Westell Technologies October 22, 2003
Westell Technologies Second Quarter Fiscal Year 2004 Earnings Conference Call
with host Van Cullens on October 22, 2003, at 8:30 A.M. Central Time.
Confirmation #7835684.
Operator: Good morning ladies and gentlemen and welcome to the
Westell Technologies Second Quarter FY04 Earnings
Conference Call. At this time all participants are in
a listen-only mode. Later we will conduct a question
and answer session. I would now like to turn the call
over to Mr. Nicholas Hindman, Chief Financial Officer
of Westell Technologies. Mr. Hindman, you may begin.
Nicholas Hindman: Good morning and thank you for attending Westell
Technologies Second Quarter Fiscal 2004 Conference
Call. I am Nick Hindman, Westell's CFO. Today's
earnings call is being managed and hosted by our
subsidiary Conference Plus. We are, again, pleased to
welcome the public to our call. Joining me today is
Van Cullens, Westell's President and CEO; Bill Noll,
our Chief Technology Officer; Gordon Reichard, our
Vice President of Marketing; Tim Reedy, President and
CEO of Conference Plus is joining us from the
Conference Plus Headquarters in Schaumburg, Illinois.
After the market closed yesterday the Company
reported our second quarter fiscal 2004 results.
Today I would like to review our financial results
and Van will offer some additional comments. We will
then take your questions.
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Westell Technologies October 22, 2003
Before I discuss our second quarter results please
keep in mind that comments made during this
conference call that are not based on historical fact
and that contain the words "believe," "estimate,"
"think," "intend," "anticipate," "goal," "strive,"
"committed," "feel," "guidance," "likely,"
"indicate," or "expect" or similar expressions should
be considered forward-looking statements and should
be taken and understood within the context of our
"Safe Harbor" statement as stated in our earnings
release.
The Company's earnings release and related earnings
information that will be discussed on this earnings
call is posted on the Home page of the Company's
website at www.westell.com.
We are very pleased to report that Westell achieved
its sixth consecutive quarter of profitability.
Income for the quarter was $4.9 million or $0.07 per
share compared with income of $796,000 or $0.01 per
share in the comparable quarter of last year. Revenue
was $58.4 million for the second quarter compared to
$56.2 million for the same quarter of last year. CNE
or Customer Network Equipment revenue increased to
$31.9 million compared to $30.1 million in the same
quarter of last year. Revenue from Network Service
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Westell Technologies October 22, 2003
Access Equipment was $15 million compared to $16.2
million in the comparable quarter of last year.
Gross margin for the equipment portion of our
business was 30.6% compared to 29.2% in the
comparable quarter of last year. The gross margin
percentage declined from the June quarter due to
price reductions on customer networking products and
a $1.2 million payment of a customer obligation which
erose during the quarter. This payment was made
pursuant to a customer contract and is deemed to be a
one-time expense. Our customer contracts are
confidential, so we will not be able to discuss this
matter in any more detail.
On operating expenses Westell's op ex as a percent of
sales without Conference Plus are broken down as
follows: Sales & Marketing - 7.8% of sales, R&D -
8.5% and GNA - 5.5% for a total Westell op ex of
21.8% of current sales. This compares to a rate of
22.4% of sales in the comparable quarter of last
year.
Conference Plus revenue increased to $11.5 million
compared to $9.9 million in the comparable quarter of
last year. Revenue at Conference Plus in the quarter
was down slightly from the first quarter due to there
being one less business day in the second quarter.
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Westell Technologies October 22, 2003
Conference Plus gross margins increased to 40.8%
compared to 29.7% in the comparable quarter of last
year. Gross margins at Conference Plus for the
quarter decreased from 41.7% in the first quarter to
40.8% in the second quarter due to reductions in
revenue rates per minute.
Some other important points of interest: Cash
generated from operations in the quarter was $8.7
million. Total debt was reduced by $12.9 million
during the quarter. We are not currently borrowing
any money on our $30 million credit line. Inventory
was reduced during the quarter by $1.3 million.
Capital expenditures were $865,000 for the second
quarter and appreciation expense was $1.9 million. We
began the quarter with 871 employees and ended with
854. At the end of the quarter we had $14.7 million
of goodwill and other intangible assets related to
the Teltrend* acquisition. The intangible assets
continue to be amortized and during the quarter we
reported $364,000 of amortization expense. Day Sales
Outstanding for the quarter were 36 compared to 39 in
the June quarter.
