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Edited Transcript of WSTL earnings conference call or presentation 7-Feb-19 2:30pm GMT

Q3 2019 Westell Technologies Inc Earnings Call

Aurora Apr 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Westell Technologies Inc earnings conference call or presentation Thursday, February 7, 2019 at 2:30:00pm 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

* Tim O'Connell

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Presentation

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Operator [1]

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Good morning, and welcome to the Westell Fiscal Year 2019 Third Quarter Earnings Call. My name is Cheryl and I will 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 Tom Minichiello, Westell's Chief Financial Officer. Sir, 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, Cheryl. Good morning and welcome to our conference call to discuss the fiscal year 2019 third 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. And I will 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, 2018, 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.

For fiscal 3Q, the sequential revenue increases was attributed to the strong performance of our ISM segment. This was driven by increased demand for remote monitoring from 2 of our larger customers. First, business rebounded from the quarter before with the 1 domestic customer we noted during our last call. Secondly, another one of our longstanding global customers increased their pace of upgrades to existing tower sites in 2 markets. This included both shipments of remote units and additional software licenses for our Optima Management System.

On the flip side, overall revenue for our IBW and CNS segments declined on a sequential quarter basis. IBW was affected by lower sales of DAS conditioners, and the CNS product line, which primarily serve the outdoor network, were seasonally down. Within both of these business segments, however, revenue increased sequentially for 2 important growth areas, our IBW public safety products and our new CNS Fiber Access solutions.

We also continued to exceed our consolidated gross margin target of 40% or greater in the quarter. In a moment, Tom will go over the financial results in more detail.

I'd like to now provide an update on our growth initiatives, both the tactical steps we are taking to improve performance in the near term as well as the more strategic direction we are heading to build long-term value.

Let me start with what I call the base business, our existing portfolio of products and solutions across the 3 business segments. Revenue associated with the base business, when taken collectively, has been decreasing over the recent periods largely as a result of some, but not all, IBW and CNS product lines either in natural late cycle -- late life-cycle decline, for example, in CNS Tower Mounted Amplifiers and T1 network interface units, or where demand has dropped due to shifting network architectures. Another example, in IBW commercial repeaters and the sharper decline of our data's conditioners.

Other areas in fact have either held relatively steady or grown slightly, including within CNS essential infrastructure solutions like our Integrated Cabinets, Power Distribution and fiber connectivity panels and our IBW public safety products. Additionally, our ISM business, where today we offer an end-to-end remote monitoring solution that includes hardware, software and services, has remained stable.

Market cycles and network changes are part of the business that we must undoubtedly manage better in the future. I do believe, however, that given some incremental investment in and the reprioritization of sales and marketing efforts, there are opportunities to expand the portion of the business that operates in steady and growing markets. And while we expect that the necessary changes we're making to expand the business will add revenue growth both near and long term, we need to do more when it comes to penetrating other growing and emerging markets where all 3 of Westell's businesses can have the highest probability of success.

Let me start with IBW, where we are making progress with our partner, ip.access, on the development of a small-cell solution based on Citizens Broadband Radio Service, or CBRS, spectrum, which also goes by the OnGo brand name. This is a new market and we intend to be an early entrant targeting private LTE networks, which we believe largely benefit enterprises. As noted on our last call, with OnGo, enterprises should have an attractive alternative to operate their own private cellular networks that more cost-effectively enable secure wireless connections across all their critical operations.

We have received positive market feedback, including interest in field trials across a variety of verticals such as gaming, healthcare, hospitality and manufacturing. So we think the potential is significant. And given what we believe will be a competitive situation, time to market is critical to capture market share early. We are currently anticipating general product release of our OnGo small cell in the third quarter of fiscal 2020, with first revenue in the back half of the year.

Staying with IBW, we have been operating in the public safety market for 2-plus years now with our current line of repeaters, battery backup units and passive components. And while we have grown this business, it has remained smaller than we'd like due to the limitations of our current product set. As we have mentioned in the past, we've been working on a partnership arrangement that would significantly expand our public safety product portfolio, with the potential to add much more meaningful revenue growth. While this has taken longer than initially projected, we believe strongly in the market potential and plan to continue to work towards our goal of a complete line of product offerings.

