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Westell Technologies First Quarter FY06 Earnings
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First Quarter FY06 Earnings
Westell Technologies
Van Cullens
07/21/05 9:30 am Eastern Time
Operator: Good morning ladies and gentlemen and welcome to the first
quarter FY-`06 earnings conference call. At this time our
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 Sir.
Nicholas Hindman: Thank you. Good morning, thank you for joining Westell
Technologies first quarter, fiscal 2006 conference call. I
am Nick Hindman, Westell, CFO. Today's earnings call is
being managed and hosted by our subsidiary Conference
Plus. Joining me today is Van Cullens, Westell's President
and CFO and Gordon Richard, Westell's Vice-President
Marketing. Joining us from the Conference Plus
headquarters in Schaumburg, Illinois is Tim Reedy,
President and CFO of Conference Plus.
Yesterday we reported first quarter fiscal 2006 results.
Today I will briefly review our financial results and then
Van will offer some comments, we will then take your
questions. Before I discuss our first quarter results,
please keep in mind that comments made during this
conference call that are not based upon historical fact
and that contain the words believe, estimate, think,
intend, anticipate, goal, strive, committed field
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.
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Westell Technologies First Quarter FY06 Earnings
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The companies earnings release and related earnings
information that will be discussed on this earnings call
including the reconciliation between the non GAAP and GAAP
financial information are posted on the homepage of the
companies website at www.westell.com.
We are pleased to report that Westell achieved a 13th
consecutive quarter profitability. Revenue for quarter was
up 35% to 75.6 million from 56.2 million in the first
quarter last year. Customer networking equipment revenue
increase 67% to $53 million up from 31.8 million in the
first quarter of last year. This performance is
attributable primarily to sales and enterprising.
Conference Plus revenue was up 6% to 11.9 million from
11.3 million in the comparable quarter of last year, this
increase is attributable to an increase in minutes billed.
Network service access revenue was down 18% to 10.7
million from 13.1 million in the first quarter of fiscal
2005. This decrease is attributable to non recurring
revenue of $1.8 million that was recorded in the first
quarter of last year related to a contract settlement and
approximately a $500,000 loss of revenue from a product
line during fiscal 2005, otherwise this business segment
is performing better than expected.
Under general accepted accounting principles, Westell
reported net income for the first quarter of 4.1 million
or $0.06 per diluted share including an income tax expense
of 2.7 million, excluding income tax expense, non GAAP net
income in the first quarter increased a 6.9 million of
$0.10 per diluted compared to 5.5 million or $0.08 per
diluted share in the first quarter of last year. A
reconciliation of non-GAAP results to GAAP results is
provided as part of the earnings release.
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Westell Technologies First Quarter FY06 Earnings
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For the June quarter, AFPs on Westell Inc. declined 4% and
modems declined 7%. We continue to expect AFP declines on
both products for the fiscal 2006 it will be less than
20%. Gross margins for the equipment portion of our
business improved to 26% from 24.8% in the March 2005
quarter, Conference Plus gross margins declined to 50.7%
from 54.7% in the March 2005 quarter. As we indicated on
the May conference call, we expect Conference Plus margin
to settle in the high 40% for 2006.
On operating expenses for the quarter, Westell's OPEX as
of percent of sales without Conference Plus are broken
down as follows. Sales and marketing 6.3% of sales, R&D
6.6% and SG&A 4%. For a total Westell OPEX report 17.4% of
current sales.
Turning to the balance sheet, cash and investments
increased by 5 million during the quarter to $32 million,
our 30 million private facility is currently fully
available. Inventory declined 2.5 million from the March
quarter. Overall working capital increased during the
quarter by 10.4 million. Other important points of
interest, capital expenditures were a $727,000 for the
first quarter, depreciation expense was $1.8 million and
product technology amortization was 224,000 for the
quarter. We began this quarter with 874 employees and
ended with 886. The sales outstanding for the quarter was
40 compared to 35 in the March quarter, this increase is
due to accounts receivable increasing at the end of the
quarter and sales decreasing from the prior quarter. We
have no collection issues. 10% customers were Verizon,
BellSouth and SPC.
