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Edited Transcript of WSTL earnings conference call or presentation 2-Nov-17 1:30pm GMT

Thomson Reuters StreetEvents

Q2 2018 Westell Technologies Inc Earnings Call

Aurora Nov 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Westell Technologies Inc earnings conference call or presentation Thursday, November 2, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew B. Brady

Westell Technologies, Inc. - CEO, President & Director

* Thomas P. Minichiello

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

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Conference Call Participants

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* Gregory Mesniaeff

Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Westell Technologies Fiscal Year 2018 Second Quarter Earnings Conference Call. My name is Allie, and I will be your operator for today's call. (Operator Instructions) Please note that this conference call is being recorded.

I will now 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. - CFO, Principal Accounting Officer, Senior VP, Treasurer & Secretary [2]

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Thank you, Allie. Good morning, and welcome to our conference call to discuss the fiscal year 2018 second quarter results for Westell Technologies. The news release we issued yesterday afternoon is posted on our new website, westell.com. On this call, Matt Brady, Westell's President and Chief Executive Officer, will begin with a discussion of our business and strategy. I will then update you on our financial results for the quarter, and we'll conclude by taking questions.

Before I 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, 2017, 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 provided reconciliations to the most comparable GAAP measures in our news release.

I will now turn the call over to Matt.

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [3]

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Thank you, Tom, and good morning, everyone. In the September quarter, we generated positive results in almost every aspect of the business. I consider these results to be an important indicator of the excellent work that the Westell team has performed over the past year. We have once again achieved sequential revenue growth and continue to consistently meet or beat operating targets for gross margins and operating expenses, and we have consistently improved profitability.

This quarter we reported positive operating profit on a GAAP basis for the first time since December 2013. Tom will detail these achievements and other results from the September quarter. It's incumbent on us to continue this positive momentum into the future. We are committed to enhancing shareholder value through a focused and disciplined approach to delivering profitable revenue growth. Now let me share with you the impressions I've had during the first 3 months as CEO, and my thoughts around where we want to take this business in order to drive shareholder value.

My impressions are that Westell is a strong company with great fundamentals. We have a good product portfolio with excellent sales and distribution channels. Our sales force has strong relationships in the wireless and wireline customer space. We have a long history of marquee customers, who greatly appreciate how Westell's helped them succeed.

We will continue to work on a current growth initiatives, including the In-Building Wireless public safety market and the evolving centralized radio access network or C-RAN, which the major service providers are embracing.

In the public safety market, sales are up year-over-year, and we continue to make progress launching new public safety products for In-Building Wireless. We have hired dedicated sales professionals to work with a national customer safety channel that has access in municipalities, building owners and the public safety integrators. This sales force will work to train, deploy and support our public safety channel partners.

This effort has just started in the last several weeks, and we are optimistic about the growth potential for Westell. In the C-RAN space, our ISM solution and our CNS offerings such as Power Distribution and Integrated Cabinets have been key to our recent success.

As the name implies, C-RAN, centralizes efficiencies in the radio access network, allows flexibility at the network's edge where end users connect and lays the future for network densification, small cells and 5G rollouts.

In addition, we are constantly evaluating new markets, geographies, verticals and products, all under what I envision as a marketing- and sales-driven business model where we profitably grow revenue by adding new offerings to complement and strengthen our overall product portfolio while leveraging the Westell brand, sales force and historical relationships with our customers.

We have started evaluating rapid OEM of third-party solutions. This would allow us to quickly bring Westell certified products to market. We believe rapid OEM can achieve increased sales quicker and more cost-effectively than internal development.

The business unit leaders and I continue to work daily on rapid OEM initiatives with third-party partners. We have also started an increased effort to sell the Westell product portfolio in the Middle East and Latin America and are exploring opportunities to expand revenue in Australia and Asia. We will determine if we can achieve profitable revenue in these international markets before we enter them.

In summary, our growth strategy is, continued focus on the In-Building public safety wireless market and the growing C-RAN opportunities, rapid OEM of new products and services and disciplined exploration and expansion into new geographies.

With that, I'll now turn the call back over to Tom.