This concludes my summary of second quarter results.
Before I turn the call over to Van Cullens, I would
like to state our guidance for the December quarter.
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We expect that revenue should be in the range of $58
to $59 million with an EPS of $0.07.
Van will now offer some remarks and then we will take
your questions. Van.
Van Cullens: Thank you Nick. Good morning everyone. I would like
to speak to you today about three basic areas. First,
for all of our investors, especially the nearer ones
I would like to explain why we feel the Company is
well positioned to deliver growth. Next, I will cover
some specifics of our Q2 performance. Finally, I will
share some general comments about the direction of
the industry and our position in it. Then, we will
take your questions.
So let me start with why I believe the Company is
well positioned to grow. First, we have very good
position in one of the few growth markets in
telecommunications, that being DSL. Our customers,
primarily telephone companies have dramatically
expanded their DSL programs and we believe they are
now taking market share from their cable TV
competitors. Traditionally most of the larger ISPs
have dispensed with offering their DSL TPE giving the
telephone companies incremental business opportunity.
Additional penetration of this market, expanded
application and the emerging premise network
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Westell Technologies October 22, 2003
opportunities provide plenty of headroom for this
market. Our initial bet that the telephone companies
will be the big winners in the DSL competition is
being validated by market development.
Second point is that we have other contributing lines of
business with Conference Plus, our conferencing
subsidiary, and our legacy T1 business, our network
service access area. Additionally we have Westell
Limited, a small but interesting operation in the UK.
These businesses compliment our DSL business more
than most people appreciate and we see that linkage
increasing. Conference Plus and NSA contributed
significant revenues and cash flows while requiring
comparatively less capital investment and senior
management attention than does the DSL business.
Conference Plus, in particular, has a very attractive
growth potential of its own and Westell Limited has
some very interesting voice over IP technology that
is beginning to produce sell. These businesses are
productive assets that enhance the overall
capabilities and the value of Westell Technology.
Lastly, as I noted earlier, we have significantly
improved our cash position. We have used this
improvement to dramatically reduce debt giving us
flexibility to improve our competitive position and
to pursue next generation product opportunity. This
increase liquidity will be used for initiatives such
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Westell Technologies October 22, 2003
as: continued evolution of our current products
providing additional functionality, ease of use and
even better price performance, incremental R&D and
strategic partnering efforts designed to increase our
market and product diversification, improvement and
expansion of our marketing capabilities and increase
financial flexibility to make timely capital
investments or acquisitions to facilitate all of the
above. We feel we now have a plan that will yield the
growth we need to maintain a sustainable leadership
position in our space.
Now a few comments on our second quarter: As the
numbers show we continue to post solid results in
still somewhat uncertain times. Where there continues
to be much media debate on the DSL cable modem
competition it seems very clear to us that demand for
DSL is now accelerating more rapidly. Our customers
are making significant investments to provide a
superior broadband service at the lowest possible
price to endusers. These customers have increased
their modem purchases during this quarter as they
expand their DSL programming. Unfortunately the full
impact of these increases is partially offset by the
continuing decline in unit prices, which we have
predicted. On the positive side of this however the
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Westell Technologies October 22, 2003
increasing volume provides additional opportunities
for operational leverage. In the DSL CPE business
volume is king and fortunately we have volume. During
the quarter we announced the addition of an important
new customer, Cincinnati Bell, where we once again
dislodged an incumbent. While Cincinnati Bell does
not have a scale of some of the larger carriers they
do have similar requirements making this win another
confirmation of Westell's superior value proposition
in the DSL modem space. As I said last quarter, we
are still working hard to chip away at the incumbent
modem suppliers and target accounts in North America
and Western Europe and we believe we are making
progress in this regard. Unfortunately this progress
has been slow somewhat by customer decisions to wait
for the next generation AR7 product rather than make
a product selection on the current AR5 based modem.
We presently have AR7 products in multiple valuation
trials and will be able to ship this product in
volume in another month. We have to work the
remaining customer issues where they exist and then
attempt to bring some of these engagements to
closure. This is all that we all say at this point
relative to specific US customer opportunities. More
broadly the broadband market in general is very
dynamic and is about to become even more so. We
believe we are on the cusp of interesting market
transitions that will be triggered by the emergence
of new applications such as WiFi and other local
distribution technologies, managed services and voice
over IP deployment, video based services, new
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Westell Technologies October 22, 2003
technical standards such as ADSL2, 2+, breach
extended ADSL and perhaps even the resurgence of
VDSL, finally the shift from USB to ethernet that we
are beginning to see in Europe and other
international markets. We intend to provide our
customers a more powerful lineup of modem, next
generation gateways, voice over IP AIDs, supporting
management platform and applications that are pointed
toward these emerging market transitions.
