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Edited Transcript of WSTL earnings conference call or presentation 6-Feb-20 2:30pm GMT

Q3 2020 Westell Technologies Inc Earnings Call

Aurora Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Westell Technologies Inc earnings conference call or presentation Thursday, February 6, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeniffer L. Jaynes

Westell Technologies, Inc. - VP, Corporate Controller & Interim CFO

* Timothy L. Duitsman

Westell Technologies, Inc. - President CEO & Director

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Conference Call Participants

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* Marc Silk

Silk Investment Advisers - President

* Mark B. Spiegel

Stanphyl Capital Management

* 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 Third Quarter Earnings Call. My name is Sylvia, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Jeniffer Jaynes, Westell's Interim Chief Financial Officer. Jeniffer, you may begin.

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Jeniffer L. Jaynes, Westell Technologies, Inc. - VP, Corporate Controller & Interim CFO [2]

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Thank you, Sylvia. Good morning, and welcome to our conference call to discuss the Fiscal Year 2020 Third Quarter Results for Westell Technologies. The news release we issued yesterday afternoon is posted on our website, westell.com. On this call, Tim Duitsman, Westell's President and Chief Executive Officer, will begin with a discussion of our business and growth initiatives. I will then update you on our financial results for the quarter, and we will conclude by taking your 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 Tim.

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [3]

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Thank you, Jeniffer, and good morning, everyone. Our results for the quarter exceeded our expectations as we began to show traction with our turnaround plans. Getting to profitability is critical to us and while we reported a net loss for the fiscal third quarter, we delivered significant improvement over the previous quarter. We saw positive revenue gains in our strategic product areas during the quarter. We also made significant progress in reducing our expenses during the quarter and ended the quarter with a higher cash balance. The Westell team is strategically aligned and is working hard to deliver growth and profitability as soon as possible. We made good progress on those goals last quarter.

Looking at specifics from our third quarter, overall revenue was down about $400,000 compared to the second quarter. There were 5 less shipping days in the third quarter and customers typically purchase and install less equipment during the holiday season. The bump we sometimes see in the end of budget year spending by large customers was also smaller this year as some customers appear to be cautious with their spending. Even with those factors, revenue for public safety and fiber products increased over the previous quarter, and we expanded our customer base for site management products.

Gross margin improved to 38.8% compared to Q2, where margins were pressured by a significant $1.3 million charge for excess and obsolete inventory. Our operations team implemented new supply chain processes during the third quarter, which should improve our inventory management and cash flow going forward.

In addition, we've been working hard to reduce our expenses. On the last earnings call, we discussed bringing down non-GAAP quarterly expenses to under $4.4 million. In Q3, non-GAAP expenses came in substantially better at $3.7 million. All of Westell's departments contributed by reducing their expenses.

Margin and expense improvement reduced our non-GAAP net loss to $850,000 in Q3, a large improvement over Q2.

On another positive note, we ended the quarter with more cash than the previous quarter, $22 million versus $21.7 million in Q2. While Q3 started to turn the quarter for our operating results, we know we need to grow profitable revenue, that is our highest priority going forward. Our revenue growth will come from new products and expanding our customer base.

We continue to drive our revenue expansion strategy in 3 key product areas: public safety, fiber connectivity and remote monitoring. I'd like to share our progress.

Public safety falls within our In-Building Wireless or IBW segment, and sales of those products increased over the prior quarter. Just as importantly, we made progress in expanding product offerings to boost future revenue. In December, we manufactured and shipped a new battery backup unit, known as a BBU, for our Class A public safety repeaters. The majority of repeater installs include a BBU, so bundling this new product with repeaters should continue to grow our public safety sales.

Then in January, we completed our first builds of the Class A public safety repeaters under the licensing agreement we announced last November. Controlling the manufacturing should allow us to better manage lead times, inventory and costs. Repeater lead times are important to our customers and quick delivery will be one of our competitive advantages.

