Q1 2020 Earnings Call

On to the Westell fiscal year, 2021st quarter earnings call. My name is Alan and I will be your operator for today's call.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.

During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.

Please note that this conference call is being recorded.

I would now like to turn the call over to Tom minute shallow Westells Chief Financial Officer, Tom You may begin.

Thank you Alan Good morning, and welcome to our conference call to discuss the fiscal year 2021st quarter results for Westell technologies.

The news release, we issued yesterday afternoon is posted on our website Westell dot com.

On this call, Steve and John Westells, President and Chief Executive Officer will begin with the discussion of our business and growth initiatives.

I'll then update you on our financial results for the quarter and we'll conclude by taking questions.

Before we begin please note that our presentation and discussion contain forward looking statements about future results performance or achievements financial and otherwise words, such as should believe expect trend and similar expressions are intended to identify such forward looking statements. These statements reflect management's current expectations estimates and assumptions. These forward looking statements are not guarantees of future performance and involve risks and uncertainties that may cause westells 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 Companys 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 Weve provided reconciliations to the most comparable GAAP measures in our news release.

I will now turn the call over to Steve.

Thank you Tom good morning, everyone.

As described in our news release on a sequential quarter basis increased revenue from our IBW business Q1 was more than offset by lower revenue from our ISS in CNS segments. While we achieved increased sales across all IBW product lines, we were particularly pleased to recognize our first revenue from public safety products that are now part of a suite of new class a repeaters weve been working to bring to market under an OEM partnership agreement.

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

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

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

I'd like to now talk about our shifting focus to organic growth and share with you. Several recent internal changes that I believe better position the company for successful execution.

These changes are designed to focus significantly more rep resources on the value creating opportunities we have in growth markets like fiber access in building public safety and on go to this end we have synergize. The previously separate CNS and IBW product line management and product development groups into a single functional organization to support both business.

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

Due to some of the unique aspects of RSM solutions, most notably the heavier software content the product organization will remain as is.

Nonetheless, we are also shifting more ice and resources towards new Io T. offerings, we've been working on to accelerate our time to revenue.

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

For IBW, we see in building wireless for public safety as the market opportunity with the highest probability of success for new near term revenue with the product testing issues behind US. We are now positioned for increased growth in this market for the past several years, our offering was limited to class B single channel half Watt and two watt repeaters for the 700 800 megahertz frequency ranges the new suite of class a repeaters available to us through our OEM partner include additional capacities frequency ranges features and generalization that enable us to address a much larger portion of the market. Additionally, we have executed extended our partnership.

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

Staying within IBCM, but moving over to the ongoing we discussed during last quarter's call our new edge solution for ongoing private LTE networks in the 3.5 gigahertz DBRS frequency band, we continue to make progress with our initial plans for go edge, including the small cell solution. We jointly developed with IP access as well as network software from Druid, who we are partnering with to create robust reliable and secure cellular connections for private networks. In addition to system testing right here in our headquarters facility. We plan to participate in the upcoming initial commercial deployment were IVC tests with two potential industrial customers. These IVC test scheduled for September are an important step towards the various regulatory approvals needed before the CBS spectrum is open for full commercial deployment. If all goes well we would expect the earliest possible revenue opportunities for us to be in November .

On the CNS niacin fronts, we continue to focus on differentiated network Densification solutions to enable future fiveg connectivity more efficiently as well as the related requirement for increase remote monitoring intelligence at the networks edge capacity intelligence and deployments simplification at the edge, our key value differentiators in areas of core expertise within Westell that we are building on.

We continue to grow our fiber access product portfolio to address the needs of service providers and network operators for simplified low cost deployments as they established a foundation for the higher speed higher capacity Fiveg connections in the future. In addition to our current suite of specialized modular cassettes collapsible.

Reeling systems and fan out and other pre terminated assemblies, we are making good progress on a new innovative below grade solution that we believe overcomes a key hurdle in network densification, extending power and fiber to areas that would otherwise not meet local municipality approval due to a static requirements. As we noted on our last call. It is essentially a large low grade plastic and closure fully equipped incorporates many of our products across all three business units power distribution fiber connectivity and access pass of RF components and remote monitoring our marketing efforts to date have resulted in opportunities with a number of service provider and neutral host operators, both domestic and internationally and we expect to be in trials. This year with two customers.

Brian We have also increased sales resources over the past half year.

And now have a growing pipeline of opportunities in new markets.

With new applications, including penetrating deeper within existing accounts as well as expanding into adjacencies, such as broadcast utilities and select international markets as I mentioned on our last call. We won a new region with our largest existing domestic customer are making inroads with another large domestic service provider.

Additionally, we recently installed our RMC 700 series iOS and remote device on a small cell radio as part of a wireless carriers Fiveg trial, our industrial pump monitor solution that leverages, our optima cloud services undergoing field trials and we recognize first revenue in June quarter for both a custom solution to monitor generators for large national retailer and for our next generation Rx 1000 that we discussed during our last call.

