WESTELL TECHNOLOGIES May 13, 2005
Westell Technologies' Fourth Quarter FY05 Conference Call hosted by Van Cullens
on May 13, 2005, at 8:30 a.m. CST. Confirmation #11575841.
Operator: Good morning ladies and gentlemen and welcome to the
Fourth Quarter FY05 Conference Call. 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 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' Fourth Quarter and Fiscal 2005
Conference Call. I'm Nick Hindman, Westell's CFO.
Today's earnings call is being managed and hosted by
our subsidiary ConferencePlus. 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 ConferencePlus is joining us from the
ConferencePlus Headquarters in Schaumburg, Illinois.
Yesterday the Company reported our Fourth Quarter and
Fiscal 2005 results. Today I will summarize our
financial results and Van will offer his perspective.
We will then take your questions.
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WESTELL TECHNOLOGIES May 13, 2005
Before I discuss our Fourth Quarter and Fiscal 2005
results please keep in mind that comments made during
this conference call that are not based upon
historical facts 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, including the non-GAAP financial information,
are posted on the Home Page of the Company's website
at www.westell.com.
We are very pleased to report that Westell achieved
its twelfth consecutive quarter of profitability.
This performance represents another important
milestone in Westell's 25 year history as we have
completed our third consecutive profitable year.
Total revenues for the quarter increased 26% from the
fourth quarter of last year, rising to $78.2 million
from $62.1 million. Revenue increased 5% sequentially
from the December quarter. Total revenues for the
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WESTELL TECHNOLOGIES May 13, 2005
fiscal year 2005 increased 15% to $270.3 million, up
from $235.7 million last year.
Customer networking equipment or CNE revenue
increased 52% to 57.8%, from $57.9 million up from
$37.9 million in the comparable quarter of last year
and up from $54.5 million in the December quarter.
The increase from the December quarter related to the
successful net subscriber adds our customers achieved
due to our strong promotional activities during the
quarter. Total CNE revenue for the 2005 fiscal year
was $183.4 million, a 35% increase over the $135.7
million in the prior year. This increase was largely
due the success of VersaLink. Included in the March
CNE revenue is $150,000 from the licensing of our
ongoing PR069 compliance source code. The total
licensing revenue including maintenance is $912,000
which will be recognized over a 15 month period.
ConferencePlus revenue for the quarter was $11.5
million, flat compared to the same quarter of last
year and up from $10.9 million in the December
quarter. The current quarter increase was primarily
due to more business days in the March quarter due to
the many holidays in the September quarter. Total
revenue for the year declined slightly to $44.4
million from $45.3 million in fiscal 2004, but we
expect that trend to be reversed in Fiscal 2006.
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WESTELL TECHNOLOGIES May 13, 2005
As expected Network Service Access, or NSA, revenue
declined $9 million from $12.7 million in the
comparable quarter of last year and down slightly
from the December quarter of $9.1 million. NSA total
revenue for the year decreased from $54.7 million to
$42.5 million. This year-to-year reduction is
partially due to an approximate $1 million loss of
revenue, attributable to the data station termination
business that we sold in June 2004 and a continuing
decline in the overall markets for these types of
products, which was very pronounced in 2004. We
continue to expect a 10% to 15% annual decline in
this profit line.
Under General Accepted Accounting Principles, or
GAAP, Westell recorded net income for the fourth
quarter of $28.4 million or $0.40 per diluted share.
During the fourth quarter of last year recorded GAAP
net income of $19.6 million or $0.28 per diluted
share. Included in this year's fourth quarter results
is a net tax benefit of $20.1 million resulting from
the release of the Company's valuation allowance
recorded against this deferred tax asset. Due to the
Company's continued strong performance in fiscal 2005
and projected future ability to generate taxable
income we were required under GAAP to release the
valuation allowance. Net income in the fourth quarter
of last year included a similar tax benefit of $12.9
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WESTELL TECHNOLOGIES May 13, 2005
million. This release of Westell's deferred tax
valuation allowance should be viewed as positive. It
reflects both our current ability to generate taxable
income as well as our assessment of the Company's
ability to generate future taxable income that will
allow for realization of Westell's net operating loss
carried forwards.
For the full fiscal year GAAP net income was $39.7
million or $0.56 per diluted share, including the net
tax benefit of $12.8 million, compared to GAAP net
income of $34.9 million or $0.49 per diluted share
last year, including a tax benefit of $12.9 million.
Excluding the net tax benefit net income in the
fourth quarter increased 26% to $8.3 million or $0.12
per diluted share compared to $6.5 million or $0.09
per diluted share in the fourth quarter of last year.
Net income for the year excluding the next tax
benefit was $26.9 million or $0.38 per diluted share
compared with $21.8 million or $0.31 per diluted
share last year. A reconciliation of non-GAAP results
to GAAP results was provided as an attachment to our
earnings release.
On AFPs - During the March quarter AFPs where our
VersaLink product declined 10.2% and modems declined
4%.
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WESTELL TECHNOLOGIES May 13, 2005
For fiscal 2005 overall gross margins were 30%
compared to 33.8% in fiscal 2004. For the quarter
overall gross margins improved to 29.2% from 27.6% in
the December quarter. Gross margins for the equipment
portion of our business was 24.8% in the March
quarter compared to 23.7% in the December quarter.
While equipment margins improved sequentially in the
March quarter, they were negatively impacted by
approximately $1.4 million of extra costs associated
to our VersaLink product. This amount includes
roughly $660,000 of extra cost associated with
bringing VersaLink assembly into our US Factory and
as expected we also incurred the last of the
expedited freight charges of approximately $750,000.
