Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Westell Technologies, Inc. (NASDAQ:WSTL)

F2Q 2013 Earnings Call

November 6, 2012 9:30 am ET

Executives

Brian Cooper - SVP & CFO

Rick Gilbert - Chairman, President & CEO

Analysts

Mike Latimore - Northland Capital

Greg Burns - Sidoti & Company

Mohammed Ahmad - Beeham Capital

Brian Horey - Aurelian Management

Operator

Welcome to the Second Quarter Fiscal Year 2013 Earnings Call. My name is Kim and I'll be your 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. Mr. Cooper, you may begin.

Brian Cooper

Thank you, Kim. Good morning everyone and welcome to our conference call covering the fiscal year 2013 second quarter results for Westell Technologies. We issued our earnings news release last night and a copy is posted on our website westell.com. On this call, Rick Gilbert and I will update you on the business and our financial results.

Before we begin, please note that our presentation and discussions contain forward-looking statements about future results, performance, or achievements financial and otherwise. Words such as should, 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 31st, 2012, 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 also will include non-GAAP financial measures. We have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website westell.com.

I will begin this morning with a review of our second quarter financial results, which are more fully described in the press release. I will then turn the call over to Rick Gilbert, Westell's Chairman and Chief Executive Officer, who will provide perspective on our performance and strategic progress, and we will conclude by taking questions.

For the second quarter of fiscal 2013, Westell Technologies reported consolidated revenue from continuing operations of $9.9 million. Revenues are almost fully attributable to our Westell division, and the relevant comparisons are at that level. The plan to wind-down of the CNS modems and gateways business is now essentially complete.

Net loss for the quarter was $2.2 million compared to net income of $3.5 million in the second quarter of FY'12. When we exclude discontinued operations, and some one-time items, non-GAAP net loss for the quarter was $1.8 million compared to non-GAAP net income of $0.4 million in the second quarter of FY'12.

EPS for the quarter was a loss of $0.04 per share on a GAAP basis, which compares to earnings of $0.05 per share a year ago. On a non-GAAP basis, EPS was a loss of $0.03 per share in the second quarter this year versus income of $0.01 per share in the second quarter last year.

From a divisional perspective, the Westell division reported revenues of $9.9 million for the second quarter. Although this is down 5% compared to the second quarter of fiscal 2012, it is up 5% sequentially, compared to the first quarter of fiscal 2013. And there were a number of improving trends.

First, sales in most of our product categories were up compared to the prior year quarter. Second, even though sales of our legacy T1 products were down year-over-year, they were up sequentially compared to T1 sales in the FY'13 first quarter. From what we're seeing, we think its spending constraints from our customers may have eased a bit. And third, our new products are starting to contribute to sales, and sales from those new products should be increasing over the coming quarters.

Gross profit for the Westell division was $3.4 million in the quarter. This compares to $3.9 million in the second quarter a year ago, and $2.8 million in the first quarter of this year. Gross margin was 35.0%, compared to 37.8% a year ago, and 29.4% in the first quarter of this year. Gross margin remained sensitive to revenue levels and the higher cost associated with new products during our introductory periods.

Westell division operating expenses were $4.6 million, compared to $3.5 million in Q2 a year ago. The main factors behind the increase are basically the same as we've discussed in recent quarters. In particular, given our focus on adding revenue, we've invested in new products and in changes in our sales and marketing. We also largely completed the consolidation of our Canadian operations during the quarter.

As we had anticipated with the business in transition, the Westell division posted an operation loss of $1.1 million for the quarter. That compares the operating income of $0.4 million in Q2 a year ago, and to an operating loss of $2.1 million in Q1 of this fiscal year.

For the CNS division, the wind-down of the modems and gateways business is essentially complete and most of the activity is related to Homecloud, which was launched on September 26th. In addition, we incurred a one-time expense of about $0.5 million to resolve a dispute related to the CNS asset sale.

Turning to the balance sheet, we had $124.4 million in cash and short-term investments at September 30th, 2012. That is down about $7.5 million, compared to $131.9 million at June 30th, 2012. The largest use of cash during the quarter was for share repurchases, which totaled $2.1million at a cost of -- I'm sorry, totaled 2.1 million shares at a cost of $4.7 million. It was $3.0 million remaining as of September 30th, for additional share repurchases under our existing board authorization.

With that overview of the financial results, I would now like to turn the call over to Rick Gilbert, Westell's Chairman, President, and Chief Executive Officer.

Rick Gilbert

Thanks, Brian. During the last three calls I reviewed our strategy, described the market segments where Westell is active, including our new wireless products, and discussed the state of the North American telecom marketplace.

