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Edited Transcript of WSTL earnings conference call or presentation 8-Aug-19 1:30pm GMT

Q1 2020 Westell Technologies Inc Earnings Call

Aurora Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Westell Technologies Inc earnings conference call or presentation Thursday, August 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred S. John

Westell Technologies, Inc. - President & CEO

* Thomas P. Minichiello

Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Marc Silk

Silk Investment Advisers - President

* Steven Henry Busch

Everglades Resources, Inc. - Founder & President

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Presentation

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Operator [1]

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Welcome to the Westell Fiscal Year 2020 First Quarter Earnings Call. My name is Ellen, and I will be your operator for today's call. (Operator Instructions) Please note that this conference call is being recorded. I would now like to turn the call over to Tom Minichiello, Westell's Chief Financial Officer. Tom, you may begin.

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [2]

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Thank you, Ellen. Good morning, and welcome to our conference call to discuss the fiscal year 2020 first quarter results for Westell Technologies. The news release we issued yesterday afternoon is posted on our website, westell.com.

On this call, Stephen John, Westell's President and Chief Executive Officer, will begin with a discussion of our business and growth initiatives. I'll 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 contain 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 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, 2019, 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've provided reconciliations to the most comparable GAAP measures in our news release.

I will now turn the call over to Steve.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [3]

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Thank you, Tom. Good morning, everyone. As described in our news release, on a sequential quarter basis, increased revenue from our IBW business in 1Q was more than offset by lower revenue from our ISM and CNS segments. While we achieved increased sales across all IBW product lines, we were particularly pleased to recognize our first revenue from public safety products that are now part of a suite of new Class A repeaters we've been working to bring to market under an OEM partnership agreement.

As mentioned during our last call in May, we had testing delays with some of these products that I'm happy to now report have since been resolved.

In our other 2 business segments, lower sales of remote units affected ISM revenue, while the CNS decrease was primarily due to lower sales of network connectivity panels and other legacy product lines.

In a moment, Tom will go over the financial results in more detail.

I'd like to now talk about our shifting focus to organic growth and share with you several recent internal changes that I believe better position the company for successful execution. These changes are designed to focus significantly more resources on the value-creating opportunities we have in growth markets like fiber access, in-building public safety and OnGo.

To this end, we have synergized the previously separate CNS and IBW product line management and product development groups into a single functional organization to support both businesses.

The clear mandate here is to reduce sustaining engineering activities on mature product lines, so that we can add those vital resources to areas of future revenue growth and improve our time to market for new products.

Due to some of the unique aspects of our ISM solutions, most notably the heavier software content, the product organization will remain as is. Nonetheless, we are also shifting more ISM lead sources towards new IoT offerings we've been working on to accelerate our time to revenue.

Let me now bring you up to date on specific initiatives in process across all 3 business segments to drive revenue growth.

For IBW, we see In-Building Wireless for public safety as the market opportunity with the highest probability of success for new near-term revenue. With the product testing issues behind us, we are now positioned for increased growth in this market. For the past several years, our offering is limited to Class B, single channel, 1/2-watt and 2-watt repeaters for the 700-, 800-megahertz frequency ranges.

The new suite of Class A repeaters available to us through our OEM partner include additional capacities, frequency ranges, features and channelization that enable us to address a much larger portion of the market.

Additionally, we have executed -- extended our partnership arrangement through a recently executed license agreement. Under this new agreement, we will be transitioning over the next 2 quarters from a straight OEM arrangement to a licensing model that can provide for greater control over inventory and costs and have the opportunity to further expand our product offerings to include distributed solutions that customers need for larger deployments.

Staying within IBM, but moving over to OnGo, we discussed during last quarter's call our new edge solution for OnGo private LTE networks in the 3.5-gigahertz CBRS frequency band. We continue to make progress with our initial plans for GoEdge, including the small cell solution we jointly developed with ip.access as well as network software from Druid, who we are partnering with to create robust, reliable and secure cellular connections with private networks.