On net operating expenses for the quarter, Westell's
op ex as a percent of sales without ConferencePlus
are broken down as follows: Sales and marketing -
6.1% of sales, R&D - 6.5% and G&A - 4.5% for a total
Westell only op ex of 17.5% of current sales. In the
fourth quarter we capitalized an additional $440,000
of R&D costs related to software development for
ongoing, a remote management software product,
bringing the total software development cost
capitalized to $1.9 million. We amortized $163,000 of
this capitalized cost in the March quarter and will
continue to amortize various components of this cost
over periods ranging from 22 to 24 months. During the
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WESTELL TECHNOLOGIES May 13, 2005
fiscal year Westell received a net $600,000 in
reimbursed engineering expense from a customer;
therefore, if we add capitalized software cost of
$1.9 million and the reimbursed engineering expense
of $600,000 our R&D spend in fiscal 2005 would have
been $2.5 million higher than our reported expense or
approximately another 1% of net sales.
ConferencePlus gross margins in the quarter increased
to 54.7% from 50.3% for the December quarter and up
from 53.4% in this comparable quarter of last fiscal
year. For fiscal 2005 we expect ConferencePlus
margins to be in the high 40%.
Some other points of interest - We generated over $20
million of cash during the fiscal year. We have
approximately $30 million of cash on hand and have
not drawn any of our bank lines and we remain
essentially debt free. Inventory decreased $1.7
million during the quarter. Capital expenditures were
$3.2 million for the fourth quarter, depreciation
expense was $2.1 million and product technology
amortization was $224,000 for the quarter. We began
the quarter with 868 employees and ended with 874.
Days Sales Outstanding for the quarter was 35
compared to 34 in the December quarter. 10% customers
remain Verizon, SBC and BellSouth.
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WESTELL TECHNOLOGIES May 13, 2005
This concludes my summary of fourth quarter results.
Before I turn the call over to Van Cullens, I will
conclude with the discussion of guidance for the
quarter ending June 30, 2005.
We expect revenue to be in the range of $73 million
to $76 million. If you will recall, we experienced
some seasonality during the June quarter of last year
and this is reflected in our guidance. We expect
non-GAAP EPS to be in the range of $0.10 to $0.12,
excluding a provision for income tax expense of
approximately $2.7 to $3.3 million and EPS in the
range of $0.06 to $0.07 on a GAAP basis including the
provision for income tax expense.
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 begin my comment on the fiscal year just closed.
Clearly it was a very good year for Westell. We grew
revenue 15%, beat our previous year's growth rate and
met our internal expectations and our profitability
remains solid despite ongoing pricing pressures,
VersaLink's start up costs and our decision to invest
ahead of the curve on international marketing
efforts, efforts that we knew would take some time to
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WESTELL TECHNOLOGIES May 13, 2005
pay off. But most important of all we met our
objectives of diversifying our product portfolio.
Westell introduced 32 new products across all our
lines of business and laid the groundwork for
significant new product launches during this fiscal
year. In summary, we delivered on all the major
objectives we established for ourselves in fiscal
2005 of being profitability, growth, increased
product diversification. I want to thank our
customers, our partners and most of all our employees
for helping us achieve this third consecutive year of
improving performance.
We are now in a new fiscal year and a new set of
objectives we hope to achieve. This year promises to
be a very exciting one. We are seeing major market
trends coming into play and we are moving quickly to
insure that Westell is properly positioned to benefit
from them, over the short and long-terms.
Let me the sight the market trends that we view as
being most significant for the year: We expect to see
considerable activity in the VoIP or Voice over IP,
video, home networking and wireline, wireless
convergence areas. Much of this activity will be
market trials, but there likely will also be some
general deployments as well. We also expect to
Verizon One and derivative products hit the market in
a meaningful way, hopefully opening up a new high end
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WESTELL TECHNOLOGIES May 13, 2005
CPE segment. While the market remains very dynamic,
our new product roadmap is fairly well defined at
this point and we are well on our way to another
active year of new product introductions. The first
of these launches will be TriLink, our Voice over IP
gateway that will also service our wireline, wireless
convergence platform. In our view the wireline,
wireless convergence opportunity is potentially as
large and as strategically important as any market we
are targeting. We presently are engaged in one such
program, the details of which are restricted by a
non-disclosure agreement and we hope to enter others
during the year. The product launch for TriLink will
occur within this quarter and we have several
customers waiting to begin field evaluations.
Second product scheduled for launch this year is our
UltraLine 2, a video rounding product that will have
multiple versions to support the different video
implementation service providers are pursuing. The
UltraLine 2 family is being quoted in the various
RFPs that are presently in play and represent some
important piece of our overall home networking
strategy.
And a third major activity, the initial trench of the
Verizon One product will be shipping over the next
few weeks. Obviously we are keenly interested in the
market reaction and acceptance of Verizon One. We're
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WESTELL TECHNOLOGIES May 13, 2005
already working on enhancements to the product and
have begun planning for a variation of this platform
that Westell can market directly outside of the U.S.
We are also investing considerable effort in the
analysis and specification of the emerging home
networking market. This market appears poised to a
dramatic growth for several years to come. Our
customers are well positioned to address this market
and have an interest in doing so in our opinion as
does Westell. We have good relationships with these
customers which we believe gives us critical
competitive advantage over aspiring companies which
may have interesting technology but no experience or
position in our space. To capitalize on this
opportunity to the fullest extent possible we expect
to collaborate with both customers and strategic
partners to develop very tailored solutions. As such,
we continue to seek partnering relationships to add
to those we already have in place. I am encouraged by
our prospects in this area and believe that we will
be able to substantially augment our existing
capabilities with some of the engagements we now have
under discussion.