Simultaneously we are expanding, as we said we would,
our international efforts. Our initial focus is in
Western Europe and we will base this effort at
Westell Limited in the UK. For the past five months
we have been doing on the ground market analysis
there and are now staffing the operation to go after
identified opportunities. While the bulk of our
effort will be focused there we will consider
non-European opportunities on a case-by-case basis as
we do have partners that surface such opportunities
from time-to-time. While our initial international
aspirations are relatively modest we are intrigued by
the longer term potential of these markets. Overall
we remain confident that along with our new product
initiatives, our reputation for product superiority,
technical innovation and strong customer support have
worked to our advantage in winning additional
customers, both domestically and internationally. As
we discussed during the last two quarterly conference
calls, pricing pressure across all of our business
this continues to be a fact of life and we expect
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Westell Technologies October 22, 2003
this trend will continue into the next fiscal year.
Our challenge is to manage these pricing pressures
through new product introduction, cost containment
action and operating leverage just as we have done
for the last 7 or 8 quarters. Going forward we want
to secure longer term relationships with our
customers wherever possible. We believe such
relationships will produce more predictable volume
which is vital to maintain margins in this type of
business. Typically the tradeoff for the longer term
relationship is some sort of price protection and
that is a tradeoff we understand. To support this
strategy we have launched new initiatives with our
suppliers to reduce component cost and our R&D teams
continue to find product innovation to help support
our margin target. Obviously the best longer term
solution to this problem is buttress our current
position with new products and with expansion into
attractive new markets. We are attempting to do both.
Fortunately we have adequate capacity in our Aurora
operation, which means that we can cost effectively
add incremental volume as we win it. Productivity
increases driven across all of our operations over
the past couple of years have positioned us very well
in this regard. To sight one example, we have seen a
236% productivity increase over the last two years in
the area of modems produced per head count.
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Westell Technologies October 22, 2003
Productivity and cost management are core elements of
the strategic planning that we are now engaged with.
To summarize our DSL business, we clearly recognize
the value, additional volume and product market
diversification it will bring. We continue to be
tightly focused on winning new customers over the
near term and in parallel we are working on exciting
new product and market initiatives to provide that
incremental growth and diversification. While this
strategy will require investment we remain confident
in our ability to maintain the profitability of our
CNA business.
Now let's look at the network service access, NSA
area known to some of as TAP. We are encouraged with
the recent improvement in the NSA results. We are not
sure if this is a permanent improvement or a
temporary period of inventory replenishment on the
part of our customers. Whatever the case, competition
in this space continues to be surprisingly active.
While we have been winning more deals than we are
losing price competition is higher than you would
expect for a relatively mature market like this one.
Westell is looking at selective R&D investments in
the NSA space and have a couple of very interesting
new productive concepts under review. We believe that
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Westell Technologies October 22, 2003
our broader product portfolio, emphasis on product
quality, responsiveness and financial stability make
Westell a very good choice for those customers
seeking NSA type solutions. Our objective for this
area of our business remains unchanged, increase
market share and the core NSA product area while
optimizing our return on investment wherever we can.
Next let me make a few comments on Conference Plus
where we continue to be pleased with the operational
performance of that business. The management team
there has been doing a very nice job and we hope that
continues obviously. Having said that, we are making
price concessions as we are doing elsewhere in order
to secure longer term customer relationships. Again,
while it may dampen margins over the short-term we
believe that it is extremely important for this
business, the more forward visibility we have the
better. We also have very good relationships on the
wholesale side of this business and have taken
significant steps to balance our revenue profile with
an expanded retail effort launched earlier this year.
Our full service positioning, meaning audio, video
and web services along with our back office
capabilities, which include special billing and
service customization capability and our overall
profitability at Conference Plus distinguish us from
most of our competitors. We are increasingly
comfortable with the positioning of this business.
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Westell Technologies October 22, 2003
Now let me close with some general comments about the
direction of the industry and our position within it.