I believe our recent earnings calls have given a fairly complete view of the Westell business, and since our strategy has not changed I will avoid being repetitive during this call. That said, it is important to note the progress we've made in transforming Westell from a business that was focused primarily on legacy wireline products, to one offering a much greater emphasis on new wireless products.

When we look at the second quarter results for the Westell division at a high level, we see a sequential quarter-to-quarter revenue gain of about 5%, which represents good progress. These results still leave us below our annual growth target of between 10% and 15%.

However, when we look at the second quarter revenue and bookings by product line, we see that the fastest growth is primarily in the new wireless products the DAS panels, the Ethernet switches in the sale side optimization products. This is a very good sign. Well, it takes time to shuffled new products through carrier qualifications and approvals, we are already seeing ramping sales and compelling opportunities in these wireless market segments.

In addition, sales of our legacy products appeared to have stabilized. In fact, sales of our T1 products also increased sequentially compared to the first quarter. So from our perspective, the second quarter results and trends are very encouraging.

During the last call, I said we had added enough new products to justify reorganization of our sales and marketing resources. I'm happy to report that those changes are essentially complete and we have a Westell sales organization that is much better suited to our new products and the opportunities in front of us.

During the second quarter, we also completed the consolidation of most of our Canadian operation into our Illinois facility. This step should increase efficiency and we reduced expenses in the coming quarters.

Finally, I would be remiss if I did not congratulate the Westell team on the launch of Homecloud. At the end of the second quarter, we began selling the Homecloud digital home manager and we've already received positive reviews from the technology media. We fully expect to achieve our first release stores of getting useful customer feedback, confirming the Homecloud trademarks, and gaining insights into how to market this unique product.

At this point, we've not yet decided the future path of Homecloud. But I'm very proud that Westell has introduced a distinctive new product from the home networking marketplace.

In summary, my team and I are committed to our strategy and excited about the continuing transformation of Westell. We're motivated by the momentum of our new products, and we remained confident that these changes will drive shareholder value.

And 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 session. (Operator Instructions) And at this time, we have a question from Mike Latimore from Northland Capital. Please go ahead.

Mike Latimore - Northland Capital

On your, say newer and higher growth categories, can you talk a little bit about the seasonality in those businesses, those product lines versus your legacy product lines, particularly may be in the December or March quarters?

Rick Gilbert

That's an interesting question Mike. We haven't had enough experience with the new product lines to see seasonality yet. And I'm -- I'd be a bit surprised if we saw it because of the real push for wireless build-outs right now. I think they're pushing as fast as they can. And I would expect the wireless product areas to be a little less affected by seasonality than some of the older legacy products.

Mike Latimore - Northland Capital

Did you have a rough revenue split here may be wireless versus wireline or new versus legacy product?

Rick Gilbert

Well the wireless products are still fairly small because they're new and we're not going to split out the revenue, but we're seeing certainly real contribution now for the wireless product lines. And as I said those product lines are the fastest ramping as you might expect with new products.

Mike Latimore - Northland Capital

Okay. And you talked a little bit about consolidating your Canadian operations I believe into may be some more efficiency. So do you have sort of a rough quantification of kind of what OpEx might look like, taking off the one-time expense form the quarter and then having this consolidation closer. Are we talking 5% down or really what kind of level are you talking about?

Rick Gilbert

Well I'm going to turn that over to Brian in a moment. But let me give you a qualification, a qualitative analysis because I think it's important. Our goal is to consolidate as much of the operations as we can into the Illinois facility and essentially our long-term goals to have design centers where we've new engineers. And so we maintain a design center in Canada. We also have a design center out in the West Coast through the wireless -- some of the wireless products. And overtime we'd like to make sure that most of the operations are here. We think it certainly would be in the most efficient way to do business. Now, Brian do we have anything on the quantification of that.

Brian Cooper

Yeah Mike, and it's not going to be a lot of operating expense, may be $100,000 or $200,000 in a quarter. I think that would be a lot. It should be less than that. But you'll see some impact also in the gross margin where we'll get more efficiencies. We're still carrying the to put kind of positive, the transition in the gross margin.

Mike Latimore - Northland Capital

Okay got it. And then the -- did you have -- did you see much in the way of cash taxes in the quarter, and if so what level was that amount and then is the stock-based comp number from the quarter kind of a good one to use going forward?

Brian Cooper

On the cash tax side well there wasn't much of anything. I don't have a national number, but next to nothing. And yeah the stock comp should be about right. It might pickup just a tiny bit in the next quarter and then stabilize there based on some changes we've made.

