Westell Technologies Inc. (WSTL) F1Q11 (Qtr End 06/30/2010) Earnings Call July 22, 2010 9:30 pm ET


Welcome to the Westell Technologies First Quarter Fiscal Year 2011 earnings conference call. My name is Sandra 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. We will not take questions from the media. Please note that this conference is being recorded.

I will now turn the call over to Mr. Brian Cooper, Chief Financial Officer. Mr. Cooper, you may begin.

Brian Cooper

Thank you, Sandra. I want to welcome everyone to our conference call covering the results for Westell Technologies during our fiscal 2011 first quarter, which ended June 30.

We issued our earnings news release last night and you can find a copy posted at westell.com. This morning Rick Gilbert and I will update you on the business and our financial results.

Before we do, I want to point out that our presentation and discussion contain forward-looking statements about future results, performance or achievements, financial and otherwise. Words, such as believe, expect, estimate, plan, 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, 2010 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.

Now, I'd like to turn the call over to Rick Gilbert, Chairman, President and Chief Executive Officer of Westell.

Rick Gilbert

Good morning and thank you for joining Westell Technologies first quarter fiscal 2011 earnings conference call. I am Rick Gilbert, Westell's Chairman and CEO.

During this call, I will discuss developments in the business and then turn the call over to Brian Cooper, who will discuss the first quarter financial results. At the end of the call Brian and I will answer questions.

By most measures our first quarter of the new fiscal year was clearly successful. During the first quarter we recorded earnings per share of $0.07 on a full diluted basis more than double our EPS for Q1 of last year.

Our consolidated revenues declined by 23% compared with Q1 of last year but the revenue increased by 9% on a sequential basis. Like last quarter, the year-to-year drop in revenue was due to very limited shipments of UltraLine Series3 products. However even with the revenue decline consolidated gross margins exceeded 37% and total operating expenses were down 12%. The result was an improvement in net income of 133%. During Q1 we also produced a small increase in cash and cash equivalents to $61.8 million.

I will focus the rest of my comments on the first quarter performance of our three business units as compared with their performance during the prior quarter. When compared to last quarter customer networking solutions experienced a 6% increase in revenue which was driven by strong demand for the profitable VersaLink DSL gateways offset by relatively weak shipments of the low profit UltraLine Series3 products. We also recorded high margin software revenue of approximately $900,000 during the quarter. This had the aggregate effect of increasing gross margin significantly.

With expenses also down, the CNS operating loss for the quarter dropped to $440,000 versus the loss of $1.7 million last quarter.

It's important to note that it remains a key CCNS goal to exit on profitable segments of the business. As we succeed in migrating the way from unprofitable business, we expect CNS revenue will decline until we can successfully introduce replacement products. However in the short term, CNS may actually see increased but less profitable sales as we clear out remaining inventories associated with End-of-Life products.

On the strategic front for CNS, the Home Cloud project continues in the development phase. So far, we've been able to minimize incremental costs for this project, by redeploying resources from other CNS areas to fill some of our needs. Over time, investments in Home Cloud will likely increase.

Outside Plant Systems had an outstanding first quarter, with revenues up 18% over last quarter. This increase was primarily due to robust sales of products related to wireless backhaul. At this time, we expect to continue the good momentum from Q1 through Q2 followed by the typical seasonal slowdown for this business in Q3.

On the strategic front, the OSP team is tightly focused on expanding our role in the wireless backhaul market by working with customers to define more integrated solutions that allow migration from current TDM-based copper backhaul, the Ethernet based backhaul via copper or fiber. Projects associated with this approach have reached the stage where customer feedback has been soft to tune our final designs.

Outside Plant expenses already reflect added resources for these developments, and during the coming months, OSP will probably add additional hires to support the development of these promising programs.

In Q1, ConferencePlus experienced another solid quarter with increased revenues and slightly decreased profits compared to last quarter. During the quarter, the weak euro had a somewhat negative effect on the ConferencePlus global services' performance.

In general, we still need to see significantly improved economic conditions before we can expect to see meaningful increases in demand for audio, video and web conferencing services.

In summary, I believe Westell has experienced a great start to the fiscal year. And furthermore, barring any unforeseen effects from the unsettled economy, I expect a solid second quarter as well. My primary focus for the coming months will be to find ways to go Outside Plant through the addition of profitable new products, while managing the tactical issues inherent in the low margin product volume sold through CNS.