First, while I am not about to say that the entire
telecommunications industry is in recovery, I will
say that certain segments within the industry are
showing encouraging signs of some recovery. Beyond
that I will only say that the outlook for the next
two or three years almost certainly must be greater
than it has been for the past two or three. And for
that I think we are all grateful. We believe that DSL
will remain an area of significant investment for the
next several years. For the immediate, intermediate
term DSL is the best weapon our customers have in the
broadband battle. Our view is that the much debated
transition to an all fiber network will take much
longer and be much more expensive than most people
expect. Additionally, trends toward wireline wireless
convergence, video and gaming applications and voice
over IP introductions will drive today's broadband
market to new heights. We believe the DSL space will
remain hot for the foreseeable future. Given this
backdrop we have moved the company into position
where we now have choices between strategic
alternatives. We have been sorting through these
alternatives for the last year and now have a roadmap
that is guiding our investment decisions. We continue
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Westell Technologies October 22, 2003
to upgrade our R&D marketing and sales and operations
capabilities with new talent and additional
investment. Our roadmap calls for more
diversification in R&D programs as we see
opportunities in all of the areas referenced in my
comment including WiFi, next generation modem,
gateway, integrated access devices, DSL management
platforms, new service application, voice over IP and
so on. We intend to augment our internal development
capabilities through selected investments and outside
products and technologies as well as with strategic
partnership. We will not be elaborating on these
activities today, but you can anticipate related
announcements over the next few months. For the past
couple of years we have been successful here with a
very cautious and conservative operating philosophy.
We intend to keep that basic orientation but we also
understand that to grow this business more rapidly is
going to require more risk investment. We believe
that Westell has the solid foundation, desirable
operating model and sound customer relationships to
enable us to successfully navigate through these
challenging times. The opportunities before us are
quite exciting and we are going to go after them.
Let me now open this up for questions. As always, we
must be restrained on the points of competitive and
customer sensitivity. We cannot answer specific
questions regarding perspective customers or on
current or expected RFPs. Premature public
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Westell Technologies October 22, 2003
speculation by Westell or analyst can result in harm
to important relationships and confidences. Please
keep this in mind as you formulate your questions. We
are now in the Q&A period.
Operator: Thank you. We will now begin the question and answer
session. If you have a question you will need to
press star/one on your touchtone phone. You will hear
an acknowledgment that you have been placed in queue.
If your question has been answered and you wish to be
removed from the queue please press the pound sign.
Your questions will be queued in the order that they
are received. If you are using a speakerphone please
pickup the handset before pressing the numbers. Once
again, if there are any questions please press
star/one on your touchtone phone. One moment please.
The first question is from Michael Perica from Brean
Murray. Please state your question.
Michael Perica: Thank you. Good morning gentlemen. A couple of
questions. I got on a little bit late. Nick, did you
disclose the 10% customers?
Nicholas Hindman: I did not, but I will happy to do that. It is the
same previous quarters - Verizon, BellSouth and SBC.
Michael Perica: Do you have their specific contributions by chance?
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Westell Technologies October 22, 2003
Nicholas Hindman: Yes we do. Verizon is 40%, BellSouth 19% and SBC 15%.
Michael Perica: Thanks. Also, Van, could you talk about the potential
disruptions that may have been caused by this whole
fiber to the premises talk by many of your customers
and do you think that backing away from this we could
see even a further acceleration of their marketing
efforts on DSL? Thanks.
Van Cullens: Yes Michael. We obviously watch the fanfare that
surrounded Supercom and immediately after about the
JPC and those sorts of things. I have personally
detected some moderation in a lot of that discussion.
I know a couple of the larger carriers have in fact
indicated they were not going to be as aggressive as
some people had expected. So yes, I would think the
logical conclusion from some of that is that they
will turn back to DSL and perhaps look at the newer
technologies coming into the DSL space as areas that
they are going to want to emphasize. We certainly
hope that is the case.
Michael Perica: Excellent. Also, if I could follow-up on the whole
FTTP issue. Have you have heard any further
clarification on what they are going to do in the
home? For example, as the fiber comes to the node on
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Westell Technologies October 22, 2003
the outside of the home; are they going to drop DSL
into the PC or a modem or are they thinking ethernet
and then have to string the house with cat 5 cable;
any further clarity on that issue?
Van Cullens: I will ask Bill if he wants to comment, Bill Noll,
our CTO.