In addition to system testing right here in our Aurora headquarters facility, we plan to participate in the upcoming initial commercial deployment for IDC tests with 2 potential industrial customers. These IDC tests, scheduled for September, are an important step towards the various regulatory approvals needed before the CBRS spectrum is open for full commercial deployment. If all goes well, we would expect the earliest possible revenue opportunities for us to be in November.

On the CNS and ISM fronts, we continue to focus on differentiated network densification solutions to enable future 5G connectivity more efficiently as well as the related requirement for increased remote monitoring intelligence at the network's edge. Capacity, intelligence and deployment simplification at the edge are key value differentiators in areas of core expertise within Westell that we were building on.

We continue to grow our fiber access product portfolio to address the needs of service providers and network operators for simplified, low-cost deployments as they establish the foundation for the higher-speed, higher-capacity 5G connections in the future.

In addition to our current suite of specialized modular cassettes, collapsible reeling systems and fanout and other preterminated assemblies, we are making good progress on a new, innovative, below-grade solution that we believe overcomes a key hurdle in network densification, extending power and fiber to areas that would otherwise not meet local municipality approval due to aesthetic requirements.

As we noted on our last call, it is essentially a large, below-grade plastic enclosure, fully equipped and incorporates many of our products across all 3 business units: power distribution, fiber connectivity and access, passive RF components and remote monitoring.

Our marketing efforts to date have resulted in opportunities with a number of service provider and neutral-host operators, both domestic and internationally, and we expect to be in trials this year with 2 customers.

For ISM, we have also increased sales resources over the past half year and now have a growing pipeline of opportunities in new markets with new applications, including penetrating deeper within existing accounts as well as expanding into adjacencies such as broadcast, utilities in select international markets. As I mentioned in our last call, we won a new region with our largest existing domestic customer while we're making inroads with another large domestic service provider.

Additionally, we recently installed our RMC-700 series ISM remote device on a small cell radio as part of a wireless carrier's 5G trial. Our industrial pump monitor solution that leverages are Optima Cloud often service is undergoing field trials, and we recognized first revenue in June quarter for both a custom solution to monitor generators for a large national retailer and for our next-generation RMX-4000 that we discussed during our last call.

We are working each and every day to develop new and differentiated products and solutions that our customers need to transform their networks for the future, which is network densification and intelligence with the edge to support 5G and IoT.

And while we'd like to see a more rapid pace of change, these transitions take time as they are typically more evolutionary versus revolutionary. We believe we are on the right track and in the right markets which have the highest probability for sustainable success and that can drive increased shareholder value for Westell.

With that, let me turn the call back over to Tom.

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [4]

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Thank you, Steve. Let me provide some added color on our quarterly results, beginning with revenue.

For the first fiscal quarter ended June 30, 2019, revenue was $9 million compared to $9.7 million in the fourth fiscal quarter ended March 31, 2019.

As Steve noted at the top of the call, the sequential quarter revenue performance was due to the lower ISM and CNS revenue, which more than offset the IBW increase.

IBW's sequential increase was broad-based across all products, safety and commercial repeaters, RF system components and DAS conditioners.

Within public safety, we achieved higher sequential sales of our existing Class B repeaters as well as our first revenue of Class A repeaters.

ISM revenue, while affected by overall lower sales of remote units primarily to our largest domestic service provider customer, did include first revenue related to a new generator monitoring solution as well as for our new RMX-4000 remote.

The CNS decrease was due to lower sales of network connectivity panels and late life cycle products, such as tower-mounted amplifiers and T1 network interface units. This was partially offset by higher sales of power distribution products and integrated cabinets.

Moving on to the rest of the operating results. Consolidated gross margin was 36.1% in 1Q compared to 37.6% in 4Q. Following 9 consecutive quarters of achieving our target of 40% or better, higher costs associated with excess and obsolete inventory, particularly in our IBW business, have resulted in sub-40% gross margins over the last 2 quarters. Excluding these costs, gross margin would have been over 43% in both periods.

Non-GAAP operating expenses in 1Q were $5 million, down significantly from the $5.9 million in 4Q and consistent with the guidance we gave you on last quarter's earnings call.