Turning to the Integrated Site Management (sic) [Intelligent Site Management] or ISM business, we added to our customer base by selling our remote monitoring products to a rural electric cooperative. In this application, our Optima software and remote monitoring units will be used to monitor environmental conditions in remote locations. The ISM products have been very successful at tower operators for remote cell site monitoring and we are optimistic about extending those same capabilities into similar adjacent markets like this one.

During Q3, our engineering team delivered the first working prototypes of our new compact monitoring product for small cell fixed wireless sites. We signed up a large carrier to sponsor the field trial, which is planned for the third quarter of this calendar year. The sales team is also working with potential new customers to deploy the same platform for Internet of Things, energy management and other similar applications. The compact low-cost platform should bring site monitoring to remote locations that are not being monitored today.

Within Communication Network Solutions or CNS, we continue to grow sales of our fiber connectivity products. Last quarter, we sold our new fiber cassettes to a new customer who is building regional fiber networks.

In addition, we are working with new customers on outside planning closures for their rural broadband networks. Westell's outdoor cabinets, fiber products and remote monitoring are well suited for the rapidly growing rural broadband and 5G deployments.

In summary, Q3 was a large improvement over Q2, and I believe the company's turnaround is on track. Our #1 priority is to grow revenue, and that is where we are focused. As I said in my first call with you, we are developing new products for In-Building Wireless, fiber connectivity and remote monitoring, and we are bringing new customers to expand Westell's customer base.

With that said, let me turn the call back to Jeniffer.

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Jeniffer L. Jaynes, Westell Technologies, Inc. - VP, Corporate Controller & Interim CFO [4]

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Thank you, Tim. I will provide some key financial highlights on our quarterly results, beginning with revenue. For the third quarter of fiscal 2020 ended December 31, 2019, total revenue was $7.2 million compared with $7.6 million in the quarter ended September 30, 2019, as revenue decreased slightly across all 3 segments.

Our IBW segment produced our highest public safety revenue to date and increased revenue from commercial repeaters. Those increases were more than offset by lower revenue from DAS conditioners and RF system components. As Tim mentioned, within public safety, we received our first revenue from the new battery backup unit that was introduced during the quarter.

In the ISM segment, higher deployment services and support agreement revenue was more than offset by lower sales of remote monitoring units in Optima software. Also, during the quarter, the balance of deferred revenue increased as we completed the annual renewal for some larger service agreements.

For the CNS segment, increased revenue from fiber connectivity connection -- solutions and integrated cabinets was more than offset by lower revenue across the remainder of the segment.

Looking at the rest of the operating results, consolidated gross margin was 38.8% in Q3, up from 20.9% in Q2 when a significant charge of $1.3 million for excess and obsolete inventory depressed gross margins. There were no significant E&O charges in Q3.

GAAP operating expenses were $4.4 million in Q3, down from $5.3 million in Q2, primarily as a result of the restructuring we announced last quarter and the cost save and other cost saving measures. On a non-GAAP basis, operating expenses in Q3 were $3.7 million, down from $4.8 million in Q2. Near term, we expect non-GAAP operating expenses to be in the range of $3.8 million to $4.2 million.

GAAP net loss in Q3 was $1.5 million or $0.10 per share, an improvement from a 1 -- from a $3.6 million net loss or $0.23 per share in Q2. Non-GAAP net loss in Q3 improved to $850,000 or $0.05 per share compared to a loss of $3.1 million or $0.20 per share in Q2.

Turning to the balance sheet. On December 31, 2019, our cash totaled $22 million, up from $21.7 million at September 30. The $300,000 increase in cash during the quarter was driven by managing expenses and improved working capital.

Looking forward, you should note that we expect to pay the second $1 million associated with our public safety licensing agreement this quarter, assuming all conditions are met.

At this time, we open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from [Jansen] from Ultra Capital.

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Unidentified Analyst, [2]

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Just a question about whether the Board has reconsidered a buyback given there's some signs of a turnaround? And also, you guys are still 30%, 20% below cash, note that. Any thoughts there?