Bill Noll: Hi Michael. No, there is no other...There are lots of
opportunities to do all kinds of things relative to
the home, ethernet, DSL have all been talked about.
It is still back to the question of what is
affordable and what is actually going to make it
happen. So lots of open discussion in that area.
Michael Perica: Right. So really no conclusion yet?
Bill Noll: No.
Michael Perica: Wonderful. Thank you gentlemen.
Operator: The next question is from Todd Koffman from Raymond
James. Please go ahead sir.
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Westell Technologies October 22, 2003
Todd Koffman: Yes, on the DSL business; can you give some magnitude
with regard to how much the average selling price has
declined in the quarter?
Nicholas Hindman: Yes, I can Todd. In this particular quarter
was a large decline because of some price concessions
relative to Van's comments about extending
relationships, so prices went down 9% this quarter.
Todd Koffman: Is that 9% quarter-to-quarter?
Nicholas Hindman: It is.
Todd Koffman: You talked about continuing price pressure;
can we expect at least for the next quarter or two
that given the price concessions that maybe you will
see some temporary stability or is this just this
never ending quarterly reduction that is going to go
on for the foreseeable future?
Van Cullens: Well, I would like to think that it will get better
at some point, but if I look back of the history of
the last maybe three years we have not really seen it
ever plateau for very long. If we were to be
successful in getting some of our agreements tied up
for longer periods that might help obviously and we
if we gain additional market share that will also
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Westell Technologies October 22, 2003
help. But you always have the ever present thread of
second source positions. I think that is something we
could easily see. So even where you have good
relationships and extended agreements you have that
pressure of always someone coming in or fighting at
the gateway level so that we do not see it
plateauing. Do you see it perhaps moderating a bit?
Hopefully we will. But that might also be a function,
Todd, of how much lower our customers take their
pricing as they continue to drive their enduser
pricing down they tend to want to turn back to their
suppliers and ask for additional support in that
regard. So it is fairly dynamic. We are managing it
so far reasonably well. We just kind of resigned
ourselves that this is the fact of life in this
business.
Todd Koffman: On a related question, well first, would you care to
give the actual number of units or the actual just
average selling price that you could back in a
ballpark unit number?
Van Cullens: We have typically not gotten into that level of
detail. I would rather not do that here actually.
Todd Koffman: Just a follow-up related to that. If you look at your
guidance for the December quarter and assuming your
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Westell Technologies October 22, 2003
NSA and Conference Plus business holds reasonably
stable it would seem based on the DSL operators that
their unit growth would exceed your overall December
quarter revenue guidance. Is there a lot of built in
conservatism on your part or am I underestimating the
pricing pressure in some of these other businesses,
including the DSL business?
Nicholas Hindman: Todd, it is Nick here. I think sitting in our
position you have to have some level of conservatism,
as Van indicated. We are early in the quarter and we
do not know what unit volumes are going to be. So is
there upside? Of course there is upside. We just have
to look at what we think our best view, what we are
relatively sure if not very sure of what our revenue
is going to be. Is there upside? Yes. Do we know what
that could be yet? No, because we are only 20 days
into the quarter. So you make a good observation, but
it is just too early to know. Hopefully your
inclination is correct and we end the year with some
huge numbers. But we do not know that today.
Van Cullens: As an example, Todd, last year we had a Christmas
push that was effectively unannounced to us until the
last minute. It occurred in the last 2 1/2weeks of
December. So is that going to happen again? We do not
know. We are polling our customers and pinging them
as hard as we can to get insight, but a lot of these
things change with very short lead time. So rather
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Westell Technologies October 22, 2003
than put a number out there that we might get but
might not get we are being maybe a little bit
conservative. But we feel comfortable with the number
we have that we can at least do that.
Todd Koffman: Thank you, very helpful. Good luck.
Operator: The next question is from Ken Muth from Robert W
Baird. Please state your question.
Ken Muth: Hi. Just a quick follow-up on Todd's was you
mentioned so what about some of this business longer
term to keep it, you gave some pricing concessions.
Do those pricing concessions lock in so you know
quarterly price erosion?
Van Cullens: Yes, we do have...Over these agreements or not
agreements, these relationships, these understandings
that we have they generally are stepping points,
break points where additional price reductions go
into place. So often times to be clear, they are
looking for a blended price over a set term. That
might be higher at the front end and lower at the
back end as we work with our suppliers to get
additional cost reduction.