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

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Thank you, Matt. Let me provide some additional color on our results for the September quarter, and we'll begin with revenue. For the second fiscal quarter ended September 30, 2017, consolidated revenue was $17.2 million, up 4% when compared to the first quarter. This represented the third consecutive quarter of sequential revenue growth, driven once again by the consistently rising topline of our IBW business as well as solid performances from our ISMS and CNS businesses.

Now let's take a more detailed look at revenue of each segment. We'll start with IBW where revenue for the September quarter increased to $7.9 million. That's a 14% sequential increase, and the highest revenue level for IBW since December 2015. Our largest revenue within IBW was a record quarterly performance for our active DAS conditioner, the Universal DAS Interface Tray or UDIT.

Our UDIT customers, mainly the wireless service providers and neutral host operators, highly value the differentiated benefits that the UDIT solution delivers for their in-building deployments.

In addition to the standout UDIT performance, we also achieved record quarterly revenue for our in-building system components. These are the passive devices such as couplers, splitters and duplexers that are required for all in-building installations, for both the public safety markets and the commercial markets.

Our ISMS business generated revenue of $4.7 million in fiscal 2Q, an increase of 15% when compared to the quarters before. Hardware deployments, which are the remote units used for on-site processing to 2 of our largest customers with the primary driver of the sequential growth.

One customer, a wireless carrier, deployed the next phase of remote monitoring at cell towers in several regions. The other customer, a neutral host operator, continued to add to the number of sites with remote monitoring.

Our CNS business turned in another solid quarter, as we completed shipments for our latest project with Transit Wireless, in which we provided customized fully equipped cabinets that assist in their ability to deliver increased wireless service in the New York City subway system.

The quarter also included Integrated Cabinet business with a large rural service provider, as part of the Connect America Fund Phase II, or CAF II initiative as well as a solid revenue performance for our Power Distribution product line, which included C-RAN build outs.

Moving on to the rest of the operating results. We continued for the fourth consecutive quarter to meet or beat key operating targets, including consolidated gross margin of 40% or greater. It was 42.2% in the quarter. We are now enjoying the full benefits of the successful cost reductions implemented in previous quarters, including the transition of IBW assembly and test operations, from in-house to our contract manufacturer.

Furthermore, while our non-GAAP operating expense target has been $6 million, in the September quarter, we drove it down to $5.7 million, the best since March 2013. Also of significance was the OpEx at 33% of revenue, a very favorable ratio, not accomplished since September 2013.

As a result, not only have we continued to grow the top line, we have grown profitability at an even greater rate. As we reported, on a non-GAAP basis, profitability for the fourth consecutive quarter, an operating profit margin of 9.4% in the September quarter, doubling last quarter's operating margin of 4.7%.

Net income of $1.7 million, more than doubling last quarter's net income of $800,000. And earnings of $0.11 per share compared to $0.05 per share in the prior quarter. Moreover, we also reported positive GAAP earnings of $0.05 per share. Due to the significant achievements in the September quarter, on a GAAP basis, operating profit was positive for the first time since December 2013 and accounted for positive GAAP earnings of $0.01 per share.

Note, [below] operating profit in other income, there was also a one-time nonoperating GAAP accounting credit of $600,000 or $0.04 per share, but that was simply additive to the already profitable GAAP result based on normal business operations.

On an adjusted EBITDA basis, which is our non-GAAP operating profit less depreciation, Westell's business in the September quarter generated adjusted EBITDA of 10.5% or $1.8 million, achieved positive adjusted EBITDA for the fourth consecutive quarter and over $1 million in each of the past 3 quarters. And on a trailing 12-month basis, has produced adjusted EBITDA of 7.2% or a total of $4.6 million.

Turning to our strong balance sheet. During the quarter, total cash grew by $500,000, bringing our cash and short-term investments to $24.2 million at September 30, 2017, compared to the $23.7 million at the end of June. This cash increase comprised $700,000 in cash generated from operations, partly offset by $200,000 of cash used for capital expenditures and share repurchases. During the 12-month period ended September 30, 2017, our business generated a total of $4.1 million in cash from operations.

