclosures and mountings, power distribution products, network interface devices, industrial switches and connectivity panels, T1 demarcation equipment and more.
WSTL kept the Homecloud product family, and plans to continue to build out the solution. The Homecloud product consists of ultra-high-speed applications, capable gateways and other applications-capable devices for the home network, plus associated software for home networking devices, plus Web-based services, to enable the delivery of new services into the home networking environment. The solution will enable customers, such as cable companies, to deliver new services into the home for a variety of applications, including enhanced security, media and information management, sharing and delivery, home control and network management. This is a new business segment and will require WSTL to invest resources to deliver the solution, but it could be a great growth business. They plan to use their current service provider customers as a delivery mechanism, along with new partners such as cloud based ISP's and online retail channels.
Due of the recent transformation of the business, using historical financials is an inaccurate method for predicting future numbers and calculating valuation ratios. The best way for a value investor to determine if WSTL is a good buy is to value the assets and ignore any growth.
WSTL has a very strong balance sheet at the present time. Due to the recent business segment sales, as discussed above, WSTL has plenty of cash, and a majority of the current assets are in cash. According to the latest 10-Q, WSTL has 129.6M in Cash, and with 66.4M shares outstanding, results in cash per share at $1.60. If you add in short term investments of $20.7M, the per share value is $1.90. The current stock price is ~$2.37, resulting in 65% of the stock price is cash. Even more so,WSTL has a market cap of $157M with $129.6M of cash on the books. NCAV per share is $2.42, meaning the stock is currently trading right around NCAV, with most of the current assets in cash and short term investments. On an asset valuation WSTL is cheap. The question is what will the company do with the cash on the balance sheet, and will be it shareholder friendly?
Book value calculates to $2.91 per share, resulting in a P/BV of .80 indicating a discount of 20% to book value.
Previously I mentioned that using historical results was not useful, but I did review the last 10 years of financials to determine how well management performed. I did not use the results in determining the value of the company. Reviewing the past 10 years' financials, the company reported 3 years of negative earnings. Two of those years were 2008 and 2009 when the recession impacted many businesses. Besides those two years, the only other negative earnings were in 2002. So the company has had a good track record of positive earnings hinting at management performing well.
OSP Business - Existing Business
Let's take a look at the OSP division to see how it has done recently, because it is the last surviving business segment. The recent 10-Q showed a large revenue decline from 2010 to 2011. The stated reasons for decline are attributed to the Verizon (VZ) strike, and a shift from T1 lines to Ethernet for Cellular backhaul. Shifting from older T1 lines to the more efficient IP method is an ongoing shift. The shift has caused margins to shrink by 4.5% over the past year. WSTL has tried to align their sales and marketing costs with the declines, so as to not affect the net margins. We see that the company has increased their R&D investment, even though revenue has dropped. This is a positive sign because the increase was due to increased investment in the growing Ethernet and Wireless products. I like to see this increased investment because the company has identified the shortcomings in the product line concerning the Ethernet backhaul product line, and they are addressing this issue.
The company is repositioning itself to focus on higher margin products within the OSP division and avoid selling commodity products (old CNS products - modems and gateways) and avoid products that compete with giants like Cisco (CSCO) and Juniper (JNPR). Management is targeting Gross Margins in the historical range of40-45% for the business unit.
The assets that were carved out of the CNS business unit were that of the Homecloud product family. We don't know a lot about the Homecloud product because it has not launched yet. According to the information we know, the Homecloud solution is trying to tackle the following problems:
- Home users have lots of personal content scattered among many personal devices
- Data is also shared across different cloud services
- Constantly changing privacy policies and business terms
Benefits of Homecloud solution are:
- First and only cloud platform for the home
- Robust API seamlessly links devices and their files
- Securely shares data with online cloud services
The initial applications provided by Homecloud are:
- Local and Offsite data backup
- In-home file synchronization
- Whole-home media sharing
The solution sounds very interesting, but it will depend on the implementation of the solution, and how easy it is for users to use the solution. It has to be drop dead easy, and provide value. If WSTL can deliver a valuable product, it will add significant value to the company. The list of current customers that can be leveraged to deliver the Homecloud solution is very impressive. In order for the company to pull off this type of solution, they realize that they do not have everything needed to deliver upon their vision. They need to acquire new products and skill sets. They are hunting for a new senior executive for corporate and business development to seek out opportunities to build the Homecloud product solution.
The company has been buying back shares of the company. During the 2011 calendar year, the company purchased back 1,772,224 shares at an average cost of $2.0889 a share. It is positive to see the company buying back stock when the shares are not at an all time high. With today's price at ~2.40, the share buy back is money well spent. The company still has $17M approved for share buybacks.
In the latest Westell presentation, the use of the cash was stated as:
Grow Outside Plant Systems and ConferencePlus and Return value to Shareholders
Since the presentation was dated Oct. 2011, we know that the company sold the ConferencePlus unit, so the cash will be used to grow the OSP and return value. I like to see that management are shareholder friendly. Insiders own ~6% of the outstanding shares in WSTL.
I believe the company has done a good job of transforming itself by selling off assets that were not high margin, and focusing the business on profitable, high margin products. The company does not have any debt, lots of cash, and is currently trading at NCAV. Even better, you can subtract out $1.90 per share for cash and short term investments, and pay ~$0.50 for the operating business.