With that, I would like the turn the call over to our CFO, Brian Cooper, who will discuss our financial results before we open the call for questions.

Brian Cooper

Thank you, Rick. I will review our financial results for the fiscal first quarter. I mentioned at the start of the call that our earnings press release is posted on our website. The release contains further information in detail in addition to the numbers I'll reference.

As Rick has already commented, Westell had a very good quarter. We reported net income for the first quarter of $4.6 million or $0.07 per share. This compares against income in last year's first quarter of $2 million or $0.03 per share. With this in context, the current result is an increase of 133%. It is our fifth profitable quarter in a row and it represents our best quarter since September of 2006, which was the last time our operating income topped $4 million.

Consolidated revenue for the quarter was $41 million, down 23% compared with $54 million in Q1 a year ago. We had revenues of $38 million in the quarter ended March 31, 2010. The largest part of the revenue reduction versus the first quarter of FY 2010 derives from CNS sales of the UltraLine Series3, which were $1.9 million during the latest quarter. It totaled $13.4 million in last year's first quarter.

In total for the quarter, CNS revenues were $15 million, compared with $28.6 million in the year ago quarter. Excluding the UltraLine Series3, demand was strong for gateway devices and for the quarter, software for modems. The move from modems to gateways, it'll likely be a longer term trend in our industry.

ConferencePlus revenue at $10.5 million was down about 5% versus the prior year quarter. As you know, ConferencePlus demand has suffered because of the weak economy, but we believe demand has leveled off. Revenues were up slightly on a sequential basis versus the March 31st, 2010 quarter. ConferencePlus is working diligently to retain and grow its revenues and customer base.

Outside Plant Systems revenue was up nicely in Q1. Revenues increased 14% at $15.7 million, compared with the year ago quarter. Outside Plant is benefiting from good demand for its products generally, and particularly for products which support wireless backhaul.

The gross margins which we earned on revenues were solid across the board. CNS margins reached 23.9%. This is almost 11%age points higher than a year ago. Sales of higher margin gateways were strong, while sales of the lower profit UltraLine Series3 were down. CNS also recognized about $900,000 of high margin software revenue for the quarter. This software revenue relates to a specific customer projects.

The gross margins in Outside Plant and ConferencePlus were stable at very solid levels. As a result, consolidated gross profit was up about $400,000, even though revenue was down by more than $12 million.

Consolidated operating expenses remained low too, at $11.5 million for the quarter. This isn't about the same range as the last few quarters and is down $1.6 million versus the same quarter last year. We continued our tight focus on cost control. The latest quarter numbers also reflect some additional investment, and a shift of resources, further develop both, CNS' Home Cloud initiative and Outside Plant's Ethernet products that are targeted primarily at wireless backhaul applications.

Compared with the prior year, operating expenses therefore were down in CNS and ConferencePlus. Consistent with our investment plans, expenses were up modestly in Outside Plant. By business unit, the operating income changes for the quarter are all positive, compared with the year ago quarter. CNS reported an operating loss of $437,000, which was $1.1 million better than its quarterly loss of $1.5 million a year ago. Outside Plant Systems improved to $3.7 million of operating income, up about $300,000, and ConferencePlus earned $1.4 million for the quarter, up almost $500,000.

For comparison purposes, you may note that the year ago quarter contained a restructuring charge as well, which in total was about $600,000.

Rounding out the P&L, income taxes were positively impacted by changes in a contingency reserve and by the newly permitted full application of previous net operating losses against alternative minimum tax obligations. As a consequence, income taxes provided a net benefit of $473,000 in Q1. This compares with an income tax expense of $155,000 in the year ago quarter. Income taxes are largely sheltered by historical net operating losses.

The net result again within net income for the quarter of $4.6 million or $0.07 per share versus $2 million or $0.03 per share a year ago. I would also like to comment on our cash and our share repurchases. Cash and equivalents increased a modest $0.5 million during the quarter to $61.8 million. Two factors account for most of the smaller cash builds during this quarter compared with recent quarters. First, shifts in customer demand resulted in our acquiring inventories earlier than usual and paying for them earlier, which you can see in our lower accounts payable. We also paid out a larger share of accrued liabilities this quarter.

Share repurchases utilized only $370,000 to acquire approximately 247,000 shares. As of June 30, it was therefore $9.6 million remaining for share repurchases under our existing board authorization. I hope this has provided some additional insight on the quarter and I believe that we are ready to open the lines for questions. Sandra.

Continue to Q&A >>

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