Q2 2020 Earnings Call
Welcome to the West out fiscal year 2020 second quarter earnings call. My name is Vanessa and I will be or operator for today's call. At this time all participants are in listen only mode. Later, we will conduct a question answer session.
During the question an extra especially if you have a question. Please press Star then one on your Touchtone phone.
Please note that this conference is being recorded I will now turn the call over to Jennifer Jane Westell interim Chief Financial Officer, Jennifer you may begin.
Thank you been that's a good morning, and welcome to our conference call to discuss the fiscal year 2022nd quarter results for Westell technologies.
The news release, we issued yesterday afternoon, it's posted on our website.
Dot com.
On this call him determine.
Our 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'll conclude by taking your question.
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 statement.
These statements reflect managements current expectations estimates and assumptions.
These forward looking statements are not guarantees of future performance and involve risks and uncertainties that may cause <unk> actual results performance or achievements to differ materially from those Scott.
A description of risk factors that may affect our future result is provided in the Companys SEC filings, including Form 10-K for the fiscal year ended March 31st 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 we present non-GAAP financial information in our news release it because we believe non-GAAP measures provide meaningful supplemental information to both management and investors.
The non-GAAP information reflects the Companys core ongoing operating performance and facilitate 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.
Thank you Jennifer and good morning, everyone.
Before I forget I want to say a few words about Jennifer our interim CFO .
Jennifer this EPA with a blend of public and non public accounting experience with increasing responsibilities. She began her career as an auditor with Arthur Andersen and has been in senior finance roles at Westell for more than 16 years.
Jennifer understands the business well and has consistently shown good judgment organizational skills and accounting expertise.
I have complete confidence that Jennifer and our accounting team can handle matters, while we look to secure a permanent CFO .
We are actively evaluating CFO candidates I will keep you updated as the process continues.
As this is my first opportunity to speak with most of you as West Health, President and CEO I want to share my perspective on the actions, we're taking to turn the company around and return to revenue growth and profitability.
The first a little bit about me.
Joining the Westell board of directors in June of this year with a homecoming for me I previously worked at Westell for 10 years, leading teams that successfully rolled out new products growing company revenue and profitability.
One point I served as vice President and General manager of what was then our telco access products business.
Developed many new products that help grow that business.
I have many good memories of working at lifestyle and that history played a large part and my decision to rejoin the westell team.
After my first tenure at Westell I served in similar executive leadership roles at Informatic, and most recently Klein tools, where we developed a new corporate strategy centered on growing the company through new product sales.
Hi, Thank tools my team rolled out many new products that led to significant revenue and profit growth over the last 10 years.
Klein tools now known in the tool industry for their new product innovation and has won many new product award.
The time I spent with the Westell board of directors over the summer helped bring me up to speed quickly.
When I accepted the president and CEO role at August I was familiar with the challenges we face.
I chose to accept the CEO role because of my high regard for the West help brand and its people I also like the opportunities for our new products and public safety fiber connectivity and remote monitoring.
In addition, I believe my experience and successfully delivering innovative new products is well suited to helping westell.
Return westell to healthy growth and profitability.
As you have seen we have work to do.
Westell second quarter results continued the recent downward trend despite continuing growth in public safety revenue declined broadly across our legacy product lines and profitability followed.
Since I joined the company in September we have been working hard to turn this trend around.
The entire management team is urgently working on increasing revenue, reducing expenses and expanding our customer base.
Over the last two months, we took direct action to improve our results by reducing our operating expenses. This included a significant restructuring in October that cover the entire company.
As a result, we expect to bring down non-GAAP quarterly operating expenses to under $4.4 billion for the mirror near term.
We are committed to building revenue and a key to that is sharpening our focus to bring the write new products to market in a timely fashion.
I want to touch on a few of those efforts.
Westell as devoting more resources to our in building wireless business and in particular to IBW as public safety offerings.
Public safety is a promising business driven by strong market demand as an expanding number of local jurisdictions are requiring public safety coverage and commercial buildings.
We are addressing that demand with the successful introduction of our new family of class, a repeaters and a new licensing agreement the provides greater control over manufacturing lead times inventory and costs.
We expect to begin shipping product to customers under this new licensing agreement in our fiscal fourth quarter.
In addition, this new agreement affords us the opportunity to expand our public safety product offerings.
As part of this refocusing effort, we are de emphasizing our activities related to ongoing and the Crs market.
We were looking at large investments and field trials inventory and additional sales and engineering personnel.
The Crs market is increasingly crowded with large competitors product margins are eroding and large rollouts are delayed into the second half of calendar 2020.
We move those resources to other IBW projects with better payback.
We are excited about the opportunities are intelligent site management business and the opportunity provided by the accelerating deployment of Fiveg wireless.