With the higher -- with part of the higher OpEx -- I'm sorry, excuse me, while part of the higher OpEx in 4Q, as we mentioned last call, included some M&A-related expenses, the internal organizational changes that Steve just spoke about netted us some additional reductions.

Going forward, our target is to continue to manage quarterly non-GAAP OpEx towards the lower end of the $5 million to $5.5 million range we guided to last quarter.

The improved OpEx, partly offset by the lower gross profit, resulted in a 1Q non-GAAP operating loss of $1.8 million compared to $2.2 million the quarter before.

Non-GAAP net loss and EPS was $1.6 million and $0.10 per share in 1Q compared to $2.1 million and $0.13 per share in 4Q. The GAAP net loss in 1Q was $2.2 million or $0.14 per share compared to the 4Q net loss and EPS of $8 million and $0.52 per share, which included a nonrecurring, noncash accounting charge of $4.7 million for the impairment of IBW intangible assets.

Turning to the balance sheet. Our cash totaled $24.1 million at June 30, 2019, compared to $25.5 million at March 31. The $1.4 million cash used during the quarter was primarily the result of the operating loss.

Before I move on to questions and answers, let me summarize. We're strategically focused on growing requirements for densification at the edge of communication networks with solutions that solve for the increased capacity, intelligence and deployment simplification needs of our customers, all key enablers for future 5G connectivity and IoT.

We've taken additional steps with internal realignments to increase resources on those specific markets with the greatest opportunities for future Westell revenue growth, namely fiber access, OnGo, in-building public safety and new ISM applications. And we continue to focus on expense control and have taken actions to restore our OpEx back to optimal levels that provide for tremendous operating leverage within our business model without hindering our ability to grow in the future.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from Marc Silk from Silk Investment Advisers.

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Marc Silk, Silk Investment Advisers - President [2]

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So it seems like you have a very interesting shift that you're really going to focus on the areas that you see growth and strategic partnership, and it sounds like a legacy stuff. I think the -- where your enterprise value is, it looks -- it kind of looks like empty calories or empty revenue. So my thought is this. That's great shift, but I also think, and this is to the Board, I also think that with the cash, I would have a line in the sand. I think if the cash goes below $20 million, and you don't see a path to profitability or it's going to take longer, then I think that higher investment bank is not the worst thing in the world. But I also think it gives you a good few quarters to see if this works. But again, I think it's a right shift to focus on the right areas and stop putting money into the areas that this is going to show no growth. So you can comment on it if you wish, but I just think it's a nice shift.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [3]

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Good morning, Mark, this is Steve. Yes, I'll take your advice, and we'll -- we are constantly looking for ways to maximize shareholder value. We certainly believe that this shift gives us the opportunity to focus where we believe the revenue opportunities exist where the spend is shifting with our customers. Certainly, the slowdown of our legacy business is an indication that the shift is happening and the shift is moving towards newer markets. So we'll certainly take your comment on advisement and are constantly evaluating opportunities to maximize value.

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Marc Silk, Silk Investment Advisers - President [4]

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I appreciate it. And on an anecdotal note, can you kind of like say some things that have happened recently that maybe get you excited about these new areas? It's just that -- it gives us more clarity going forward.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [5]

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Yes. I think the biggest one, Mark, is what we're seeing in the public safety marketplace. Its -- the traction is real. More and more jurisdictions are taking serious the -- at enforcing the new requirements that are expanding requirements even into brownfield and existing buildings, not just new occupancies or newbuilds. So we're absolutely seeing a lot more opportunity there. And with this transition in our agreement, we also have the ability to expand our product offerings into the fiber DAS solution, which opens up a larger part of that market.

If you look at that overall market, the Class A, Class B, the products that we historically have had either through previous arrangements or through this OEM, only address about 25% of the entire market opportunity. The fiber DAS product that will become part of this agreement addresses the other 75%. So I'm very excited about that, and certainly seeing momentum around more work in the 5G space, the small cell space, which plays towards the strength that we're building in the fiber access.

