Westell's Teleconferencing Sideline May Become Its Main Attraction

With sales growing at 55% a year, Conference Plus could be a lucrative spinoff.
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SAN FRANCISCO -- The long-awaited boom in broadband digital subscriber lines has so far eluded DSL-equipment maker Westell Technologies (WSTL) - Get Report, but the company sees a second chance in a separate market: teleconferencing services.

Westell went public at a split-adjusted 6 1/2 per share in November 1995. The stock screamed to 56 in June 1996 on the promise of its DSL systems before plummeting below 3 last October. Telephone carriers delayed deploying DSL, and Westell was stretched thin. Its revenue flattened and profits remained elusive. Now the market is taking off, but rivals such as

Cisco

(CSCO) - Get Report

and

Alcatel

(ALA)

are slashing prices. In the March quarter Westell grew DSL shipments 73%, but DSL revenue still slipped 1%.

"We had a spectacular IPO and a spectacular crash," says Marc Zionts, who was promoted to CEO in early 1998. Zionts has worked to resuscitate the company by slashing operating costs, cutting jobs and tightening its supply contracts with giants such as

Lucent

(LU)

.

Last Thursday, Westell's stock got an unexpected surge as the stock bulletin boards buzzed with speculation that Lucent would buy the company or its DSL business (neither company would comment on the speculation). Friday, the stock closed down 1/32 at 8 29/32, just 2 13/32 above its initial offering price.

Investors may have missed out on the real reason to feel more confident in Westell: It's mulling whether to offer separate shares for its 88%-owned teleconferencing services division,

Conference Plus

, which is not only profitable but growing sales 55% a year. If floated separately, Conference Plus might give Westell a rich asset -- and give its stockholders a long-awaited profit.

Wall Street is slowing awakening to the idea. Zionts spends four or five days each month evangelizing these hidden jewels to equity analysts and money managers. On Monday, for example, he's making the rounds in New York.

Conference Plus helps large companies such as

Ameritech

(AIT) - Get Report

conduct video, audio and document conferences, often using the Internet. The unit has no real synergies with Westell's core business. It's just a great sideline business that Westell launched a decade ago.

The division was born almost by accident when Westell built a network "bridge" for teleconferences in the late 1980s and started selling services along with it. Westell ceased producing bridges, but in recent years has found many large companies willing to pay up for teleconference services. In the March quarter, Conference Plus posted a pretax profit of roughly $1.1 million, compared with $740,000 in the same quarter last year. The unit now counts for more than one quarter of Westell's revenue.

"Conference Plus is begging for investors to realize the value," says analyst Reg King with

Hambrecht & Quist

. King expects the stock to rise to 13 this year and says he is not fully valuing the Conference Plus operations while they remain part of Westell. H&Q, which has a buy rating on WSTL, wasn't an underwriter on Westell's IPO but was the agent for a recent convertible-bond placement. Currently Westell trades at 3.5 times revenue for the four most recent quarters.

Westell needs a leg up. The company has posted just one profitable quarter two years. In its fourth fiscal quarter ended March, Westell lost $8.5 million on revenue of $24.1 million, compared to a net loss of $6.4 million and revenue of $23.7 million one year earlier.

So the company continues to scrounge for money. In April, deciding that interest for a stock offering was sparse, Westell raised $20 million through a 6% convertible debenture that carried an unusual provision: Debtholders can convert their debt into increasing amounts of shares if the stock falls, risking dilution for other shareholders.

It's dangerous. If Westell stock slips below roughly $6.38, the debt holders can convert for more shares, which "may result in substantial future dilution to the holders of our Class A common stock," according to company filings with the

Securities and Exchange Commission

. To limit that risk, Westell has fixed a floor price of $4.46 per share.

"It isn't as bad as it could be," says Stan Fingerhood, research director with the investment bank

Dirks & Co.

"If there was no floor price, then you could drive the price into the ground and get an infinite number of shares." The temptation for traders is to sell shares short, depressing the price, then cover and short more shares. Fingerhood's firm has invested in companies that fell victim to these so-called death spirals.

Meanwhile, the company is also shoring up other lines of business.

Fujitsu

(FJTSF)

just agreed to license Westell's DSL technology and help fund its research and development. Westell also sells "access" products that widen pipes for carriers and is developing telephone systems with the DSL upstarts

TollBridge

,

Jetstream

and

CopperCom

.

Still, Westell lacks the cachet of DSL upstarts such as

Copper Mountain Networks

(CMTN)

, which has quadrupled from its IPO price in May. Somehow, splitting its business lines seems advisable.

As one institutional trader and Westell shareholder put it, "This company would be more profitable if they just dumped DSL, which is amazing because that's why we started looking at it."