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Westell Technologies October 22, 2003
Ken Muth: What would be then kind if you normalized a quarterly
ASP decline; is that more of a 5% type number
quarterly?
Nicholas Hindman: Ken, Nick here. It depends. Obviously we had a larger
increase this past quarter. But I would say that is a
good rule of thumb. This year I think we talked about
this fiscal year that we are in of having 25%
decline. I would think you should look at that 25% to
30% decline going forward next year as well. So I
think you can put it by quarter. It is not
necessarily going to be the same each percentage each
quarter, but those yearly numbers divided by the
quarters would give you an approximation. But it does
change. It is not exactly tied to quarters and from
time-to-time you could have a bigger adjustment. But
keep in mind that over this time our cost will be
coming down as well. Operations Team and Engineering
Team are outstanding in terms of keeping our cost
low. You have seen what we have done in the past. And
just an aside, I would like to get into this in case
this is the last question in this area, by hanging
onto these customers and hopefully winning new ones
we are building a base to be able to sell the new
products and services that we mentioned in the
release and hopefully that some you will ask about in
this call. So there is a method to our madness here
because we believe the customer base is extremely
valuable. We believe we can continue to perform well
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Westell Technologies October 22, 2003
with the existing products, but we are building a
base for the future. So you need to keep in mind
there is a tomorrow here and the tomorrow is just as
exciting if not more exciting than today.
Ken Muth: Then maybe could you just kind of jump in the NSA
business, can you give us some explanation to what
got that up for the quarter?
Van Cullens: As I said in my comments, we have seen lift and it is
actually, now I have running four almost five months
we have seen improvement. Understanding that the
benchmark was pretty disappointing for the previous
couple years it has been somewhat depressed part of
our business. We have seen orders ramping upward. We
are hoping that this a function of improving economic
conditions and demands for these services at the
telephone company level and not just to them
replenishing inventories that were allowed to get
pretty lean. We think that it actually may be the
signs of things going better than they have been. It
also may indicate that ACSL is not deploying as fast
as all places as it once was predicted and so that
was another factor we had anticipated might dampen
this business. At the moment we are pretty pleased
and in fact it has brought us back to thinking about,
as I said, some investment into some new areas here.
We have some pretty interesting thoughts on what we
can do. One of them kind of links back to DSL even. I
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Westell Technologies October 22, 2003
am going to leave it at that because I do not want to
tip off any competitor to start running down the same
path. Our interest in this business has been really
encouraged over the last few months.
Ken Muth: Finally, what Nick just touched upon, the managed
services. When would that possibly hit your quarterly
revenues?
Van Cullens: I will let Gordon Reichard, our new VP of
Marketing just talk about where we are there. I do
not want to give the impression that we are gong to
be generating immediate revenue from this because
this is a fairly new area and we have a lot of
engagements here, but he can comment on what he
thinks the timelines might be.
Gordon Reichard: Right. We are pursuing a number of different
opportunities with our customers for bringing value
add services to our largest installed base of modems,
coupled with the new modems that will be shipping
going forward. In addition to op ex savings that our
service provider customers can realize for using this
type of system. Those engagements will take some
time. We hope to have a few trials possibly launched
in calendar year 2004. But we do not expect a lot of
revenue being generated from this new initiative for
at least some time.
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Ken Muth: Can you just give us an example of some of the
matched services you are talking about?
Gordon Reichard: It really breaks down into three different areas.
There are services that relate to the installation of
the product and that help speed the installation.
There are services that relate to the management of
the product and that would improve the reliability
and service availability of DSL service to the
customers and speed the time to repair a DSL problem.
And thirdly our value add information services could
be things like of course managed firewall, parental
control, virus protection, things like that that we
see our service providers looking to provide to their
end customers.
Van Cullens: A point there, Ken, the key word there is they want
to provide their solution not someone else's and that
is what we are trying to do is enable them to be able
to deliver their branded solution versus some other
service like Yahoo or whatever.
Ken Muth: Great. Thank you.
Operator: Once again, if there any additional questions please
press star/one on your touchtone phone. The next
question is from Anton Wahlman from Neeham & Company.
Please state your question.
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Westell Technologies October 22, 2003
Anton Wahlman: Hi. This is Anton. Can you hear me?
Van Cullens: Yes Anton.
Nicholas Hindman: Good morning.