We are quite excited about the current broadband
market outlook. Westell is fortunate to be in the
access portion of this market where change and
opportunities abound. There is healthy competition
between the various types of service providers and
that should drive continued investment in broadband
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WESTELL TECHNOLOGIES May 13, 2005
service evolution. In fact, we believe that these
competitive pressures are likely to intensify. There
is strong interest in workable and affordable
wireline and wireless convergence, Voice over IP and
video home networking solutions. These new market
developments will not only extend broadband
penetration to new customers but they will also lead
the widespread upgrades of the existing base of
broadband CPE. In both cases the outcome should be
favorable for our business. Westell is involved in
all of these markets and is working with customers to
leverage their existing and near term broadband
capabilities and to these exciting new opportunities.
There is no substitute for being closely involved
with the customer as they formulate their broadband
strategic plans. During this coming year you will see
us continuing to evolve Westell into a broadband home
networking company taking us well beyond our past
roots and basic DSL and core transmission products.
Our portfolio of products are being designed to work
with various access technologies and optimized for
the more exciting growth markets I have sighted here
in my comments this morning.
Now the new fiscal year will be challenging for
Westell given ongoing competition and heavy demands
on our engineering resources, but the potential it
brings for longer term strategic positioning can not
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WESTELL TECHNOLOGIES May 13, 2005
be understated. We are off to a good start despite
some signs of softness in order flows which we are
attributing to the short-term seasonal pattern we saw
last year. We hope to add another major customer to
our VersaLink ranks within the next few weeks. We are
working with key customers on several strategic
product initiatives. Our ConferencePlus operation
succeeded in securing a 30 month agreement with their
largest customer providing valuable stability and
predictability for us and even our NSA business by
leveraging new partnerships and developing specific
solutions for the expanding cellular infrastructure
market is seeing some signs of improvement after two
or three months of lower than expected order
activity. And on the other hand there are areas of
our operation we want to improve. Our international
efforts are still not at levels we want to see. Most
of our wins thus far have been with smaller accounts,
which are welcomed but are not sufficient to deem our
overall efforts of success. We continue with several
larger customer pursuits but are finding these
engagements are even less predictable than those of
our domestic efforts. Fortunately our teams are now
benefiting from the market development work put in
over the last year and are building a much broader
base of customer relationships. The teams are
focusing down on higher quality prospects and putting
more emphasis on our newer products where we believe
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WESTELL TECHNOLOGIES May 13, 2005
our competitive advantage is more easily
demonstrated. We are staying patient and providing
active support to these efforts as we believe the
diversification and revenue growth potential of the
international market justify the investment. Finally,
we intend to continue aggressive cost reduction and
productivity programs across all of our businesses.
There will be continuing pressure to meet new
competitive threats and to rapidly respond to market
development. Such circumstances dictate that
follow-up cost reduction programs will remain a
critical component of our business success. We have a
good track record of performance in this area and we
expect this to continue in FY06. Fortunately, we have
a more favorable outlook for components, especially
memory than we had this time a year ago and so this
should help.
So to summarize, we see a very crucial year shaping
up for the industry and for Westell. We believe we
are well positioned with several new product programs
that can provide us with our next phase of growth and
diversification. As long as our customers maintain
their active marketing programs for current product
offerings our base business should see continued
growth. This in turn should provide us with the means
to drive new product development, pursue cost
reduction programs, improve our international
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WESTELL TECHNOLOGIES May 13, 2005
performance and develop the new opportunities we are
targeting. We are very excited about the prospects we
see in the marketplace and are moving decisively to
capitalize on that.
Let me now open this up for questions. As always, we
must be restrained on points of competitive customer
sensitivities. We cannot answer specific questions
regarding perspective customers, our own current or
expected RFPs. Premature public speculation by
Westell, our analysts 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 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 speakerphone you may
need to pickup the handset first before pressing the
numbers. Once again, if there are any questions
please press star then on your touchtone phone. The
first question is from John Anthony from SG Cowen;
please go ahead.
SG Cowen: Good morning gentlemen. Congratulations. I HAVE A FEW
QUESTIONS. THE FIRST ON THE COMMENT, VAN, THAT YOU
MADE ABOUT VERSALINK GOING TO A SECOND CUSTOMER. IN
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THE MARCH QUARTER YOU RECOGNIZED REVENUE FROM ONLY
ONE RBOC FOR VERSALINK; IS THAT CORRECT?
Van Cullens: Well actually that might have been true but
Cincinnati Bell is also an existing customer. I am
now referencing a third customer.
SG Cowen: A THIRD CUSTOMER. DO YOU EXPECT TO RECOGNIZE REVENUE
FROM THAT THIRD CUSTOMER IN THE CURRENT QUARTER OR IS
IT TOO SOON TO TELL?
Van Cullens: I think it is probably too soon to tell. We are
hopeful but I think the safe answer is it is too soon
to tell. That is in the hands of the customer.
SG Cowen: SO IT IS NOT FACTORED INTO YOUR GUIDANCE?
Van Cullens: No.
SG Cowen: AND THEN ON VERIZON ONE IS THAT FACTORED INTO THE
JUNE QUARTER GUIDANCE?
Van Cullens: The Verizon One, yes, that is.
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WESTELL TECHNOLOGIES May 13, 2005
SG Cowen: WHAT ARE THE MARGINS GOING TO LOOK LIKE? I CAN
IMAGINE THEY ARE GOING TO BE PRETTY LOW ON THE
INITIAL UNITS AND IS THERE ANY WAY YOU CAN GIVE US A
SENSE FOR ROUGHLY HOW MANY UNITS WE ARE TALKING?
Nicholas Hindman: John, was that on Verizon One?
SG Cowen: Yes.
Nicholas Hindman: Yes, the margin will be low. It is a very small run.
It is not a lot of units. I don't want to get into
the number of units just because I don't want to
break any confidences with our customer, but small
amount of units. Of course the ASP is relatively good
so it will amount to some revenue but because it is a
startup there is not going to be much margin.