Before I turn the call over to Van Cullens, I will
conclude with the discussion of guidance for the quarter
ending September 30, 2006. As we referenced in the press
release due to seasonal weakness, changing customer
promotional strategies, deferred product transitions and
pricing competition. We expect revenue to be in a range of
$61 to $64 million. We expect non GAAP EPS in the range of
$0.03 to $0.04 excluding a provision for income tax
expense in a range of approximately 785,000 to 1.3 million
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and EPS in a range of $0.01 to $0.02 on a GAAP basis
including the provision for income tax. Van will now offer
some comments and then we will take your questions. Van?
Van Cullens: Well, thank you Nick and good morning everyone. As you
just heard from Nick, our first fiscal quarter was solid.
We extended our profitable quarter straight to 13, further
strengthened our balance sheet, continue to diverse our
product portfolio. We had a major new line with BellSouth
selecting our product for their wireless gateway offering.
Our NSA business began to show signs of recovery,
Conference Plus performance was good and our new products
are attracting very promise interest. In summary, we are
pleased with the first quarter results.
The selection of BellSouth is a significant development
for us. We need a very challenging technical requirement
there and the incumbent supplier in the process and we
managed to develop. The third significant account went in
for Westell Inc. and we hope the success will give us
momentum with other perspective customers that are
evaluating the product. We don't expect to receive revenue
from this one until the incumbent inventory is depleted,
but when that happens, we will have a new revenue stream.
We continue to pursue new accounts for our ProLine modems
as well and are encouraged with recent progress in this
regard. We are addressing some significant accounts with
ProLine and the level of engagement is good. We hope that
all of these pursuits will be concluded one way or the
other by the end of the year. Equally significant during
Q1 was the attention and engagement generated by our newer
products. We have multiple evaluations underway and expect
sound entering trials for TriLink, UltraLine and the
Westell Media Gateway a variation of the one product that
we are marketing outside of the US.
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Additionally we are involved in a wireless and convergence
project utilizing a version of the TriLink product and
also are supporting Verizons launch of the Verizon One
platform. These initiatives are positioning Westell and
some very attractive emerging markets. Unfortunately most
was not developed significant on calendar 2006 and the
interim, we have to afford the associated cost and
initiate additional new product developments. In the end,
we believe we will achieve a very good return on this
investment.
So, we remain confident in our view of the market and
believe that our CNA product portfolio strategy is
correctly aligned with how this market will develop.
However the primary question remaining is market timing.
Obviously we would like these markets and new customer
relationships to develop sooner versus later, but we
understand the customer evaluations and field trials take
their own time.
The important point is that, we continue to feel quite
positive about our new product positioning. Outside of the
CNA area we are very encouraged by the life we see in our
NSA business. NSA's quarter over quarter improvement was
better than expected and we are pleased with the latest
outlook.
Westell as the market share leader in this space, and we
are believe we are building on this lead as we continue to
expand our product offerings and account support. The
improving situation with NSA is most welcome. Conference
Plus targets for the quarter and continues to make
valuable contribution to our bottom line. Our task here is
to grow the top line in the phase of annual pricing
adjustments with our largest customers. Our team has
budgeted aggressive marketing and sales initiatives for
this fiscal year and we expect these adjustments to
produce growth and more than offset the pricing reductions
negotiated with customers.
Unfortunately our Westell Limited operation based in the
UK had a disappointing Q1 for both DSL and VoIP product
lines. A significant portion of the short fall appears to
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have been order timing not competitive losses. And while
we expect improvement going forward, especially with our
newer products such as the Westell Media Gateway, we are
making some adjustments to the resource profile there.
Additionally we are considering other actions that could
augment the approach we have been taking in this market.
So this continues to be a work in progress.
Now let's talk about the environment we are seeing over
the short-term. As stated in our earnings release in the
CNE space we are seeing seasonal weakness, changing
promotional strategies, differed product transitions and
additional pricing pressures. All of these factors are
impacting our results over the near term. Our task is to
take quick remedial actions where we can find them and to
get our newer products into volume deployment as soon as
possible.
