Westell Technologies, Inc. ( WSTL)

F3Q11 (Qtr End 12/31/10) Earnings Conference Call

January 20, 2011 9:30 AM EST

Executives

Brian Cooper – CFO

Rick Gilbert – Chairman, President and CEO

Analysts

Jeff Linroth – Leaving It Better, LLC

Steven White – RMB Capital Management

Brad Evans – Heartland

Brian Horey – Aurelian Management

Richard Greulich – REG Capital

Ted Moreau – WJB Capital

Presentation

Operator

Welcome to the Westell Technologies Third Quarter Fiscal Year 2011 Earnings Conference Call.

My name is Christine and I will be your operator for today's conference.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Brian Cooper

Thank you, Christine. I want to welcome everyone to our conference call covering the results for Westell Technologies during our fiscal year 2011 third quarter which ended December 31 st. We issued our earnings news release last night and you can find the copy posted at westell.com.

This morning Rick Gilbert and I will update you on the business and our financial results.

Before we begin, I would like to note that our presentation and discussion contain forward-looking statements about future results, performance or achievements financial and otherwise. Words such as believe, expect, anticipate, 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 material 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 st, 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 would like to turn the call to Rick Gilbert, Chairman, President and Chief Executive Officer of Westell.

Rick Gilbert

Good morning and thank you for joining Westell Technologies’ third 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 third quarter financial results in more detail. At the end of the call Brian and I will answer questions.

I am pleased to report that despite the expected seasonal slowdown in the Outside Plant business, our third quarter results show year-to-year increases in revenue, earnings and cash flow with all three business units contributing positive operating income.

To put this quarter into perspective, looking over the past several years, the Q3 FY11 consolidated operating income trials only the previous two quarters, which were unusually strong results for Westell.

During the third quarter, we recorded earnings per share of $0.04 on a fully diluted basis, essentially equal to the EPS for Q3 of last year. Our consolidated revenue increased by 13% compared with 3Q of last year. Consolidated gross margins for the quarter were 31%, slightly down from 32% last year. Consolidated net income increased modestly by 7% year-to-year. During the quarter, we also increased cash and short-term investments by $16.4 million to a total of $86.4 million.

As usual, I’ll focus the rest of my comments on the third quarter performance of our business units as compared with their performance during the last quarter.

When compared to a strong second quarter, Customer Networking Solutions still experienced a 6% increase in revenue, coupled with an increase in gross margins to 18%. Furthermore, despite a modest increase in operating expenses to support their HomeCloud initiative, CNS recorded an operating income of $642,000, a significant improvement over last quarter. The business continues to be driven by demand for our VersaLink gateways and by shipments of our remaining Verizon UltraLine Series3 inventory. In Q3, we also recognized $1.1 million in the software revenue associated with the UltraLine Series3 products at Verizon.

On the strategic front, the HomeCloud team continues to make good progress. During the quarter, we received the first production level Digital Home Manager units, and the software team prepared an excellent demonstration of HomeCloud functionality for this month’s consumer electronic show. During Q3, we announced that HomeCloud was chosen to receive one of the coveted CES Innovation Awards this year. And the private demonstrations of HomeCloud at the show were enthusiastically received by our current customers and potential partners.

Outside Plant Systems had a relatively weak quarter with revenues and operating income down when compared to last quarter. The primary reason for this slowdown was weak sales of our T1 network interface units due to the winter seasonal slowdown that is typical for this business.

In addition, we saw an unusually high level of customer reuse, refurbished equipment during the quarter. You may recall that in our last call, I said we expected the seasonal effect. But it seems more dramatic this year given the outstanding Q1 and Q2 performance at Outside Plant. The good news is that order levels have improved and we expect strong performance in Outside Plant during the current quarter.

Relative to new products, the Outside Plant team is making nice progress on the development of the Ethernet backhaul products that are designed to retrofit into existing already installed cell packing closures. Using closures are made by Westell and used for the backhaul of cellular traffic over wireline networks. This month, we released the first of these e-Smart access products, a temperature hardened Ethernet Edge switch, and we are in the process of supplying evaluation units to customers.

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