SG Cowen: CAN YOU DISCUSS, THERE SEEMS TO BE A LOT OF CONCERN
ABOUT CHANNEL INVENTORY. CAN YOU DISCUSS IF ANYTHING
HAS CHANGED AND YOUR VISIBILITY INTO CHANNEL
INVENTORY GIVEN THE MIX SHIFT OVER TOWARDS VERSALINK
OVER THE LAST YEAR?
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Nicholas Hindman: Yes, we checked on that a few days ago and there is
nothing out of the ordinary.
SG Cowen: BUT HAS ANYTHING CHANGED FROM HOW YOU GUYS ACTUALLY
GET VISIBILITY INTO WHAT IS HAPPENING WITH THE LEVEL
OF CHANNEL INVENTORY WITH VERSALINK VERSUS PROLINE IN
TERMS OF HOW YOUR CUSTOMERS MIGHT HANDLE THE UNITS
DIFFERENTLY IN TERMS OF RETURN AND THINGS LIKE THAT?
Nicholas Hindman: Yes, we have been assisting our customers in returns
of VersaLink which we didn't have visibility to
before, so because of that we do a better visibility
than we have in the past.
SG Cowen: I MISSED THE COMMENTS YOU MADE ABOUT ENVOY. CAN YOU
GO OVER THAT AGAIN?
Nicholas Hindman: The licensing?
SG Cowen: Yes.
Nicholas Hindman: Gordon, do you want to describe that?
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WESTELL TECHNOLOGIES May 13, 2005
Gordon Reichard: What we have found is the underlying source code that
our EnVoy software system is built upon we have found
it is a very robust implementation of the standard
and we repackaged and we are currently marketing that
source code package. Nick referenced the returns from
our first customer that purchased that license in
this fiscal quarter.
Nicholas Hindman: That's right. We recognized some revenue last
quarter.
SG Cowen: IS THAT A CUSTOMER THAT'S NEW TO WESTELL OR IS THAT
AN EXISTING OF WESTELL THAT IS NOW BUYING ENVOY?
Van Cullens: That was a new customer buying the TRO69 protocol
stacks.
SG Cowen: SO IT IS A COMPLETELY NEW CUSTOMER. THEY DON'T BUY
ANYTHING ELSE FROM WESTELL?
Van Cullens: That's correct.
SG Cowen: I WOULD IMAGINE THE MARGINS ARE FAIRLY GOOD THERE.
Nicholas Hindman: Yes, they are.
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WESTELL TECHNOLOGIES May 13, 2005
SG Cowen: LAST QUESTION - IF YOU GUYS START TO GENERATE MORE
CASH ON THE BALANCE SHEET AND GENERATE MORE FREE CASH
IN 2006 WHAT DO YOU EXPECT TO BE DOING WITH THAT
CASH?
Van Cullens: Well as I referenced in my remarks, we have quite a
number of business development engagements underway.
We are trying to hold open our options there. If we
see opportunities pick up, software packages that
would supplement what we are doing and add,
accelerate our time to market we would be interested
in doing that. Obviously if we find opportunity like
we found with direct TV and Hughes to pick up systems
we would be interested in doing that. There might be
some need for some co-development and co-marketing
with some of these builds, so we haven't locked down
on specifically what we will do. We are just
comfortable that we now have the means to make the
choices as they are presented to us.
SG Cowen: Thanks guys.
Operator: The next question is from Todd Koffman from Raymond
James; please go ahead.
Todd Koffman: Thank you very much. COULD YOU JUST SHARE WHAT
PERCENTAGE OF THE VOLUME DID VERSALINK CONTRIBUTE TO
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YOUR CNE SEGMENT AND JUST REMIND US WHAT PERCENTAGE
THAT WAS IN THE DECEMBER QUARTER?
Nicholas Hindman: It was 50% in this quarter and a similar percent I
believe in the December quarter.
Todd Koffman: I'M SORRY, 50% IN MARCH AND 70% IN DECEMBER?
Nicholas Hindman: No. 50% is for March and 50% is for December quarter,
50%.
Todd Koffman: FIFTY IN BOTH?
Nicholas Hindman: Yes.
Todd Koffman: JUST A CLARIFICATION TO THE EARLIER COMMENT THAT
THERE IS A THIRD CUSTOMER FOR VERSALINK THAT IS NOT
REFLECTED IN THE GUIDANCE. IS IT FAIR TO SAY THAT IF
THAT CUSTOMER WERE TO MOVE THAT THAT IS A COUPLE OF
MILLION DOLLAR OPPORTUNITY OR IS THAT WAY OUT OF THE
BALLPARK?
Van Cullens: Well just on the ramp- in fact I should be probably
modify that statement to say - depending on how
quickly they decide to ramp it could have some impact
toward the end of the quarter. But again, that's
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WESTELL TECHNOLOGIES May 13, 2005
speculative at this point and we are trying to be
fairly conservative on that. It all depends, Todd, on
if we get it. That is always the first and most
important qualification and secondly then what their
plans are as to how they are going to introduce it.
Todd Koffman: JUST ONE LAST FOLLOW-UP ON THAT. WHEN YOU HAVE HAD
THIS SUCCESS AT YOUR CORNERSTONE CUSTOMER WITH
VERSALINK YOU WERE THE ONLY BASIC SUPPLIER WITH AN
INTEGRATED COMBO BOX. FOR THESE ADDITIONAL TWO WINS
YOU SIGHTED CINCINNATI BELL AND MAYBE THIS OTHER ONE;
DO THOSE CUSTOMERS HAVE AN EXISTING OR SECOND
SUPPLIER FOR THIS INTEGRATED COMBO BOX?
Van Cullens: Yes, they did.
Todd Koffman: Thank you very much. Good luck.