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Jeniffer L. Jaynes, Westell Technologies, Inc. - VP, Corporate Controller & Interim CFO [3]

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This is Jeni. Thank you for your question. As we've mentioned in the past, any type of buyback program is really a Board decision. While the management team believes we're in a position to turn the company around and feel that we'd like to continue to grow the company and turn it around, it really is a Board decision.

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Unidentified Analyst, [4]

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No, that's why I asked whether the Board has considered a buyback.

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [5]

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We've considered -- this is Tim, John. We've -- the Board has considered all options to increase shareholder value, and that's one of the things we're talking about.

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Operator [6]

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Our following question comes from [Harry Sawyers] from [Sawyers Family Office].

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Unidentified Analyst, [7]

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Yes. First, I want to congratulate you on the strong quarter. That actually was one of my questions regarding the buyback. But in any case, can you provide any guidance of the cash burn going forward beyond sometime in fiscal 2021?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [8]

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Yes, Harry. Cash -- going into next quarter, cash will be affected by a few things. Jeniffer mentioned the $1 million licensing payment that may go out this quarter. We will also have prototyping and product demonstration expenses during the quarter that may increase our cash burn a little bit, but these are investments that are good and grow the business and should lead to new revenues down the road.

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Unidentified Analyst, [9]

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And would you please describe for me what you view as Westell's strongest competitive advantage?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [10]

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I think our biggest competitive advantage in the way that we've changed over the last month is getting very close to our customers and understanding their needs and then rapidly pulling together solutions that meet their full needs. So for example, in public safety, we're working on ways to make it very easy to install those products and carry all the products that an installer would need and do their designs for them. So we become a very easy company to do business with.

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Unidentified Analyst, [11]

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Right. And of course, looking at the quarter-on-quarter gross margin increases across all of your business lines, that took me by surprise when I read your press release yesterday. What do you attribute to that though?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [12]

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Most of that comes from the E&O expense we took last quarter. We did have a significant E&O expense of $1.3 million last quarter, and that was across all the product lines. So that's the quarter-over-quarter difference.

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Unidentified Analyst, [13]

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Do you view this as still an improvement?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [14]

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Yes. We are definitely watching our margins going forward.

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Operator [15]

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Our following question comes from Steve Busch from Everglades Resources.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [16]

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So I mean, I'm amazed that anyone thinks that exceeding the $7.2 million was exceeding expectations, and I hate to think what expectations were. I just don't see how going down on revenue is exceeding expectations. So my question really revolves around you got this employee base, you're in a highly competitive field, what's going to attract and retain employees when you've had 15 years of stock instruction, and you can't really pay them in options because their options are worthless?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [17]

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Well, that's a long question, Steve.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [18]

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I have got more, don't worry.

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [19]

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I think we have a good -- we already have a good team here. I think it's just been an issue of focusing and focusing on the right products and working with our end customers in the right way to grow revenue. And earlier, your comment about exceeding expectations, that had more to do with our bottom line non-GAAP results and our expense reductions. Obviously, going forward, we need to focus on growing our profitable revenue.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [20]

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Okay. Well, so I guess -- I mean, it's not towards you, but we've heard the same story for -- I don't know how many CEOs now, for 15 years. So the question becomes, the Board considers all its options. We're trading well below cash per share, right? With no debt. We're not buying back stock, which is whatever. I don't think that's the right move. But the question is, has the Board considered just resigning and letting someone else come in who knows what they're doing because Brannock's Chair and the rest of the Board have done absolutely nothing for 15 years except drive the stock to $100. It makes no sense. So I don't think the Board considers many options, and we don't think there is a Board. And if I was employees, I'd be considering doing some sort of walk out until the Board resigns or merges the 2 classes, and so I don't think the Board considers all the options.

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [21]

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Steve, let's get back to your question which is the Board is investigating always to increase shareholder value. And the management team here -- our #1 priority is to grow, revenue. And that's obvious at this point. We've limited our expenses, we need to grow revenue.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [22]

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But we've been hearing that for 10-plus years. I don't understand...