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Marc Silk, Silk Investment Advisers - President [6]

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That sounds great. And then, Tom, last question. I didn't really see anything with regards to the share buyback. Did you guys buy any shares last -- this past quarter?

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [7]

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Marc, in the quarter -- in the first quarter of fiscal '20, there were no buybacks. The plan we had in place actually expired towards the end of the quarter before, but we certainly have an opportunity to take another look at it here in the month of August.

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Operator [8]

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(Operator Instructions) Our next question is from Steve Busch with Everglades Resources.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [9]

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So I mean, I like the fact that you have a new focus and a shift. But I mean, as a long-term shareholder, I think we've focused and shifted multiple times over the last 10 years. I mean what's different this time? Our revenues are dropping. How are we going to get up to this $12 million to $15 million run rate we've been talking about last couple of quarters when we're going in this southern direction?

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Alfred S. John, Westell Technologies, Inc. - President & CEO [10]

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Yes, fair comment and legitimate question, Steve. I think solving the challenge we had in public safety, I don't want to underemphasize the value that brings to us to give us an expanded product portfolio in a market that's well defined, that is growing and that there is existing spend. That's where I get the most confidence in what we're doing. I thought it was important to align our resources a little differently, so that we can bring product to market more rapidly and not spend as much of our time and effort on sustaining products that regardless of the effort that we put in there, the spend is shifting, and continuing to wrap resources around those that just didn't make sense to us.

So I think that's where I get the confidence that we'll see a trough in revenues and start to see revenue growth. There I -- the other thing that gives me confidence is our pipeline. Our pipeline has doubled in the last 6 months of new opportunities. And we're seeing different types of opportunities, larger opportunities, opportunities for more of a solution approach as opposed to just a component approach. So those are the 2 things I would say, Steve.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [11]

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Okay. I mean it's fair enough. I mean, obviously, we're focusing on new growth markets as opposed to some of those legacy stuff. But I guess, the question gets back to, where is the trough? Are we at the trough? Or are we going to drop down to $7 million revenue, $8 million? Or are we on the way up like you were planning? Exactly, where do you think we are at this stage? And given the fact that we haven't bought back stock, we're down to like 17% right now. It just doesn't seem to make a whole lot of sense. It's a pretty small company to stay public, expense-wise.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [12]

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Understood. Understood, yes. So certainly, we addressed the expense side this past quarter. And as I've said in previous calls, I don't see quantum leaps. It's hard to predict where the trough truly is. All I can tell you is, I do see a growing pipeline. We do see new opportunities. It certainly takes time when you're bringing new products into the market to gain traction and get momentum. So hard to predict, but I do have confidence that we're seeing -- you are seeing the right types of data to give us confidence in the future.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [13]

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Right. Okay. I guess, I mean, I'll just follow up one more time because that wasn't clear to me. But in the last 2 calls, our breakeven was expected to be around, I forget the number now, $14 million, $15 million. Is that correct?

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [14]

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That's in the $12 million, $12.5 million.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [15]

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And I believe you have expected to get there around year-end. Is that off the table now?

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Alfred S. John, Westell Technologies, Inc. - President & CEO [16]

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No. I wouldn't say it's off the table. Still, that is the goal. As previously stated, the goal is to get there. The visibility we have leads us to believe that we've got a fighting chance to get there, but it's sometimes hard to predict with shifting spends with our largest carriers how much of that shipment spend will affect us.

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [17]

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And Steve, just to clarify, this is Tom. The breakeven analysis currently with the OpEx where we had, and if you assume the 40% on a non-GAAP basis is more on the $12.5 million to $13 million range, and then on a full GAAP basis would be more in the $14 million to $15 million range. But $12.5 million to $13 million under the current structure of our costs and expenses with normalized gross margins would be in that $12.5 million to $13 million range.

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Operator [18]

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(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back to Steve John for any closing remarks.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [19]

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Thanks, everyone, for joining us today. As mentioned, we have much to do to grow the business and drive up shareholder value, and we look forward to speaking to you again on the next call.

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Operator [20]

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