Anton Wahlman: I have a couple of questions, probably for Bill. You,
Van, first you mentioned the adoption
rate/transferring your customers over from the 5
platform to the 7 platform. Just to understand
correctly, the 7 platform where you have now included
the combined network processor and the AFE in the
same chip?
Bill Noll: That is right Anton.
Anton Wahlman: And basically what we are talking about here is a
usual kind of slow as molasses RBOC approval process
for just about anything?
Van Cullens: That was your words not ours.
Anton Wahlman: With that as a caveat then. So basically you are
expected it is just going to happen it is going to
work through whatever number of weeks and months and
they will all get there.
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Bill Noll: No doubt about that Anton. The ADSL2 and 2+ and then
two plots are key capabilities as you look at the
technology rollout so that is incorporated in the AR7
as well.
Anton Wahlman: Also, Van, you mentioned something which I did not
quite understand what you were trying to say. You
mentioned some developments in terms of USB and
Ethernet connectivity. If I understand it correctly,
some of your US customers today get an ethernet only
device, other customers who get both USB and
ethernet. I was trying to get your point of where the
market is going in that regard. Were you implying
that US customers were going to go to a USB only
solution or to...?
Van Cullens: No. No, I am sorry I confused there Anton. This is in
Europe where the first year or two that I was here
every time we looked at the international market we
found it was largely USB oriented. That was not where
we were positioning our product strategies. Over the
last six months or so as we have done research we
have gotten a lot of indication that there is now
evidence of trim from USB back to more US type
solutions including ethernet with gateway products
and a lot of the same sort of applications we are
seeing here. That is why we became more encouraged
about kicking off efforts in Europe. We believe now
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Westell Technologies October 22, 2003
our product fit and the application set that we have
and the pricing is much more competitive than it
would have been say a year ago. Now we will have to
test this to find out if our research is in fact
valid. But that is what we are being told that they
are increasingly looking at ethernet solutions versus
what they have been typically using, which is USB. If
that is the case this may be a good time for us to
move.
Anton Wahlman: OK, that comment was in regards to Europe. Two more
questions. So one, you mentioned a potential comeback
of interest in VDSL. Is that any specific geographic?
Is that domestic or international or both? What
precipitated? I have never heard you comment like
that before.
Bill Noll: It is Bill again, Anton.
Anton Wahlman: VDSL.
Bill Noll: It is VDSL and it is coming primarily from the
domestic market as well. We are seeing renewed
interest in getting closer to the customer premise
and therefore having a higher bandwidth to the
customers and looking at VDSL.
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Westell Technologies October 22, 2003
Anton Wahlman: And in that regard, domestically are customers
looking more at the DMT based solutions or the more
proven sort of qualm based solutions or they are not
decided about that yet?
Bill Noll: Not decided.
Anton Wahlman: They are looking at both so far.
Bill Noll: Yes.
Anton Wahlman: Final question on WiFi. Next year calendar 2004 do
you think that customers are going to be adopting
integrated devices or do you think this will be very
slow to develop and/or be like the two box solution?
How far do you think the market will go in 2004 in
terms of integrating of WiFi?
Bill Noll: It is going to vary, Anton, so different customers
have different view points of how they want to do
that. It is going to be very interesting. I think
next year is going to be WIFI entry view for many
many devices. So it is going to be very interesting
times. You are going to see solutions go there.
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Westell Technologies October 22, 2003
Van Cullens: We are trying to track, Anton, the Silicon guys as to
what their integration plans are and I think that is
a gating factor to some extent. We see them talking
over the second half of the calendar year.
Anton Wahlman: So for the next two to three quarters we should not
be looking at any material contribution of WiFi?
Van Cullens: Well I think we will but it will be two box. It will
be outboard or plug-in cards. It will not be the full
integration that we expect shortly thereafter.
Anton Wahlman: All right. Thank you very much.
Operator: Ted Moreau from Robert W Baird is online with a
question. Please go ahead sir.
Ted Moreau: Good morning. Probably a question for either Nick or
Van here. Just to follow-up, Nick, you said that you
would question whether this would be the last
question on the subject of pricing, but what I am
interested in is what is the offset to the pricing
concessions? You mentioned solidifying relationships.
What specifically can that do? Is there a contractual
relationship or a promise to look at other products?