Operator: The next question is from Michael Perica from Brean
Murray; please go ahead.
Michael Perica: Thank you. FIRST QUESTION, NICK, ON THE OPERATING
EXPENSES, MORE SPECIFICALLY, SALES AND MARKETING AND
G&A, REVENUES BEGAN THE YEAR IN THE MID 50S, NOW ARE
IN THE HIGH 70S OR SO AND WE ONLY HAVE A COUPLE
HUNDRED, 200,000 TO 300,000 MORE. HOW MUCH MORE
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LEVERAGE CAN WE EXPECT FROM THOSE COUPLE OF LINES
THERE?
Nicholas Hindman: Well G&A certainly is controllable. The sales and
marketing as well as engineering is going to go up
with revenue, so we have done a wonderful job of
doing a lot of things with not spending a lot of
money and the things that Van talked about are going
to take some support but we think we are going to
have the revenue to support it, so those... Sales and
Marketing and R&D will be trending up but we think we
can cover that in our increased sales.
Michael Perica: BUT DO YOU STILL THINK THERE IS STILL MORE LEVERAGE
JUST NOT AS MUCH AS WE SEE ON THE SHARE WHICH HAS
BEEN SUBSTANTIAL?
Nicholas Hindman: Yes.
Michael Perica: MOVING ON ON THE ASPS, MAINLY FOR VERSALINK, YOU
MENTIONED, I BELIEVE, THE 10.2%. I PRESUME THAT IS
SEQUENTIAL BECAUSE WE DON'T HAVE A YEAR-OVER-YEAR
COMP. WHAT DO YOU THINK FOR THIS CALENDAR YEAR IS A
REASONABLE ESTIMATE FOR PRICING DECLINE?
Nicholas Hindman: The number I have been using is 20% and sitting here
today I will still use that number.
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Michael Perica: SO WE WON'T SEE A DRASTIC SEQUENTIAL MOVEMENT;
CORRECT?
Nicholas Hindman: No. And that 20% is for our fiscal year. I look at
this from April to March so the 10% that we talked
about is last year so that is the best number I have
today.
Michael Perica: I see. AND DO YOU THINK YOU CAN AT LEAST MATCH IN
THAT COST REDUCTIONS OR POTENTIALLY DO BETTER?
Nicholas Hindman: Well we certainly want to do the do better part that
Van mentioned that we have a huge focus on cost
reducing all of our products so we have been able to
manage that pretty effectively in the past and I
would say we will manage it effectively going
forward.
Michael Perica: Moving onto more on the technology on the TriLink
wireless/wireline integrated product; could you give
a sense of the first iteration whether that is going
to be a GSM or CDMA product?
Van Cullens: Let me qualify first, TriLink, the initial
application for TriLink are going to be simply voice
enabled gateways, so it would be sitting at the next
increment up from VersaLink. Then separate
applications are to have used it in the convergence
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projects that we are talking about. At that point I
will let Gordon amplify a bit further.
Gordon Reichard: So that's exactly right. The base TriLink product
will support two Voice over IP SIP ports, a wireless
gateway of course with more Ethernet ports for local,
local data networking. That will be the base
platform. On top of that we are developing software
that will provide and support for the
wireline/wireless convergence. It would be an add on
software module that will be purchased at an
incremental cost. That platform right now is
independent of either cellular technology that the
customer may use. That is just the way the
architecture works. I really can't disclose too much
more on how that architect works right now because it
is proprietary.
Michael Perica: Fair enough. NOW DO YOU HAVE HANDSETS RELATIONSHIPS
OR WILL THAT EVEN BE NEEDED FOR YOUR ARCHITECTURE?
Nicholas Hindman: It will be needed.
Van Cullens: We shouldn't probably comment too much further.
Michael Perica: Fair enough. Thank you gentlemen.
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WESTELL TECHNOLOGIES May 13, 2005
Operator: As a reminder, if you would like to ask a question
please press star then one on your touchtone phone.
The next question is from Ken Muth from Robert W
Baird; please go ahead.
Ken Muth: Good morning. AS YOU GUYS HAD TALKED ABOUT BEFORE THE
VERSALINK MANUFACTURING I THINK IS ALL SETTLED OUT
AND NICK YOU TALKED ABOUT SOME EXPENSES. WHAT WILL BE
KIND OF THE INCREASE IN GROSS MARGIN SINCE YOU ARE
ONLY GIVING BASIS POINTS OR HOWEVER YOU WANT TO LOOK
AT IT FROM VERSALINK FROM THIS LAST QUARTER OF FISCAL
Q4 AND TWO FISCAL Q1 WILL BE 2, 3, 400 BASIS POINTS
JUMP BECAUSE OF THE CHANGEOVER AND EVERYTHING IS
SETTLED OUT?
Nicholas Hindman: Let me just say that VersaLink for this quarter, for
the June quarter will be in that range we talk about,
in the upper 20% and it was probably in the high
teens in the fourth quarter. So it is going to
improve, characterize that is getting up to our, kind
of our historical margin percent run rate for that
type of product.
Ken Muth: AND THEN WITH ALL THE OTHER PRODUCT ENHANCEMENTS THAT
YOU HAVE COMING OUT WHAT WOULD BE MAYBE THE LIKELY
IMPACT ON KIND OF THE YEAR HERE OF GROSS MARGINS?
WOULD YOU ASSUME IT WOULD BE 100 TO 200 BASIS POINTS
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WESTELL TECHNOLOGIES May 13, 2005
OR HOW SHOULD WE LOOK AT ALL THESE NEW PRODUCTS
COMING OUT FROM AN IMPACT ON GROSS MARGINS?