Moving on to the ISM segment, a business that, as mentioned, has held steady and that we like given the favorable economics for our customers and the real-time information that remote monitoring provides to network operators in a world with more and more connected devices, especially at the network edge, where more intelligence is increasingly in demand. While ISM tends to have a longer sales cycle than other areas of the business, we have added and will continue to add, sales resources to our ISM business, refining our go-to-market approach with cell power and telco service provider customers and expanding in adjacent verticals such as cable service providers, utilities and potentially select international markets. As an example of vertical market expansion, we are currently in partnership discussions on an industrial pump monitoring solution leveraging our Optima cloud service.

For CNS, we continue to grow our new Fiber Access portfolio to address the ever-increasing bandwidth requirements, both for delivering quality broadband today and higher speed, higher capacity 5G connectivity in the future, which requires extending fiber all the way to the end user across enterprises, single-family homes and multi-dwelling units. Our products, which to date include high-density cassette and fiber panels along with low-profile ruggedized terminated fiber cabling, are designed to help network operators economically and quickly deliver new wireline and wireless services by simplifying fiber deployments in central office, outside plant and customer premise environments, enabling network densification, technology coexistence and the convergence of data centers within central offices.

We are excited with the pace of our execution in this key growth market, including our ability today to quickly bring new fiber solutions to market and the customer acceptance we've seen. In the September quarter, we received initial orders from 3 customers and recognized our first revenues with 2 of them. In the December quarter, we grew revenue with the first 2 and recognized our first revenue with the third customer. We expect to continue to build out the product and solutions set, grow the business we have established with our initial customers and add more new customers in coming months.

By now you've heard a common theme around product development, be it entirely within Westell or codevelopments with key partnerships. In addition to the aforementioned new suite of Fiber Access solutions that we continue adding to, the expansion of our public safety product portfolio and the OnGo small cell development, we have recently added new Integrated Cabinets specifically for fixed wireless broadband applications among communication and utility companies, a new line of fire distribution and fuse panels, more useful network densification builds and a new, lower-cost ISM remote unit with more advanced features.

Let me move on to inorganic growth and a discussion around acquisitions.

Since I came on board we've continued to build an ever-increasing pipeline of potential targets and have been actively engaged, including into the diligence phase, with 2 businesses that we thought could be the right match. But ultimately it has to be the right deal that makes the right sense and meets our criteria. We do not intend on closing a deal just to get a deal done. So we have passed on opportunities that, after deeper examination, did not meet our criteria. We continue to actively and aggressively pursue growth through acquisition and are currently in the middle of 2 others right now that we feel we're making good progress on. And we continue to expand our pipeline of potential targets.

Let me wrap up by reinforcing the direction we are heading in, that is to drive growth across all 3 business segments, with each one having at least 1 meaningful growth driver leading the way. As I just outlined, we are actively working on internal initiatives and pursuing the right partnerships and acquisitions that are natural extensions of our 3 businesses and that enable us to penetrate and expand in existing and adjacent markets. Our #1 mission is to provide profitability and expand the business and drive increased shareholder value.

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 third fiscal quarter ended December 31, 2018, revenue was $10.7 million, an increase of 6% compared to $10.1 million in the second fiscal quarter ended September 30. The overall increase in sequential quarter revenue was driven by the strong performance of our ISM segment, which nearly doubled to $5.1 million in fiscal 3Q. As we expected and noted during last quarter's call, ISM revenue rebounded from the 1 domestic customer that had significantly slowed down their orders the quarter before. Additionally, during fiscal 3Q, another large global customer increased the pace of their upgrades to existing tower sites in 2 markets. The strong ISM quarter was partly offset by lower sequential quarter revenues for both IBW and CNS.

Within IBW, lower sales of DAS conditioners and passive system components were partly offset by revenue increases for commercial repeaters and public safety products.

CNS was seasonally down as the products in this segment are predominantly deployed in the outdoor network, resulting in lower revenue in October through December quarters due to the approaching winter months. Within CNS we did, as Steve mentioned, increased revenue for our new Fiber Access solutions.