The engineering team is developing a new monitoring products, specifically designed for small cell fixed wireless site.
We're also expanding the I SM business into adjacent markets. As one example, we continue to Rick recognize revenue for our custom solution that enables remote monitoring of backup generators at a large national retailer a deployment that kicked off in June .
On the communication network solution side, we continued to develop new fiber connectivity solution products.
These new CNS products deliver quick and easy fiber deployment with Ryan reliable connections for Fiveg broadband and the internet of things.
Last quarter, the company discussed a below ground vault solution.
Our two lead customers for that solution decided not to rollout they below ground network at this time.
Since the projects were delay we put the product on hold and moved those development resources to other fiber connectivity solutions that we expect to deliver near term revenue.
In summary, we are beginning to turn the company around and drive revenue growth and profitability by developing new products for in building wireless fiber connectivity and intelligent site monitoring.
Bringing on new customers to expand Westells customer base.
And managing our expenses Wellington, we invest in the most promising new product areas.
With that said, let me now turn the call back to Jennifer.
Thank you Tim.
I will provide some key financial highlights on our quarterly results beginning with revenue.
For the fiscal second quarter ended September Thirtyth 2019, total revenue was $7.6 million compared with $9 million in the first fiscal quarter ended June Thirtyth 2019, as revenue decrease across all three segments.
Our IBW segment produced our highest public safety revenue to date and increased revenue from active das conditioners, but those increases were more than offset by lower revenue from commercial repeaters passive das conditioners and RF system components.
Within public safety customers continue to embrace our newly released class a repeaters.
In the items segment higher Optima software support agreement revenue with more than offset by lower sales of remote monitoring units.
For the CNS segment increased revenue from Q1 network interface units with more than offset by lower revenue across the remainder of the SEC.
Please.
Hi, Wiley reconnect our presenters.
Thank you for standing by our speakers have rejoined.
Sorry for the technical difficulties I will begin my presentation at the top from from the handoff from Tim I will provide you with some key highlights of our quarterly results beginning with revenue.
For the fiscal second quarter ended September Thirtyth 2019, total revenue was $7.6 million compared with $9 million in the first fiscal quarter ended June Thirtyth 2019, as revenue decreased across all three segments.
Our IBW segment produced our highest public safety revenue to date and increased revenue from active das conditioners, but those increases were more than offset by lower revenue from commercial repeaters passive das conditioners and RF system components.
Within public safety customers continue to embrace our newly released class a repeaters.
The I SM segment higher Optima software and support agreement revenue was more than offset by lower sales of remote monitoring units.
For the CNS segment increased revenue from Q1 network interface units 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 20.9% in Q2 compared with 36.1% in Q1.
The lower margin in Q2 reflects significant charges for the quarters excess and obsolete inventory amounting to $1.3 million.
Excess and obsolete inventory costs were also high in each of the two preceding quarters. This was unusual as reflected rapid changes in some product technologies and unexpected shifts in customer demand.
We believe the estimates and assumptions underlying our inventory provision are reasonable and we expect to see lower eno charges moving forward.
Excluding the cost gross margin would've been 38.5% in Q2 and 43.2% in Q1.
The remaining pressure on Q2 s margin is primarily the negative effect of fixed cost absorption because of lower revenue.
We have addressed some of these fixed cost with our October restructuring.
GAAP operating expenses were $5.3 million in Q2 down from $5.6 million in Q1.
On a non-GAAP basis operating expenses in Q2 were $4.8 million down from $5 million in Q1.
As Tim already mentioned once the full impact of the restructuring actions that were completed in October flow through the financial statements. We expect to reduce non-GAAP operating expenses to less than $4.4 million per quarter for the near term.
The lower operating expense in Q2 was more than offset by the lower revenue and gross profit, which resulted in a GAAP operating loss of $3.7 million compared with $2.3 million in Q1.
Our non-GAAP operating loss in Q2 was $3.2 million compared with $1.8 million in the prior quarter.
GAAP net loss in Q2 was $3.6 million or 23 cents per share compared with $2.2 million or 14 cents per share in Q1.
non-GAAP net loss in Q2 was $3.1 million or 20 cents per share compared with $1.6 million or 10 cents per share in Q1.
Turning to the balance sheet.
On September Thirtyth 2019, our cash totaled $21.7 million compared with $24.1 million at June Thirtyth.
The $2.4 million in cash use during the quarter was the result of the operating loss adjusted for noncash items and and the initial $1 million payment associated with the licensing licensing agreement for the public safety products.
At this time.
We will open the call to your question.
Thank you we will now begin our question and answer session.
If you have a question. Please press Star then one on your Touchtone phone.