Nicholas Hindman: Well the new products, as we discussed about,
VersaLink last year and Verizon One coming out the
products, initial margins on these products are not
going to be great. We are just going to try to
maintain, again, historical margin rates that we have
had and that is going to be certainly a challenge
with all these new products coming out. Don't look
for any big improvement. We are trying to just hold
ground until we get some of these products out and
get them into volume.
Van Cullens: We need volume. Particularly over the last couple
years what we have seen and we saw it with VersaLink
we are going to see it with these other products is
that you just have to get up to really impressive
volume runs before you can negotiate back into your
supply chain as effectively as you need to to get the
cost reductions. And then the engineering teams
working with marketing start looking at what else can
we be doing on the design side and you start planning
cost reductions rather soon in the lifecycle. That is
the nature of the business these days. You are forced
to hit market windows very fast and sometimes that
requires you to hit them with maybe less than an
optimal cost oriented design. You hit them to how to
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WESTELL TECHNOLOGIES May 13, 2005
have a good performing unit in a timeframe that gives
you competitive advantage then you come back and work
the problem.
Ken Muth: ON THE VERIZON ONE INITIAL KIND OF SMALL LOW VOLUMES
IN THE JUNE QUARTER HERE WOULD YOU EXPECT THAT TO
KIND OF RAMP THROUGHOUT THE YEAR THEN FOR THAT
PRODUCT SPECIFICALLY?
Van Cullens: I probably should defer that question to Verizon
because they are in control of that marketing program
and we are not always totally clear on their
strategies. My personal guess is that there will be a
period of assessment of the feedback we get and
adjustment to the product and then maybe a pretty
good ramp toward the end of the year with the holiday
season like we have seen in the last couple years
with other products. That might be the pattern but
that is speculation on my part. You should ask
Verizon that directly.
Ken Muth: LAST ONE I HAVE ON THE CPI SIDE OF IT, YOU SAW A
LITTLE BIT OF POP THERE IN THE QUARTER; IS THAT KIND
OF A NEW PLATFORM RUN RATE AND CAN WE EXPECT THAT
SEQUENTIAL GROWTH THROUGHOUT THE YEAR? AND THEN ON
THE FOLLOW ON TO THAT IS - IS THIS A MARKET SHARE
THING OR IS THE MARKET EXPANDING, HOW DO YOU LOOK AT
THE GROWTH FOR THAT DIVISION?
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WESTELL TECHNOLOGIES May 13, 2005
Van Cullens: Tim, would you like to take that question?
Tim Reedy: Sure. We are attempting to grow revenue per day
quarter-to-quarter. We have some challenges out in
the marketplace because it is a very competitive
market so we ramped up some of our marketing and
sales activities and we will see how it goes for the
next couple quarters, but we are expecting to grow
this year.
Ken Muth: Thank you.
Operator: The next question is from Bill Choi from Kaufman
Brothers; please go ahead.
Bill Choi: Thank you. Couple quick questions on you have given
us the 10% customers, could you do that right now?
Nicholas Hindman: Can't hear you too well, Bill.
Bill Choi: Is this any better?
Nicholas Hindman: Yes, it is.
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WESTELL TECHNOLOGIES May 13, 2005
Bill Choi: Sorry about that.
Nicholas Hindman: I'm sorry, would you repeat please?
Bill Choi: YES, CAN YOU JUST FIRST START OFF THE 10% CUSTOMERS?
Nicholas Hindman: Yes, it was Verizon, SBC, BellSouth.
Bill Choi: YOU HAD GIVEN PERCENTAGES IN THE PAST, COULD YOU...
Nicholas Hindman: Yes, I will give you those. Verizon was 56%, SBC was
10%, BellSouth was 17%.
Bill Choi: JUST WANTED TO FOCUS A LITTLE BIT ON GROSS MARGINS
HERE. FIRST A CLARIFICATION, THE $650,000 FOR RAMPING
UP INTERNAL MANUFACTURING; THAT HAD GROSS MARGINS?
Nicholas Hindman: Yes, it did.
Bill Choi: WHAT IS THE MIX LIKELY GOING TO BE GOING FORWARD
STARTING WITH THE JUNE QUARTER BETWEEN INTERNALLY
MANUFACTURED VERSALINK VERSUS THOSE SHIPPED FROM
ASIA?
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WESTELL TECHNOLOGIES May 13, 2005
Nicholas Hindman: The only assembly that will be done will be done
here. We have some units that we had ordered from
China which are coming over by boat but essentially
in the June quarter most all of the VersaLinks will
be coming out of our assembly in our factory here.
Bill Choi: THOSE ARE ALSO BENEFITING FROM NEW PRODUCT DESIGNS
THAT HELP THE MARGINS?
Nicholas Hindman: Not yet. Those are coming down the line a bit, but
just bringing in-house improved our margins and the
next improvement will be the next cost reduction,
which Van alluded to and we are working hard on.
Bill Choi: AND YOUR COMMENTARY ABOUT VERSALINK IS GOING BACK TO
IN THE UPPER 20%, THAT IS IN THE JUNE QUARTER AND
THAT IS ALL WITHOUT THE COST IMPROVED VERSIONS?
Nicholas Hindman: I said, it would be north of 25% and it is the
correct version that we are producing today in our
Aurora factory.
Bill Choi: ALSO YOU HAVE SOME BENEFITS AND MARGINS IN THE
REGULAR MODEMS THAT SHIFTED TO COST IMPROVE ADSL2+.
SOME PEOPLE HAVE TAKEN THAT AND OTHERS HAVEN'T. CAN
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WESTELL TECHNOLOGIES May 13, 2005
YOU JUST TALK ABOUT WHERE WE ARE ON THAT AND WHAT THE
GROSS MARGINS ON THE REGULAR MODEMS WOULD BE?
Nicholas Hindman: The first part of your question, where we are on;
would you amplify what you meant there?