Moving on to the rest of the operating results. Consolidated gross margin in fiscal 3Q was 42.8%, up from 41.5% in fiscal 2Q and marking the ninth consecutive quarter in which we exceeded our consolidated gross margin target of 40% or greater.

Non-GAAP operating expenses in 3Q were $5.2 million, up from $4.8 million in 2Q. Increased investment in sales and marketing and professional service expenses within G&A were the primary drivers.

Our non-GAAP operating loss in fiscal 3Q was $580,000, slightly better than the 2Q loss of $631,000 as the higher revenue and gross profit more than offset the increased OpEx.

Non-GAAP net loss and EPS was $423,000 and $0.03 per share in 3Q compared to $476,000 and $0.03 per share in 2Q. Year-to-date non-GAAP net income and EPS for the 9 months ended December 31, 2018, was $343,000 and $0.02 per share. Additionally, through the first 9 months of fiscal 2019, adjusted EBITDA, which is our non-GAAP operating profit less depreciation, was positive $352,000.

GAAP net loss and EPS was $1.6 million and $0.10 per share in 3Q compared to $1.7 million and $0.11 per share in 2Q.

Turning to the balance sheet. Our cash totaled $27.1 million at December 31, 2018, compared to $28.5 million at September 30. Cash used during the quarter was primarily due to increased working capital and share repurchases. Under the stock repurchase program authorized by our Board of Directors in May of 2017 and as part of open market 10b5-1 plans, in fiscal 3Q, Westell repurchased 201,186 shares at an average price of $2.19 per share, for a total of $441,000. To date, from May 2017 to December 31, 2018, Westell has repurchased a total of 485,663 shares at an average price of $2.59 per share, for a total of $1,257,000.

Before we move on to Q&A, let me summarize. We are taking steps to grow those areas of our base business that operate in steady and growing markets. We are continuing to make progress in new growth areas like OnGo and Fiber Access, and we are aggressively focused on inorganic growth through partnerships and acquisitions.

So 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) And our first question comes from Marc Silk from Silk Investment.

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Marc Silk, Silk Investment Advisers - President [2]

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So the other day on RC Wireless news, I saw an article that said with nearly 80% of data consumed inside of buildings, the next generation of cellular 5G will have a significant impact on the daily operations of commercial office buildings. Is that anything that you can try to capitalize on? Or it's just too competitive that you just want to stick with your strategy going forward?

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

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Thanks for the question. This is Steve. Well, certainly the OnGo development that we're in the process of delivering to the market is going to address that specific area of business opportunity. WiFi will continue to be an important part of in-building. But as the cellular operators move away from wanting to fund growth into the large venues and push some of that desire for in-building wireless coverage to the building owners. We believe that the opportunity exists with OnGo because of the unique nature of the way the spectrum is going to be allocated to facilitate in-building growth of both cellular and private LTE coverage. So we plan to be a significant player in that.

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Marc Silk, Silk Investment Advisers - President [4]

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Yes, that's very encouraging. So you talked a lot about inorganic growth. So you talked about partnerships, which I think is a great key. And what I'm encouraged about is you're not going to do a purchase unless it makes sense, because with my experience with companies like you that's a part of the telcos, they definitely need a healthy balance sheet. So I'm sure you're very cognizant of that.

My issue is, and I hate to beat a dead horse here, is that what I'm afraid of, if you make an acquisition, okay, because of this dual ownership of the stock, which, again, I've talked to investors and they stay away from you because of this, I don't know if you're going to get true value until this situation is taken care of. So again, I hate bringing up an issue, but I think Mr. Penny has a fiduciary responsibility to the shareholders to do the right thing, but there's a conflict because he has a fiduciary responsibility for the trust. So hopefully this can be handled this year, whether they -- it's got to be rectified. Let's just leave it at that. Because I think you're doing a great job. I love everything. What you're doing is you're cutting costs, you have the focus and it's something that I want to hold onto. But it's very discouraging when I get a call from someone who's interested -- because of your balance sheet. Right now you have a $7 million enterprise value and you're doing over $40 million in sales. And again, I don't want your hands to be tied because I think you're the right person for this job. So anyways, keep up the good work.