We are working each and everyday to develop new and differentiated products and solutions that our customers need to transform their networks for the future, which is network densification and intelligence at the edge to support Fiveg and Aiotv and while we'd like to see a more rapid pace of change. These transitions take time as they are typically more evolutionary versus revolutionary. We believe we are on the right track and in the right markets, which had the highest probability for sustainable success and that can drive increased shareholder value for westell with that let me turn the call back over to Tom.

Thank you Steve.

Let me provide some added color on our quarterly results beginning with revenue.

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

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

IBW sequential increase was broad based across all product lines public safety and commercial repeaters RF system components and das conditioners.

Within public safety, we achieve higher sequential sales of our existing class B repeaters.

As well as our first revenue of class a repeaters.

I SM revenue, while affected by overall lower sales of remote units.

Primarily to our largest domestic service provider customer.

Did include first revenue related to a new generator monitoring solution as well as for our new Arren next 4000 remote.

The CNS decrease was due to lower sales of network productivity panels and late lifecycle products, such as tower mounted amplifiers and T. One network interface units.

This was partially offset by higher sales of power distribution products and integrated cabinets.

Moving on to the rest of the operating results.

Consolidated gross margin was 36.1% and one Q compared to 37.6% in for Q.

Following nine consecutive quarters of achieving our target of 40% or better higher cost associated with excess and obsolete inventory, particularly in our IBW business have resulted in sub 40% gross margins over the last two quarters.

Excluding these costs gross margin would have been over 43% in both periods.

non-GAAP operating expenses Q1 were $5 million down significantly from the $5.9 million in Fourq, you and consistent with the guidance. We gave you on last quarters earnings on last quarter's earnings call.

With the higher with with part of the higher Opex I'm I'm, sorry, excuse me with while part of the higher Opex and for Q as we mentioned last call.

Included some M&A related expenses.

The internal organizational changes that Steve just spoke about netted us some additional reductions.

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

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

non-GAAP net loss and EPS was $1.6 million.10 per share Q1 compared to $2.1 million.13 per share in Fourq you.

The GAAP net loss was in one case, it was $2.2 million or 14 cents per share compared to the Fourq you net loss and EPS of $8 million.52 per share, which included a nonrecurring noncash accounting charge of $4.7 million for the impairment of IBW intangible assets.

Turning to the balance sheet, our cash totaled $24.1 million at June Thirtyth 2019, compared to $25.5 million at March 30 Onest.

The 1.4 million cash use during the quarter was primarily the result of the operating loss.

Before we move on to questions and answers let me summarize.

We are strategically focused on growing requirements for densification at the edge of communication networks with solutions that solve for the increased capacity intelligence and deployment simplification needs of our customers all key enablers for future Fiveg conductivity and Aiotv.

We've taken additional steps with internal realignments to increase resources on those specific markets with the greatest opportunities for future Westell revenue growth.

Namely fiber access on go in building public safety, and new iOS and applications.

And we continue to focus on expense control and have taken actions to restore our opex back to optimal levels that provide for tremendous operating leverage within our business model without hindering our ability to grow in the future.

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

Thank you we will now begin the 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 queue. Please press the pound sign or the hash key.

If you are using a speaker phone you may need to pick up the handset first before pressing the numbers. So once again if you have a question. Please press Star then one on your Touchtone phone standing by for questions.

And we have a question from Marc silk from Silk investment advisors. Please go ahead.

Hi, guys. So it seems like you have a very interesting shift that you're really going to focus on the areas that you see growth of strategic partnership and your it sounds like your legacy stuff.

You know I think the where your enterprise value as it looks kind of looks like <unk> you know empty calories are empty a revenue. So my thought is this.

That's great shift, but I also think in this is to the board I also think that with the cash I would have a line in the sand I think of the cash goes below $20 million and you don't see a path to profitability or it's going to take longer.

Then I think that hiring investment banks not the worst thing in the world, but I also think it gives you you know a good a few quarters to to see if this works, but I again, I think it's the right shift of focus on the right areas and stop putting money into the areas that they're just gonna showed no growth. So you can comment on that you wish but I just think it's a nice shift.

Good morning, Mark Steve.

Yes.

You know I take your your advice and we will we are constantly looking for ways to maximize shareholder value. We certainly believe that the shift gives us the opportunity to focus where we believe the revenue.

Opportunities exists where the spend is shifting with our customers.

Certainly the the slowdown of our of our legacy business is an indication that the shift is happening in the ship is moving towards newer markets. So.

We certainly take take your comment on advisement and are constantly evaluating opportunities to maximize value.

I appreciate that and then anecdotal note can you kind of like say some things that have happened recently that maybe get you excited about these new areas. It's just that gives us more clarity going forward.