Mike Latimore - Northland Capital

I guess one another. Do you have what percent of revenues came from say your top two customers?

Brian Cooper

We don't have a current number for that.

Operator

Thank you. Our next question comes from Greg Burns from Sidoti & Company. Please go ahead.

Greg Burns - Sidoti & Company

Just a question about Homecloud, I understand the benefit versus some of the other solutions out there like iCloud in terms of the privacy, but when we think about so many other solutions like Western Digital My Book Live. How does Homecloud differentiate from those other Homecloud type solutions?

Rick Gilbert

Well, first of all, I mean as you correctly pointed out there are other cloud solutions and you also correctly pointed out that the big concern on the cloud-based solutions are privacy and security. They work fine, but they have those limitations. They also have a limitation of cloud seeding process where if you are moving a lot of data up to the macro cloud, it could take a long, long time over even fast broadband links. So the concept of application enabled routers or application enabled NAS devices, network-attached storage devices, it’s something that has taken on more and more emphasis in the home networking market slicing.

You do see products out there, most of them come from outer vendors who have added network addressable storage options or from network addressable storage vendors actually people that build the storage with applications out to access storage.

What Homecloud does is it has a very nicely implemented application capability where you can not only use the built-in apps that Homecloud comes with, but you can add your own apps fairly easily through the software developer’s user kit. And in fact, at this point, we've built a number of apps that are built in. We’ve also added a number of example apps to the app center and we’re getting very good feedback on that structure.

The other thing Homecloud does that nobody else does is it integrates with the operating system deeply. And so, for instance, I can right click on a folder under a Mac or a PC and I’d literally get a Homecloud context menu that comes up and allows me to invoke the applications, various applications, both Homecloud base and cloud based applications directly from the operating system, and no one else has done that.

Greg Burns - Sidoti & Company

And then in terms of some of the functionality you have in the road map specifically around both access can you just give us an idea when that might be coming?

Rick Gilbert

Well, the two biggest features we're see right now from Homecloud are remote access and an android apps. I can tell you that the android app is virtually done and will be launched in the app center very soon. I've been trying with it myself already. And the remotes access is something that we're -- we've have certainly looked at ways to do it. We want to do it right when we do it and it's going to take a little bit longer to do the remote access. But it's certainly something that's on our roadmap. And at the same time we continue to add other applications, for instance that some of the ones we've added have been the Picasso application or the YouTube application or the Amazon S3 application. All those are already in our app center and we'll keep adding additional apps.

Greg Burns - Sidoti & Company

Okay. And then I guess just looking forward; do you feel you have the necessary resources to really bring this thing to market?

Rick Gilbert

No, actually, I mean, to be honest, we're not a retail player and we started Homecloud during the time where we owned CNS. I've gone through it many times in terms of the recently started Homecloud was, as we saw interest from some of the carriers relative to running applications on modems. So one of the reasons we have put out a limited release and are trying to get customers feedback and technology immediate feedback is that we built a very interesting device, but we need to figure out better ways to bring it to market or other ways to bring it to market on a large scale. And the first step of course before you bring anything to market on large scales, make sure it works the way it should work, and get the media and customer feedback. And that's exactly what we've been able to do here and so far its looking best and quite good.

Greg Burns - Sidoti & Company

So could you potentially look to license this to a larger vendor or is that a possibility?

Rick Gilbert

We could license it. We could sell it outright. We could put in a retail organization ourselves. Although I think the latter is not the most likely path.

Greg Burns - Sidoti & Company

Okay. And just lastly, do you have any potential impact from Hurricane Sandy the damage that caused either providing sales or stimulating sales?

Rick Gilbert

Not yet. I wouldn't be surprised that we would see actually additional sales because of Hurricane Sandy. There's going to be replacement of equipment for sure. And we do have some significant sales for instance in the Ethernet area. We have a large project that's underway in New York City subway system, and that one we've seen a delay and so forth.

Operator

Thank you. (Operator Instructions) And at this time, we have a question from Mohammed Ahmad from Beeham Capital. Please go ahead.

Mohammed Ahmad - Beeham Capital

Actually my questions were similar regarding Sandy and Homecloud. But regarding Homecloud, you had mentioned that you haven't determined the future path. Are there any milestones or thresholds you're waiting or expecting or is it purely based on the competitive landscape, or there are some other internal factors that you will take into consideration in determining this future path and if you can elaborate on that future path?