Under the stock repurchase program authorized by our board in May, and as part of an open market 10b5-1 plan, Westell, through October 27, repurchased just over 131,000 shares at an average price of $2.94 per share for a total cash outlay of $386,000.

I also want to note that a new lease for our Aurora headquarters facility took effect on October 1. So starting in the October to December quarter, we'll begin realizing reduced cash outlays of approximately $500,000 per quarter.

Let me summarize before moving on to Q&A. We generated positive results in almost every aspect of the company, many of which have not been achieved at Westell in several years. We reported sequential revenue growth for the third straight quarter and have continued to consistently meet or beat key operating targets.

And while we are executing on growth initiatives like public safety and C-RAN, we are also pursuing new business expansion opportunities, that can strengthen our market position in areas that represent for Westell, the highest probability for profitable growth and increased shareholder value.

With that, we'd like to now 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)

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

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Allie, looks like we have Mike from Northland on the -- and another person behind him on the queue.

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Operator [3]

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Yes, we have Mike Latimore from Northland Capital.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [4]

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On the -- just on the In-Building Wireless segment here, obviously, UDIT and passive components are really helping to drive that segment. I guess, what's the pipeline looks like for those product categories? And I guess when might we see kind of public safety maybe or I don't know, overtake those categories as a driver?

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [5]

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Well, I think -- this is Matt Brady, Mike. I think the pipeline looks good. It looks as well it's ever looked. And as far as the public safety market, we're tracking to what FirstNet's doing. Our sales team is keeping their relationships in place with FirstNet, and the public safety build outs will first start at the macro level and then they'll kind of work their way inside to the micro level, which we're kind of calling the Second Net. So FirstNet has to get out there and build that overall macro wireless network for public safety, and like I said, our sales team is working with them. We've met with them a couple of times in the last quarter, and we'll continue to work with them on the external and internal build-outs.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [6]

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Got it. Great. And then, you talked about rapid OEM opportunities. Can you just elaborate a little bit more on that? Which products, what type of OEMs? Just a little more clarity if you could, there.

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [7]

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Yes, so rapid OEM is something that I've used historically in my career is that you're able to use your brand and your sales force, both direct and indirect, to bring products and solutions to those marquee customers that we already have. So we're exploring the full array of public safety products, wireless products, anything that could go into a cabinet that generates revenue for the carrier. So every one of those things are in play, and we look to partners, both domestically and internationally, who have really good products, but they don't have the brand or the distribution network to bring to market. So that's what we're working with rapid OEM, and the word rapid in front of it means we're going to work a heck of lot quicker than doing, let's say, an internal development that it would compete against.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [8]

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Got it, okay. All right. Make sense. And then just on, given the growth of in-building, success with some of your ISMS products and then obviously CNS in the mix, I mean, how do you think about seasonality? I mean, historically when there was more CNS focus, you had a noticeable seasonality in December quarters. I guess, how do you think about seasonality given the product mix now?

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Thomas P. Minichiello, Westell Technologies, Inc. - CFO, Principal Accounting Officer, Senior VP, Treasurer & Secretary [9]

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Yes. Sure, Mike, this is Tom. I'll take your question. So we're about 1/3 of the way into current (inaudible). And with respect to CNS, there is the typical seasonality as lot of that is outdoor equipment. But as Matt said, the backlog entering into the quarter is strong relative to recent periods. So we're happy with the progress there and a lot of that is the continued strength of UDIT and IBW kind of getting back to your first question and then -- and ISMS as well. So going forward, we see continued strength in those 2 units, and we see continued strength in CNS, especially with the cabinet business and the Power Distribution products over the next 6 months, even though, there's some seasonality in the final calendar quarter. It usually rebounds pretty strongly in the January to March quarter as you enter the springtime.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [10]

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Great. And then obviously, the cost controls have been excellent. On the new lease year, with that $500,000 a quarter impact. Should we think about your OpEx, I would say, I think, you said $5.7 million in the September quarter. Did that drop by $500,000 with this new lease? Or do you kind of reinvest that?