If you wish to be removed from the Q. Please press the pound sign or the hash key if you are using a speaker phone you may need to take the handset up first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone and please standby, while we allow parties to queue up.
And thank you we have our first question from Marc silk with silk investment.
Thanks for taking my questions I have quite a few here. So I don't start for about four years mill.
And.
As I'm watching the stock down 20% of right now at 98 cents. This isn't part of my questions, but it's just so frustrating because I. Just here. This is like every time, a new CEO and you the fourth CEO in the last few years.
And now were 98 cents, we're gonna probably have to do another reverse stock split which will be the second time in four years. It's just on the hurdles. So you know you them so much Scott skepticism where.
So frustrating and I'll give you a great point, Okay. You were small company and you have some very interesting products, just I want to get into but the problem is you just talked about this underground the fiber and now a client decide to push it off for a few quarters you can't continue to be accompanied by it.
So because telco is a fairly tough urea its long sales cycles and that's what so let me get some questions.
All right. So on October 18th you announced the restructuring to save cash and focus on three areas for new product growth. Okay. So let's talk about public safety, what makes the west top product unique.
Hi, I missed yourself this is Tim Duitsman item.
What we're working on right now and continue to work on to make it new unique his work on our durability reliability and the ease of installing that product.
Right now we are in an OEM relationship and we're shipping that product, but the licensing agreement that we sign will allow us to bring that product in next year and and work with that product at our sub contractor.
So.
The advantages we have right now as our sales team does some great design work with our integrators and we've got.
Several people learning that market and driving it forward.
It's.
We also will have a BBU unit, which will bring us up to you. All 20 524 in the second quarter of next year.
So, but so when these type of things how long is a sale cycle for these products.
It varies the quote cycle it depends on when they build the building and when they ask for the quote. So we can ask for a quote and sometimes it will be turned around and on less than a month and other times, it's a much larger innovation or a new building and that takes six to nine months.
Our pipeline of quotes is growing rapidly.
On your fiber deployment, what kind of opportunities do you see out there.
We've got several going right now the most promising one is to help tier two level customers attached to their fiveg installations. So we're working on boxes that easily allow them to quickly and reliably attached to a fiveg radio so it's a cost.
Them cable and a custom box.
And those prototypes will be going out within a month.
And then what.
And then the same question what makes you guys with what makes the west helped product unique.
I think working what's different about US is we're working with the end customers to learn their needs and then designing a product specifically for them. So it's not.
Generic product its fits exactly the way that they're deploying that product and it fits their needs in the market.
And then we rapidly turnaround a prototype for them.
Which again sounds like pretty long sales cycle am I incorrect on that.
On that one it's a much shorter sales cycle, there, they're putting those radios out there right now.
And the installers are having a difficult time.
And in some cases, the cables are getting broken and they want to solution quickly to help that.
In regards to remote monitoring what areas are you focusing on.
And what opportunities do you see out there.
Well the main one we're focusing on is the fiveg deployment, the small small new fiveg radio and and small cell sites.
Developing as a new product for that.
We have one in trial right now and then we're also developing a new smaller version that can be used.
So we also have efforts in international and then in domestic we're looking at trying to expand into district different customer markets with utilities and remote generation monitoring.
And again, what makes you guys unique in this.
It's good are our actual monitoring products that set out on the end our are pretty high level and can do quite a bit of they manage you can manage things you can put in Ethernet connection you can.
Monitor power, there's there's quite a few things, but that doesn't brings the data back to the user.
So those are pretty useful to us and we have a larger scale than most of our competitors and the quality is very high.
And then okay, that's encouraging but the sales cycle again, another six to 12 month type of scenario.
Well, we're in field trial, right now and the power generators solution. So that depends on how quickly the customer decides to roll that out so.
Some of the other products it is a little lumpy and it does take longer on the big bids. It's and then the new the new smaller monitoring is probably nine months away.
All right. So you mentioned that you will take a restructuring charge of 200000 to save 1.7 million annually, but last quarter alone. The cash was reduced by 2.3 million can you see how this is a company that is on sustainable on its own with continued cast depletion long sales cycles at the Mercy of your customers continue to shrink in the business.
And now the cash continues to go lower and I've.
I had been investing in.
Yes, its companies for 30 plus years, it becomes more challenging to sell to the large customers you sell to as they need to make sure you will be able support them going forward over the negative trend. This company has been in for numerous years getting new business is a sold into the is going to become harder and harder not easier over the next few years would you like to comment on that.
Yes, there were a lot of questions in there, but let me get to the base of it I guess the problem. Our largest problem is getting back to growing revenue. This current revenue trend is not acceptable and we need to grow our revenue while watching our expenses and the way we're going to do that is through new products.
We've realigned our resources and the products that are most likely to yield significant revenue.