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [23]

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I can't say what happened in the past, Steve.

I can only talk about what we're doing going forward.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [24]

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All right. What are your top estimates for what you think revenues could be within the next year?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [25]

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We're not making -- we're obviously focused on growing the company, but we're not giving a forward outlook on revenue.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [26]

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Okay. All right. So I hope you do well, but I'm telling you that the Board needs to go. And that's my statement.

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Operator [27]

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Our following question comes from Marc Silk from Silk Investment Advisers.

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Marc Silk, Silk Investment Advisers - President [28]

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Tim, let's see -- it's funny, Steve. My first question was when you said exceeding expectations, I just was -- I didn't even know what your expectations would have looked like, but let's move on. The 2 -- first guys, I want to talk about the share buyback. Normally, when I start trading below cash, I would be on board with that. I just think that people need to realize that you have burned cash for a long time. When you're dealing with a...

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [29]

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Marc.

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Marc Silk, Silk Investment Advisers - President [30]

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What's that?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [31]

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Marc, in interest of everybody's time, can we talk about questions?

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Marc Silk, Silk Investment Advisers - President [32]

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Yes. Well, this is a very important question because they talked about a share buyback, and I just wanted to say that you should not be buying back shares because cash is one of your most biggest assets right now. So my -- all right, so it shouldn't even be pushed. Okay. So would you say the expectations of getting to profitability is based on the growth of your 5G business?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [33]

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Right. We're actually focusing on 3 areas. 5G is one of our growth areas, and that would be fiber and cabinets or both going into 5G along with integrated site monitoring. We obviously need growth across the board to increase our revenues and we've got public safety, too.

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Marc Silk, Silk Investment Advisers - President [34]

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Right. But if public safety does well, you still need the 5G, considering you just said, 2 out of your 3 businesses are focused on -- okay. So having said...

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [35]

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We're focusing on all 3.

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Marc Silk, Silk Investment Advisers - President [36]

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Okay. I -- trust me, I'd love to see all 3 move up. But without a doubt, if 2 out of 3 are focused on 5G, then you would -- would the answer be yes that -- to get to profitability, it's really based on the growth of 5G business, and I understand the -- that...

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [37]

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It's actually not just 5G, Marc. Part of it is 5G, but also in that same area, there's a lot of rural broadband going in right now. And they're talking about expanding another $20 billion in spend there. So it's -- and that isn't necessarily 5G. That's also wireless radios going in to deliver rural broadband and fiber. So that's a whole another area that we can grow into.

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Marc Silk, Silk Investment Advisers - President [38]

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Okay. Because what -- and I appreciate that because I've been listening to a few conference calls, and like the CEO of Ericsson is basically saying how 5G is actually slowing down in many countries. CEO of Xilinx in a conference call, basically is laying off people because they're seeing 5G slowdown in many areas. So I just wanted to -- so do you think even if 5G is not taking up as much as possible, you think broadband is something that -- I'm just trying to understand, that profitability -- that you could still do well even if that's not the case because of the broadband could take over the 5G? Is that -- that makes sense?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [39]

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Rural broadband delivery, there's portions of the country with poor broadband and delivering rural broadband to those people is very important. And then in addition, public safety is going to grow.

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Marc Silk, Silk Investment Advisers - President [40]

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Okay. That clarifies that question. And then the last thing. So basically, Tim, I'm sure you understand, as a publicly-traded CEO now for 2 quarters, I think you would agree that the movement of the stock is based on supply and demand and what gets you there is profitability, correct?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [41]

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Yes. We are focused on profitable revenue growth.

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Marc Silk, Silk Investment Advisers - President [42]

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Right. So just one thing, and I just think that the problem is the stock appreciation will be muted because what will keep investor demand suppressed, and this is because I have talked to a lot of people that I've been trying to get into Westell, is the dual-class stock. So as a majority voting block has historically has not had the best interest of shareholders because all you have to do is look back at the filings in August 2016...