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Westell Technologies October 22, 2003
I know you can standardize with your customers. You
know, is it more just relationship or is there really
a firm commitment by them contractually or what
exactly are you getting for these pricing
concessions?
Van Cullens: Ted, I have to be careful. We are getting into fairly
sensitive customer relationships and arrangements. So
I would say we do not do these things if we do not
think they are incremental benefits one of having a
better prediction model of what kind of volumes would
be generated out of that particular customer over a
period of time. It also tends to free up a lot of our
activities in pursuing the basic modem business and
we can now engage more broadly on gateway discussions
and IED discussions and the wireline and wireless
convergence and a number of other things, managed
services, all of which kind of get sometimes eclipse
if you are into the month-to-month battle over what
is the price and what are the deliveries etc.? This
just tends to get that part of the business more into
a programmed mode and free up people to talk about
the perspective opportunities in these accounts.
Obviously when you have those kinds of relationships
you would expect to be sitting at the table and
planning discussions and that sort of thing. It is
definitely worth doing, plus our operations people
can now start optimizing the factory and supply chain
so that we are squeezing every bit of savings that we
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Westell Technologies October 22, 2003
can get out of it by running it to a more predictable
forecast.
Ted Moreau: But there is no, and there never probably will be,
volume commitments necessarily as an offset to that?
Van Cullens: I am not going to get into how binding any of these
are. That is our customer's private affairs.
Ted Moreau: Fair enough.
Nick Hindman: Let me add something. People should not underestimate
the value of this channel and that is part of why,
this is what Van was saying. It is part of what we
are doing. We want to keep these relationships with
these customers, gaining new ones, of course, but
this channel is extremely valuable. We have people
beating a path to our door every day that want to
team with us to get into this channel. So let's not
discount the value not to our debt. I think everyone
should not discount the value of this channel. It is
very important. We want to keep the channel. We want
to expand the channel and then put these additional
new exciting products we talked about and others to
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Westell Technologies October 22, 2003
come and maybe products form partnerships in the
future. So I think we need to keep in mind the longer
term gain here.
Ted Moreau: Right. So the impact of the pricing issue can be
mitigated by a more solid really foundation with the
customer base.
Van Cullens: That is the argument we make to ourselves when we sit
down and do these things.
Ted Moreau: Thank you very much.
Nicholas Hindman: Thank you Ted.
Operator: Once again, if there are any additional questions
please press star/one on your touchtone phone. Ken
Muth from Robert W. Baird is back online with a
follow-up question, please go ahead.
Ken Muth: Just one other thing, with your existing customers of
Verizon and BellSouth, wondering if there are plans
or intentions to deliver the ADSL2 and ADSL2+ to
their customers?
Bill Noll: They are in the planning phase right now Ken and they
are working through both the DSALM and the CP
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Westell Technologies October 22, 2003
community. That is where we are. We are defined
phases, early lab type plug test activity going on.
Ken Muth: Any sense of what they have to do first though; would
they go to the D Slam area first and upgrade that or
would they do both kind of simultaneously?
Bill Noll: You will have to do both simultaneously. That is the
issue with ADSL to the box, it requires both ends of
the circuit to actually get the benefit.
Ken Muth: And is this for the D Slam, is this just a line card
upgrade or?
Bill Noll: No it is a technology change for them as well in many
cases of the line card.
Van Cullens: The line card and some common software.
Ken Muth: But it is not a forklift upgrade?
Bill Noll: No it is not a forklift upgrade from that
perspective.
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Westell Technologies October 22, 2003
Ken Muth: So you would assume that they would do something
probably by the mid timeframe of 2004? Does that make
sense?
Bill Noll: Those are currently plans, those are the customer's
plans and they are working on it. That is a fair
view, but things can go wrong as you go through this
phase of introduction as well.
Van Cullens: When we look at it from our side and the timing that
we see on the AR7, it would suggest that that is
their thinking.
Ken Muth: It is commercially available next month from your
perspective?
Van Cullens: It is more towards the end of this quarter.
Ken Muth: Thank you.
Operator: Gentlemen, at this time we have no further questions.
Van Cullens: Thank you everyone for joining us and your questions
and this call is now adjourned.
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Westell Technologies October 22, 2003
Operator: Thank you ladies and gentlemen. That does conclude
today's teleconference. Thank you for participating.
You may now disconnect.
*Please Note: Proper names/organizations spelling not verified.
C7835684/1133
Job #: 1771931
DT: 10/22/03
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