Public safety fiber connectivity and integrate site integrated site monitoring.
We did put some projects aside but those had a longer payback or were less likely to be successful.
And we have to get back the cash flow breakeven and Thats, what the management team is working towards.
What kind of timeframe are we talking here a year.
You're talking later in the 2021 fiscal year.
All right, one more thing or actually a few things because not many people who ask questions. On this so I just want to reach out to the recipients of the Penny Trust as well as shareholders on August 11, 2016 Club Street capitals wed a large position in Westell was trying to help all the shareholders increased the value of the company.
Following a 13D they publicly stated quote we are writing to call for an end to the charade before any more new growth or second chance opportunities burn more cash further destroy value just about any unbiased observer would conclude that the company should immediately hire a credible third party investment banker and put the company up for sale in order.
It to salvage what lemonade can be salvaged. Our extensive research suggests there are legitimate willing buyers who can provide scale to westells minute product line unquote.
This is me in addition, cold mentioned that there were four CEO changes, while they own the stock for several years previous to the filing bus Penny ignored the play now fast forward to today more than three years since Cove tried to help they are out of the stock and now the stock has been cut in half while the S&P 500 has gone up 50%. So if you're wankel buzz was not so close minded.
Instead of you losing half your inheritance, you would have received a premium for your shares which at the time, we're trading in the 2070 cents range and then even if you put the money and S&P 500 fund with the proceeds of the sale your west mistake would have been more than tripled from where the stock prices. Today. In addition, we have gone through three more Ceos. So I am pleading with you when you have.
Thanksgiving dinner with uncle Bobs, you can say, we did it your way, but now have we still have the cash on the balance sheet and relevant products into the expanding fiveg environment are too small to compete to get our brand to profitability why don't we explore selling the company before it is too late and clip pennies creation will be part of something bigger and you. Finally did the right thing for the family.
Most of the long suffering shareholders. So again, the things you're saying are great. What's the same thing over and over again and I just want bus to do the right thing because what he's doing is it's just the self gratification be part of a board and listen I get it my my dad develop the cash for its financial strategy and and he passed away last year, although it's Michael to.
Keep that going but at what expense if it's not working out then you just move on this has not worked out cold pride to help and then you just given the high summit.
This is just again this is just on and on none and I don't care, if I have a huge position the stock I don't care, if I heard the stock price, but you got to do the right thing put Tim your great Guy and that's fine and obviously your first bite at the Apple the CEO . So now we have to break it another new CEO . It's just not right pleased with the right thing I, just I hate being in a position where.
I have no say an all my only say is to sell my shares or file a 13 days, but obviously that didn't work so listen good luck, but suffice it to the right thing and the Penny Trust you got to put pressure on your won't go because this is going to go to zero. So.
Okay.
Thank you. So much we will proceed to our next question. It comes from Daniel Toner Who's the shareholder.
Hi, Good morning, Tim I think Mr. she'll covered most of my questions I'll ask if you can just expound a little bit more on the fiber access below grade product.
Heard that it's been delayed put out a couple of quarters.
But is that something that will be generating revenue down the road and can you give a little insight.
Into.
It's possibility.
Quantify the approximate a potential revenue that a product like that can generate.
Well.
Mr Toner.
What happened with the product was we were working with two lead customers and the first customer lost their funding for the program and the second customer Randy to approval problems with a municipality, where they were planning the rollout.
The municipality Didnt want to approve underground digging in so many locations.
So when we looked at it it makes it a much more difficult project to deploy and.
We will continue to see if there is interest in it but right now I'd say, it's unlikely that it'll have revenue in the next couple of years.
I see okay.
Municipalities are having problems with digging that many holes throughout an area.
Because they have to go out and spectrum and look at them and so on did I understand you to see that management's goal now is to reach breakeven level.
Of operation at the end of fiscal 2021, which would be.
Oh, that's that's about a year and a half a year in a quarter out little over a year.
Okay. So will the expectation is will be burning cash for another year or so.
Well, we're we're trying to reduce that burn rate and get their as fast as we can but right now the plan looks like we can get there.
In the third or fourth quarter of next fiscal year got it okay.
Alright, Thank you very much.
Thank you Sir I see we have no further questions in queue. At this time I will turn the call over to Tim do Smith for closing remarks.
I. Thank all of you for joining us today as mentioned previously we have much to do to turn the business around and drive up shareholder value topline revenue growth is our highest priority, we're developing new public safety fiber conductivity and remote monitoring products.
We're also expanding to new customers, particularly in the IBW and I assume product areas, we will manage our expenses and strategically invest in the most promising new product areas. We look forward to speaking with you again.
Thank you ladies and gentlemen, this concludes our conference. We thank you for your participation you may now disconnect.
Yes.
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