Bill Choi: LIKE I SAID, YOU HAVE TWO KINDS OF MAIN ADSL MODEMS
TODAY. YOU HAVE THE AR5 BASE TIP SIT PRODUCT, YOU
HAVE 7 BASE, SOME ARE TAKING THE 7S, SOME ARE TAKING
THE 5S. IF YOU COULD GIVE YOU A ROUGH PERCENTAGE
BREAKDOWN ON THE REGULAR MODEMS, WHAT THE COST
IMPROVED ARE AS A MIX? AND WHERE THOSE ARE IN TERMS
OF GROSS MARGINS?
Nicholas Hindman: In the same percentage we are in the high 20%s there.
The AR5 modems, let me just deal with those for a
second, there is just one customer that is taking
those. Our production and shipment of those will be
over the summer and those, that product will be
phased out. The AR7 modems, as you said, we have been
able to do a better cost there, but of course we have
also given up some ASP so those margins are still
going to be in historical rates in the high 20s.
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WESTELL TECHNOLOGIES May 13, 2005
Bill Choi: IN TERMS OF YOUR COMMENTARY ON VERSALINK ASPS,
EXPECTING DECLINE AROUND 20% YEAR-OVER-YEAR. AS YOU
ADD NEW CUSTOMERS AND TYPICALLY THE ONES YOU HAVE
BEEN SELLING TO SO FAR HAS BEEN YOUR LARGEST
CUSTOMERS, SO YOU KNOW YOU GIVE THEM VOLUME
DISCOUNTS. IS THIS COMMENTARY ALSO IN VIEW OF A THIRD
CUSTOMER COMING IN WHO YOU COULD POTENTIALLY SELL AT
A HIGHER ASP?
Nicholas Hindman: It is and I don't know that the ASPs will be that
much higher but it certainly does take into
consideration the other customer that Van alluded to.
Bill Choi: Thanks.
Nicholas Hindman: Thank you.
Operator: The next question is from Eric Kainer from Needham &
Company, please go ahead.
Eric Kainer: Thank you very much. Congratulations on a nice
quarter guys.
Nicholas Hindman: Thanks.
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WESTELL TECHNOLOGIES May 13, 2005
Eric Kainer: WONDER IF YOU COULD TALK A LITTLE BIT MORE ABOUT THE
TRILINK PRODUCT, SPECIFICALLY THE CUSTOMERS THAT ARE
WAITING FOR TRIAL THERE. COULD YOU KIND OF PROVIDE
SOME COLOR AROUND THE TYPE OF CUSTOMERS THOSE ARE?
ARE THOSE ONLY DOMESTIC CUSTOMERS? ARE THOSE
TYPICALLY YOUR TYPICAL TOP THREE CUSTOMERS OR YOU
HAVE SOMETHING BEYOND THAT?
Van Cullens: It is the usual suspects. Our typical existing larger
customers and we do have some customers outside the
US who are waiting for this product. They would like
to trial it. Quite honesty, we are a little bit late
from where we wanted to be. They are standing by. We
hope to be releasing this product within this
quarter, within weeks so we are close and hopefully
we will see this to some fairly rapid fill to
valuations and we will get a good read on where we
are by the next call.
Eric Kainer: I WONDER IF YOU CAN DESCRIBE KIND OF YOUR EFFORTS,
KIND OF TAG ONTO THAT ANSWER, WHAT YOUR EFFORTS ARE
GOING TO BE FROM A PRODUCT PERSPECTIVE INTO
INTERNATIONAL MARKETS? DO YOU SEE THAT REALLY KIND OF
BEING, TRILINK BEING A BIG LINKAGE TO YOUR DEVELOPING
BUSINESS THERE OR DO YOU SEE THAT KIND OF MORE
VERSALINK OR HOW DO YOU SEE THAT DEVELOP?
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WESTELL TECHNOLOGIES May 13, 2005
Van Cullens: It depends on exactly where you are. In Europe we are
seeing interest in TriLink. We have to make sure that
our pricing there is going to be competitive because
there are some entries from some of the national
champions there that will be challenging and we have
to decide what our response to that is going to be.
In the case of Verizon One and the Westell Media
Gateway, which is a variation on Verizon One, there
is a tremendous amount of interest there and we have
actually had to make some scale back and concentrate
our efforts on some of the larger possibilities and
we are providing prototypes to those companies very
shortly for demonstration and testing and we will see
where that goes. I would say at this point, almost
universally the product that gets the most interest
right off the bat is the Verizon One and it is
derivative. I would say the TriLink is the second
product that gets the most interest because of the
voice capability and so we will tend to be focusing
on those two. I think for the most part, still taking
VersaLink in and talking about our other products but
that seems to be where we get the higher level
engagement, so that is kind of where we are
concentrating at the moment.
Eric Kainer: DO YOU SEE VERY MUCH IN TERMS FROM ASIA OR ARE YOU
MOSTLY FOCUSED ON EUROPE AT THIS TIME?
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WESTELL TECHNOLOGIES May 13, 2005
Van Cullens: We are focused on Europe and the other parts of North
America, it is where we are putting our resources at
the moment. We are contemplating possible approaches
to Asia but that would almost certainly be with the
indirect.
Eric Kainer: Thank you very much.
Van Cullens: You're welcome.
Operator: The next question is a follow-up question from John
Anthony from SG Cowen; please go ahead.
John Anthony: COULD YOU ALSO COMMENT ON THE RECENT ACTIVITY IN THE
CONFERENCING BUSINESS RELATIVE TO SPRINT SELLING
THEIR ASSETS AND ALSO IF YOU COULD JUST PROVIDE A
LITTLE MORE CLARITY ON THE AK FILING AS IT RELATES TO
YOUR CONFERENCING BUSINESS?