I think the biggest one.

Mark is you know.

What we're seeing in the public safety marketplace.

It is the traction is real.

More and more jurisdictions are taking serious the AD enforcing the new requirements, they're expanding the requirements even into brownfield in existing buildings, not just new occupancy is where new newbuilds.

So we're absolutely seeing a lot more opportunity there.

And with this transition in our agreement. We also have the ability to expand our product offerings into the fiber daz solution, which which opens up a larger part of that market. If you look at that overall market.

The class a class b the products that we historically have had either.

Through previous ranges or through this OEM only address about 25% of the of the entire market opportunity the fiber das product that will become part of this agreement.

Addresses the other 75% so very excited about that.

And certainly seeing momentum around more more work in the fiveg space to small cell space, which place towards the strength that we are building in the in the fiber access.

That sounds great and that Tom last question I didn't I didn't really see anything in regards to the share buyback did you guys. Many shares last this past quarter.

Mark in the quarter and first quarter fiscal 2000, and there were no buybacks. The we planned we had in place actually expired towards the end of the quarter before but we certainly have an opportunity to take another look at it here.

In the month of August .

All right, Thanks, guys and good luck with your strategy.

Thanks, Mark Thanks, Mark.

And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.

Our next question is from Steve Busch with Everglades resources.

Hi, guys. Good morning, Thanks for taking my call.

Good morning, Steve So.

I mean I like the fact that you have a new focus shift, but I mean as a long term shareholder I think weve focused and shipped it multiple times over the last 10 years, what's what's different this time our revenues are dropping.

You know how are we going to get up to this 12 to 15 million run rate we've been talking about last couple of quarters, when we're going to Miss southerly direction.

Yeah Fair comment and.

And legitimate question Steve.

I think solving the challenge we had in public safety.

I don't want to under emphasize the value that brings to us to give us an expanded product portfolio in a market that is well defined that is growing.

And that there is existing spend.

That's that's where I get the most confidence in what we're doing I thought it was important to align our resources a little differently. So that we can.

Bring product to market more more rapidly.

And not spend as much of our time and effort on sustaining products that.

Regardless of the effort that we put in there the spend is shifting and continuing to to wrap resources around those.

Just didn't make sense to us so.

I think that's where I get the confidence that we'll see we'll see a trough in revenues and start to see revenue growth.

There.

The other thing that gives me confidence is our pipeline our pipeline has doubled in the last six months.

Of of new opportunities and we're seeing different types of opportunities larger opportunities opportunities for more of a a solution approach as opposed to just a component approach. So those are the two things I would say Steve.

Okay. I mean, it's fair enough I mean, obviously, we should be focusing on new growth markets as opposed to some of the legacy stuff, but I guess the question gets back to.

Where's the truck are we at the trough are we going to drop down to 7 million revenue 8 million or are we.

On the way up.

Look we were planning, but exactly where you think we are at this stage and given the fact that we haven't bought back stock.

No.

We're down to 17% right now it just doesn't seem to make whole lot of sense, it's a pretty small companies say public.

Expense wise.

Understood understood. So certainly we addressed the expense side. This this past quarter.

And as I said in previous calls I don't see.

Quantum leaps.

It's hard hard to predict.

You know where the trough truly is all I can tell you as I do see a growing pipeline, we do see new opportunities. It certainly takes time when you bring in new new products into the market to gain traction and get momentum.

So hard to predict.

But I do have confidence that we're seeing we are seeing the right types of data.

To to try to give us confidence in the future.

Right, Okay, I guess I mean, I just follow up one more time, because it's that wasn't clear to me but.

In the last two calls our breakeven was expected to be around.

I forget the number now.

The 14 15 million was that correct that's into 12, 12, and a half million.

Yes, and we would expect it to get there around year end is that off the table now.

No I wouldn't say it's off the table.

Just still that is that is that the goal as as previously stated the goal is to get there.

The visibility we have leads us to believe that we've got a fighting chance to get there.

It's sometimes hard to predict.

With with shifting spends with our largest carriers how much that shifted spend will affect us.

And Steve lets start clarify this is Tom.

The break even analysis currently with the Opex, where we have it and if you assume a 40% on a non-GAAP basis is more in the 12 and a half that 13 range and then on a full GAAP basis would be more in the $14 million to $15 million range, but 12, and a half that 13 under the current structure of our cost and expenses with normalized gross margins would be in that 12, and a half that 13 range.

Right.

Okay. Good luck.

Thank you.

And once again, ladies and gentlemen for any questions. Please press Star then one on your Touchtone phone.

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And I'm showing no further questions at this time I would like to turn the call back to John for any closing remarks.

Thanks, everyone for joining us today as mentioned, we have much to do to grow the business and drive up shareholder value.

And we look forward to speaking to you again on the next call.

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