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

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Yes, Mark. The thing I'll say to that is, the family has heard you loud and clear. I've had numerous conversations. I think the family is very open-minded on this issue. And I believe when the time is right they'll address it. I think we all want to see continued growth in the value of the stock and I think when the time is right we will absolutely address that. The family has been very open in their conversation around that.

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Marc Silk, Silk Investment Advisers - President [6]

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Great. Because, like I said, I think you're doing the right things and I'm encouraged over the next few years because you're in the right area and seems like you're making all the right steps and you're not -- you're long-term focused and I think that's right. And the balance sheet is one of your biggest assets with your technology. So it sounds to me like you understand. So thanks a lot and good luck going forward.

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Operator [7]

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(Operator Instructions) And our next question comes from Steve Busch from Everglades Resources.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [8]

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Glad to see you guys buying back stock still. Are we still in that mode right now, given the enterprise value?

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

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Yes, Steve, this is Tom. We are still -- we do have a plan in place still into the fourth quarter. So there will be continued share repurchases into the fiscal fourth quarter. We continue to examine it and look at it and evaluate it in the light of cash deployment because we're also looking at acquisitions. So we're continuing to figure out what the right balance is there between deploying the cash on stock repurchases and using our cash for investments in growth. Right?

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [10]

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Absolutely right, yes. I mean, we've got $27 million, so even just another million would be nice, but -- because right now it's just so incredibly cheap, it's probably the best deal you've got. But let me ask you 2 other questions. And I appreciate you guys are looking forward towards growth and investing in growth initiatives. We are small, so we don't have a lot of scale. I understand that's an issue. What do you -- can you add some color or elaborate on your co-partnerships and kind of who you're looking at? Are you looking at any big companies, like an Ericsson? Is that kind of stuff in the works, or all smaller companies?

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Alfred S. John, Westell Technologies, Inc. - President & CEO [11]

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Yes, I can address some of that without kind of exposing the secret sauce too much. But certainly, the ip.access partnership is a good healthy partnership with a company that has a history of developing LTE wireless solutions in the small cell space. And as I responded to Mark's question, we see a growing opportunity in building. Clearly, a significant percentage of data usage happens inside the building. And there are more and more applications that are going to be specific to needing LTE-type capabilities, with the aspects of security, reliability, resiliency of that type of network. So we're excited about that development.

We have a significant development going on, on the public safety side. I will withhold the name of that company for the time being. But it's a company that has an extended relation- -- experience in the industry, a good reputation and a broad breadth of products, which we believe will give us the ability to address a larger portion.

When you look at the in-building public safety market, the segment we can address today is only a $50 million annual segment of a $400 million business. As we continue -- and that $400 million annual business is projected to grow to about $700 million over the course of the next 4 years. So what we're looking to do is expand our product portfolio to be able to take advantage of the remaining $350 million of the market segment that we can't address today and then take advantage of that double-digit CAGR from a growth standpoint. So those are the 2 most meaningful.

Certainly, as we look at 5G and what we're doing with wireless and our focus on facilitating the edge densification and growth of the network, partnerships with the likes of the [NACs] and Ericssons from an OEM standpoint continue to be of interest. We have conversations constantly going on with the likes of those types of companies. But as you well know, it's hard to get the attention of some of those larger OEMs, but we continue to entertain those types of conversations.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [12]

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Okay. That's fair enough. Just to get back to your statement on -- well, actually, let me ask you another question about the operational side. So when do you think we'll be hitting positive cash flow or even net GAAP profitability on a per share basis? You got any kind of outlook on that?

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

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Yes. So Steve, on a non-GAAP basis, the breakeven is around $12 million to $13 million in quarterly revenue given the current level of OpEx and assuming a low-40% gross margin. So I mean all you have to do is look back at some -- at the 7 quarters where we were making money. You could see the model at work if you looked back not last quarter but the quarter before and all the previous quarters from that point.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [14]

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Yes, with that said, Steve, if you kind of look at that and look out over our horizon, the investments we're making in sales and marketing and some of these new products, it's not that hard to see your way clear to getting back to those $13 million, $14 million quarters, which then would create the ability for us to be profitable again.