Van Cullens: I will let Tim maybe give you some color on what he
sees in that area because he is the most informed,
and then I may choose to add something at the end.
Tim Reedy: As far as Sprint, there have been different people
that have been looking at consolidation
opportunities. West Intercall has been very
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WESTELL TECHNOLOGIES May 13, 2005
aggressive in bulking up their business. We believe
that is in response of some of their core
telemarketing business declining over time so now
they are either the largest or one of the larger
teleconferencing specific companies in conjunction
with the MCIs of the world. So there are people that
are out there looking to consolidation opportunities.
Again, West Intercall, another one being Premier
Conferencing, folks like that. There are some other
distressed properties out there that we believe are
currently for sale. One has been publicly announced
is ACT Conferencing. We believe that over time there
will be some of our competitors that are not as good
financial shape that either exit the market or will
be acquired over time by other people. In terms of
the AK filings, we can't comment beyond what was
already disclosed due to confidentiality of the
agreement.
John Anthony: ALSO, I THINK, VAN, YOU HAD MENTIONED ABOUT SOFTNESS
IN ORDERS COMING INTO THE QUARTER. CAN YOU REMIND US
THE LINEARITY PATTERN OF THE JUNE QUARTER; IS THAT
SOMETHING THAT TYPICALLY STARTS OUT SOFT AND THEN
STRONGER OR IS IT VICE VERSA?
Nicholas Hindman: I will answer that, John. It is Nick. Well this is
really just our second year where we experienced it
so whether history will repeat itself totally I don't
know. But last year we began to see some improvement
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WESTELL TECHNOLOGIES May 13, 2005
the end of June and then throughout July, August,
September. Whether that is the same this year we will
see and then having two years under our belt we will
be better to predict for next year.
John Anthony: ON A RELATIVE BASIS THOUGH I KNOW YOU ARE ONLY
DEALING WITH TWO DATA POINTS HERE, BUT ON A RELATIVE
BASIS ON A YEAR-OVER-YEAR COMPARISON ARE YOU FEELING
LIKE YOU ARE IN A BETTER POSITION COMING INTO THE
JUNE QUARTER FROM A SEASONALITY STANDPOINT GIVEN WHAT
IS GOING ON IN THE MARKETPLACE OR IS IT KIND OF THE
SAME LEVEL?
Van Cullens: That is really difficult to say, John, because there
are a number of variables that are not in our control
and some of those will be the intensity of marketing
promotions that are run by customers. That has a huge
impact. The decisions they make on the mix between
ProLines and VersaLinks is a huge swinger. So we are
just trying to be like we were last year and last
year we had punished for being the first person to
say, "There maybe a little seasonality pattern here."
We just want to make sure everybody is aware that it
could be coming again. If promotions were to stay
very high and the mix stay high on VersaLinks than
the problem may sort itself out. If it doesn't then
we will probably, at this point, we are assuming we
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WESTELL TECHNOLOGIES May 13, 2005
will some something kind of like hat happened last
year. I will just only remind everyone, the year in
total finished out quite well.
John Anthony: I just want to be clear on something though Van, I'm
trying to get a better sense of - Last year there was
seasonality but then there was kind of remnant affect
with inventory levels. I just want to make sure that
this year while there might be seasonality you are
feeling more confident about how you are handling the
channel inventory levels so that it won't be a
lingering problem, it will truly be a seasonal
problem where it is going to have a tick down and
then you won't necessarily see that more of a lasting
effect?
Nicholas Hindman: Yes, John, it is Nick. Let me take that. Yes, the
issue we had last year was this build up of some
inventory. I won't get into that in specifics. You
all remember what that was. We don't see that this
year. So, to answer your question - We don't see that
part of the scenario repeating.
John Anthony: Thank you guys.
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WESTELL TECHNOLOGIES May 13, 2005
Van Cullens: We tried to put together a new process to help us be
a little bit more, have a little bit more visibility
and real time tracking so we are hoping that we won't
have any reoccurrence along those lines.
John Anthony: Thank you.
Operator: The last question is a follow-up question from Todd
Koffman from Raymond James; please go ahead.
Todd Koffman: Thank you. IN RESPONSE TO MY EARLIER QUESTION YOU HAD
INDICATED THAT VERSALINK WAS ABOUT 50% OF THE VOLUME
IN THE DECEMBER QUARTER AND AGAIN ABOUT 50% OF THE
VOLUME IN THE MARCH QUARTER. IN THE MARCH QUARTER
YOUR TWO CORNERSTONE CUSTOMERS SAW A VERY NICE
SEQUENTIAL LIFT IN THEIR DSL NEW NET ADDS AND I WAS
WONDERING WHY WE DIDN'T SEE A STRONGER UPTAKE OF
VERSALINK ON A SEQUENTIAL BASIS DURING THE MARCH
QUARTER?
Nicholas Hindman: Todd, let me just speculate here and we will see if
Van or Gordon wants to jump in. We believe that there
was much less of a churn rate. That impacts the
number of units that we shipped, so it is hard to
say. That part we don't see, we don't see the details
of the net adds with our customers but the term net
means net increase and that includes churn, so we
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WESTELL TECHNOLOGIES May 13, 2005
believe that the VersaLink product has helped solve
part of that issue and is reduced churn therefore one
reason why we wouldn't have shipped as many more
units as you expected was because of the churn factor
going down.
Todd Koffman: Thank you.
Operator: At this time we have no further questions.
Van Cullens: Thank you everyone for joining us today and thank you
for your questions. This call is now adjourned.
Operator: Thank you. Ladies and gentlemen, this concludes
today's teleconference. Thank you for participating.
You may now disconnect.
*Please Note: Proper names/organizations spelling not verified.
C11575841/1133
JOB #: 2219858
DT: 05/15/05
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