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [43]

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Marc.

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Marc Silk, Silk Investment Advisers - President [44]

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Yes?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [45]

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Is that in a form of a question? Are you...

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Marc Silk, Silk Investment Advisers - President [46]

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Yes. Yes, I think that -- I think what you need to do is have a serious talk with the Board and figure out a way that to work through the dual-class shares because what happens is, it's keeping people out of the stock. So you could be profitable but there's still a lot of people that are going to look at the past history and say, "Listen, this Board is not doing their -- finish their responsibility." It's important, I'm not bashing the Board, I mean, what's done is done. I mean, the coal thing was -- it was unjust, but it affects the stock price. And I hope that some -- you can figure out some way to make this happen because if one person is controlling the votes, it's just not fair. And this...

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [47]

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Marc.

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Marc Silk, Silk Investment Advisers - President [48]

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What's that?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [49]

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You've got to turn this into a form of a question, please.

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Marc Silk, Silk Investment Advisers - President [50]

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Okay. Will the -- can the Board show us a plan -- here's a question, can the Board show us a plan to basically move the stock from dual-class to single class? If you're Jeff Bezos or these guys, that's one thing, but the stock has really underperformed. And it would be -- it would show good faith to the shareholders and probably get more people interested in the stock. So the question is, can the Board devise a plan that can show that they're planning on making this a one issue stock? Yes or no?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [51]

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Marc, the Board continues to review all the options, and we'll take that under consideration.

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Marc Silk, Silk Investment Advisers - President [52]

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I'm just trying to have the stock go up as you do.

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Operator [53]

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Our next question comes from Mark Spiegel from Stanphyl Capital.

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Mark B. Spiegel, Stanphyl Capital Management [54]

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Before I ask my question, I'll just say one sentence that I echo what Marc Silk just said. We have about 4.9% of the company ourselves, and there's no way in hell a lot of people will buy this, no matter how good your performance is, if there's that dual-class stock out there. So this guy who's the Chairman is just shooting himself in the foot with this kind of stupidity. Okay. I'll move on to my -- before I do my question, yes, Trump, earlier this week, said he's going to spend $20 billion on rural digital opportunity fund and the Democrats actually stood up and applauded that, which tells me it's going to get done. So hopefully, you guys can make some money there. My question, how much, if any, of your supply chain goes through China? And how could this affect you?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [55]

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We are investigating that right now. It's a small part of our business. It's -- it will affect probably less than 10% of our business right now. We're closely watching the spread of the coronavirus. We did talk to our factories that are there and currently, they're saying they're going to open next week, which is only a week later than Chinese New Year when they were going to open. If they open next week, we think we'll hit about a 1- to 3-week delay in shipments of those parts. It's a developing thing so it may change. So as a contingency plan, we're quoting U.S. suppliers for those parts if that situation in China continues, and the plants are closed. But I think we'll make it up during the quarter if they ship in the next 1 to 3 weeks.

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Mark B. Spiegel, Stanphyl Capital Management [56]

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Okay. So there's nothing that you get from China that you can't get elsewhere?

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [57]

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The main thing we're looking at right now is cabinets. I will say, I don't know what other ramifications it might have. There might be some parts that we haven't even heard of yet that we can't get, but that's the main thing that we've heard about. And I think that's quite true for a lot of companies.

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Operator [58]

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No further questions.

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Timothy L. Duitsman, Westell Technologies, Inc. - President CEO & Director [59]

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All right. Thank you for joining us today. As I mentioned previously, we are working hard to turn the business around and drive up shareholder value. Top line profitable revenue growth is our highest priority. With our focus on developing new public safety, fiber connectivity and remote monitoring products.

In addition, we are targeting new customers, particularly in the IBW and ISM product areas. We also will continue to manage our expenses while strategically investing in the most promising new product areas. We look forward to speaking with you again.

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Operator [60]

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