Brian Cooper

Well, catch 22 for us on Homecloud. As Rick pointed out it's the one huge missing future is remote. And we'd like to have a complete product before we fully explore our options in terms of licensing or selling the product through other vendors. And so right now what we've done, as I said is, and this is -- what we said in previous calls is we wanted to get the feedback, we wanted to get enough units out there, so we could verify functionality. And of course the thing is clearly upgradeable over the error. So, it's very easy for us to have the additional features. And I'd like to get the remote and the android step out before we take too many steps forward in terms of the next step for Homecloud.

Rick Gilbert

I think we've a caller.

Operator

Thank you. Our next question comes from Brian Horey from Aurelian Management. Please go ahead.

Brian Horey - Aurelian Management

Thanks for taking my call. Could you see things stabilizing and kind of moving forward this quarter? Can you talk about what kind of investment you see in Homecloud going forward obviously the strategic issue is still to be dealt with, but any interim -- what kind of investment do you expect you're going to making in Homecloud going forward?

Rick Gilbert

Well we're certainly going to have reduced investment in development and testing obviously the big push through for an initial release, used a lot of testing resources, and there are some development resources that won't be going forward. But we're going to maintain at least for a while a development team for these additional features and probably spend a little bit more obviously on the marketing side of thing, we barely marketed the product at all. And that was intentional, but realistically, we've programs for instance that we will be launching like a developers, external developers contest, so that we can see applications developed by some of the interest groups and things like that that are out there and get little bit more buzz about Homecloud out there.

So, I see a little bit more spending in the marketing, a little less spending in the testing that we've had to do for this launch. Realistically, this quarter that we're in right now, we will probably spend at a similar rate to what we ended last quarter but then it will probably reduce a bit.

Brian Horey - Aurelian Management

Okay. And then, with respect to the business as a whole, can you talk about, what you see as the path to profitability, to get the company back to profitability at this point and what are the key things that need to happen and any sense of timing on that?

Brian Cooper

Well, as you now our strategy, we were a public company we have to get bigger. Our strategy was to work on organic growth. And as I said in the call on organic growth rate of 10%, annualized organic growth rate in telecom are 10% to 15%, it's fairly healthy. If we depend entirely on organic growth rate, to get profitable, we're going to start doing $12 million quarters not $10 million quarters. And so, part of our path to profitability is to see a continued rapid ramps in these new wireless products. And we're pretty optimistic about that. We made some real progress in some of these products like the DAS panels and the Ethernet products and kind of the Tower-Mounted Amplifiers that are starting to see some real interest.

So, I think we're pretty optimistic about those products. One of the things that also happened this quarter and we will see that it maintains, as we saw some stabilization of some of the legacy products. And again, in the aftermath or something like Sandy, it will be interesting to -- not to be replaced as well, so that's sort of interesting to us on a short-term basis.

The thing we haven't talked about in this call is the other part of our strategy of course is to find and acquire other products through an inorganic process and find the right acquisitions. And that's the -- it's a big challenge to find exactly the right company at the right price that is available and fits into our overall strategy, but that's still a key part of our strategy, and we need to execute against that as well.

Brian Horey - Aurelian Management

Okay. Given the headwinds that the industry has faced in the last three to six months, does it seem like prices have gotten more reasonable on the M&A side, evaluation has certainly come down for a lot of public companies?

Rick Gilbert

It's interestingly enough. I don't think you can generalize that answer. I mean, it's a specific situation, I wish I could give you a general answer but company-by-company we've seen people expect outrageous multiples and we see people that are more reasonable but have other issues. And so I think our big approach on M&A is we'd like to do M&A that fits into our strategy but a delay is better than a disaster from our perspective and we're going to be very, very careful on the acquisitions we do. We're very happy with the interim acquisition and it's very small but we need to do something bigger and we need to do a good one.

Brian Horey - Aurelian Management

Okay. And then lastly, do you all see doing second reporting on the wireline versus wireless one, when the wireless side of things gets scales up little more?

Brian Cooper

Hi, Brian. This is Brian Cooper. I think it's a little too early to make a call on something like that. But certainly in the near-term we wouldn't be reluctant to do that. We really have products that stand both sides, the wireless products are still small and we're not managing those as separate businesses but it's really one business with different product lines, so at this point, no.

Operator

Thank you. This concludes the time we have for the question-and-answer session. I'll now turn the call back to Mr. Brian Cooper for closing remarks.

Brian Cooper

Thank you. Just wanted to thank everybody for joining us for the call. We're very happy with the momentum we're starting to see in these new products and are pretty optimistic as we go forward. So thanks for joining us and look forward to the next call.

Rick Gilbert

Yeah, thanks everybody.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Westell Technologies' CEO Discusses F2Q 2013 (Qtr End 9/30/12) Results - Earnings Call Transcript
This Transcript
All Transcripts