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

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So -- but I mean what kind of timeframe are you looking for that $13 million to $14 million? Is it 2 quarters? 2 years?

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

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It will be within this coming fiscal year for certain.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [17]

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Within fiscal year. Okay. All right. That's good to know. That's actually really good to know. So getting back to the A/B, I know we've had conversations offline about it, so I'm not going to beat that too much. But you did make the comment to Mark, and I think you said that when the time is right for the Penny Family Trust to make that kind of tradeoff. What does that mean when the time is right? What would make the time right?

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Alfred S. John, Westell Technologies, Inc. - President & CEO [18]

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Well, I can't speak for the trust. I will say that they have been very open to this conversation. And I think just from a general statement, the time being right is when we start to see appreciation in the stock value so that it makes sense for everyone at that point. What that number is I don't know and I can't speak for them. But I do -- I will tell you they have been open to that conversation.

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Steven Henry Busch, Everglades Resources, Inc. - Founder & President [19]

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Right. And I'll just add, just in case they are listening, so it's not really directed at you. But you'd probably see appreciation in the stock value if they started to do a announcement of some sort that they will begin to convert the shares into regular shares to -- on some sort of process. And then maybe the time would be right quicker. But anyway, you guys are doing a good job. I appreciate it and I look forward to the next call.

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Operator [20]

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Our next question comes from Tim O'Connell from Insight Investments.

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Tim O'Connell, [21]

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I want to follow up on Marc Silk's comments and also the previous caller. So I'm an institutional investor that has a lot of interest in Westell. And so I'm kind of going to endorse what they said. And we would look to make a significant investment in [PCTEL] at these kind of valuations. But the A/B shares is keeping us from doing that. This conversation has kind of been going on for years on this. So while you say they are open-minded, the conversation has gone on for years. There hasn't been any change. And in terms of getting to the price that they want to entertain that, just following up on this last comment that that's going to happen when those are converted. So I mean by doing this conversion, Westell is going to now be on the radar of a lot larger investment community. So it just seems kind of illogical to me, the reasonings here, the positioning by the Penny Family Trust. It just doesn't make sense as someone who's looking at this and saying we would be very interested but this is keeping us out. And I know we're far from the only ones. So those are my comments for today.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [22]

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Well, appreciate the comments, Tim. And as I said, I don't think they're falling on deaf ears. But we do appreciate the position of our investors.

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Operator [23]

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Our next question comes from [Mark Siegel from Sand Hill Capital].

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Unidentified Shareholder, [24]

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Well, we're new shareholders. I guess we picked up pretty much what Royce was selling in November/December. And we have, I don't know, maybe around 4% of the Class B shares now. So couple of things. First, I want to reiterate the obvious comments from the last 2 guys, which is it's a bit circular for them to say that they'll consider merging the share classes once the stock price is higher. I mean, the obvious reason why the stock price isn't higher is because of the separate share classes. So they might be waiting a very long time.

That said, I guess that was my opportunity and what attracted me to you guys was an incredibly low price on an EV-to-revenue basis considering how good your gross margins are. So that's a longwinded way of my urging you to make any growth that you do either organic or through partnerships, which I guess would also be organic, because, I mean, I bought you guys and even now you're selling, I don't know, somewhere around 10% of revenue or something like that. You'll never be able to buy a decent company worth buying for that kind of a revenue multiple anywhere close to that. If somebody is willing to sell you their company at that price, there's something wrong with it. So I'm glad to hear about these initiatives. I just urge you to do as much as you can organically and via partnerships. And again, this controlling family, I mean, they're shooting themselves in the foot with this thing. If you guys are out there, you Penny family people, there isn't another company publicly traded that's selling at 10% of revenue unless it's headed for bankruptcy next Tuesday. So that's what I have to say. Thank you.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [25]

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Appreciate it. Thanks, Mark.

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Operator [26]

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(Operator Instructions) And speakers, I have no further questions in queue. I will now turn the call back over to Steve for any additional comments.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [27]

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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. We look forward to speaking to you again on our next call.

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Operator [28]

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And thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.