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Thomas P. Minichiello, Westell Technologies, Inc. - CFO, Principal Accounting Officer, Senior VP, Treasurer & Secretary [11]

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So the new lease is the cash benefit, Mike, because the restructuring from about a year ago took care of almost all of the expense piece of that. So that's already baked into the current OpEx run rate. But while we're talking about expenses -- so just to be clear on your question, on the lease, it's really a cash benefit going forward. But we are in constant continuous expense management mode. We've done a lot there as you know. But we continue to manage that tightly, and you'll likely see it stay where it is and may even get a little lower if we can make that happen. So we're at $5.7 million non-GAAP OpEx, way better than our $6 million target, and we continue to work it.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [12]

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Great, and then just last one is on gross margin you talked about doing -- moving from contract to -- from in-house to contract manufacturers. Does that change your view on what gross margin can be? Or should we still think about it, kind of, 40% target?

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Thomas P. Minichiello, Westell Technologies, Inc. - CFO, Principal Accounting Officer, Senior VP, Treasurer & Secretary [13]

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You know the model has always been the 40% or better, and I like that model in general for this business and this industry, selling what we sell. It will always be dependent on mix, but a few subtle changes going forward, Mike, CNS is pretty much what it's been, and you can see the run rate that's been at around 30% on a pretty consistent basis when you look at it over trailing 12 months, let's say. And ISN is pretty strong, it's always close to the 50% level. The real change is in the IBW area where it's been running typically at 40%, but we're now running at more in the low to mid-40s, and that's largely due to the change we made from in-house to outsourcing.

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Operator [14]

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And our next question comes from Gregory Mesniaeff with Drexel Hamilton.

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Gregory Mesniaeff, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [15]

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I was wondering if you can give us any update or any color on potential opportunities with FirstNet? I know one of your larger peers has indicated that they have some orders in hand already. I was wondering if there's any -- anything going on over there.

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [16]

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So we're aware of that. Like I said, we're really waiting for the macro network to be built out, right? So our solutions are -- we are working with FirstNet on building out some of the solutions, but it's incumbent upon them to build out that macro network first for the first responders and then we can start selling some of our solutions for the in-building part of the business. So I don't really have an answer. We've been watching FirstNet really for 10 years right now. Pre-Westell -- back in my previous days at Motorola, and I -- we're still waiting for this network rollout by FirstNet.

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

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Yes, Greg, what I would add to help with that as well is, remember, the macro network, the cell sites and the existing macro network is being built out first. Our penetration and our focus is really inside the buildings when it comes to public safety. So our real opportunity is going to be once the macro network is -- they're blasting out the first responder frequencies, and then the buildings start going on to FirstNet, that's really when -- that's the market we're targeting primarily. But in the meantime, there may be some opportunities for the macro build out and a good example of this is our Power Distribution panels, which are outdoor hardened and would work well as that macro network is built out as well as some of our ISMS gear.

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Operator [18]

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(Operator Instructions) You have Mike Latimore from Northland Capital back on with a question.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [19]

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Brady, just on the C-RAN opportunity there, you've mentioned some sales into those projects, I think that you said for your Power Distribution products, how do these C-RAN deals play out? Are they kind of small kind of pilots and they build or do carriers move forward kind of in fairly substantial deployments over a year or so?

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [20]

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So Mike, it -- really answers both, right? We have some that are small trials that have just started and they're taking shipments of it now. And then there are some other larger deployments that we're working on as well. So it's both aspects. I mean, we're really chasing that business right now with J.J.'s sales team.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [21]

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Okay, got it, great. And then how about just the number of 10% customers in the quarter?

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [22]

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Yes, Mike, we had 4 that were 10% or greater, 3 wireless service providers, and 1 was a distributor. And then we had a -- just below that, in the high single digits, we had a neutral host operator as well, but 4 over 10%.

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Operator [23]

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(Operator Instructions)

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [24]

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Allie, we don't see any other questions, so unless we do...

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Operator [25]

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And we have no further questions. I would like to now turn it back over to Matt Brady for closing remarks.

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Matthew B. Brady, Westell Technologies, Inc. - CEO, President & Director [26]

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Thanks, Allie. I want to thank everyone for joining us today. We are pleased about the progress made, but we are far from done. We are continuing to step up our focus on growing our top line and executing on our growth initiatives. We look forward to speaking with you again. Thank you.

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Operator [27]

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