Remedial actions we are pursuing include, one, considering
ways to provide additional and prudent support to the
marketing efforts of our customers. Two, working with our
suppliers to realign cost reduction actions with the
pricing realities of today's market. Occasionally the
market and our plans get out of sequence. And I can assure
you that we are working to re-sequence them as quickly as
we can.
The third area is where we are re-examining our R&D
programs to see if there are opportunities to shift
projects in a way that increases near term contribution to
our financial results or maintaining our customer
commitments. And finally adding additional capabilities to
our current product offerings.
As our visibility into customer and market developments
improve, we will very add to this list of remedial
actions. We are going to make every effort to improve upon
our second quarter guidance. But I can see that it's not
going to be easy with just over two months left. But, if
there is a company in this space that has demonstrated an
ability to adjust and adapt to challenges, it is Westell.
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What we are not going to do is to become derailed from the
longer-term product strategy that we have put in place. We
remain confident in that strategy. We will manage the
short-term softness without sacrificing our commitment to
the future. We realize we have to deal with both and that
is what we intend to do.
Let me now open this talk for questions, as always we must
be restrained on points of competitive and customer
sensitivity. We can answer specific questions regarding
prospective customers, our own current or expected RFPs.
Pre-mature 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 any question please press "*" then
"1" on your touch-tone phone. If you wish to be removed
from the queue please press the "#" sign or the "hash"
key. If you are using a speakerphone, you may need to pick
up the handset first, before pressing the numbers. Once
again, if there are any questions please press "*" then
"1" on your touch-tone phone. One moment please. The first
question is from John Anthony from SG Cowen, please go
ahead.
John Anthony: Good morning guys. I have a few questions, first on the
revenue guidance. Can you give us a little more detail
about the mix that you are expecting first to assume that
the client is entirely due to CNE or is it, you know, is
there going to be a decline at NSA and a decline at CPI?
And along the same lines I guess the thing that's a little
confusing here is, on the one hand you are saying that you
don't expect ASPs to decline and either the modem or the
gateway more than 20 percent for the year but, you are
talking about increasing price pressures. So, can you
clarify that please?
Nicholas Hindman: John, it's Nick starting, I am sure Van will want to add.
On the mix question, it is primarily a move from VersaLink
of the basic modem is not an issue in Conference Plus not
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Westell Technologies First Quarter FY06 Earnings
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an issue at NSA. So, it's a move to back at least
temporarily to the lower price products, which is really
essentially all of the delta that you are seeing. And what
was the second part of your question?
John Anthony: Their price.
Nicholas Hindman: Oh, pricing. So, it's always an issue with us, we wanted a
reference it just to keep it in front of you. It's not
particularly a big issue in the September quarter, but
it's something that we would always like to keep in front.
So, you know, it's out there, but in short-term it's not
giving us any particular problem just something that we
need to be aware of that's part of the equation.
Van Cullens: We refer--this is Van and I will add a little bit there,
we referenced this, because we did have some discussions,
they did come a little bit earlier and planned and we
expected a lot of this to be -- to be blind we are kind of
doing in real-time. These issues both on our concerns
about how the product mix might change and some pricing
discussions occurred just less than a month ago or a
little over a three weeks ago. We are still processing
through our assumptions as to how this might affect us and
that's what we have it outlaid on your guidance. But we
are still looking at some unknowns here in terms of
how--if there is going to be a change which we have
assumed, if there is going to be a change in the mix how
that change is going to really be structured and how is
the market going to respond. Those to a large extend are
unknown to us. And if you are going to ask questions about
today on that, we are going to differ most of those to the
customer, because quite honestly we don't know too much
more than what I have just said.
John Anthony: Okay. So is it safe to say then the guidance for the
revenue does not only include the mix, but it does
incorporate some further ASP versions over and above the
20% that was referenced earlier?
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Nicholas Hindman: No, not over and above. For the September quarter, the
impact of any pricing is less than $500,000 it's just a
very minimal.
John Anthony: Okay. Well I guess I am little confused here Van, because
if I just go through--are you expecting decline in the
unit volumes?
Nicholas Hindman: No, just a big decline in the VersaLink volumes.
John Anthony: Okay. Well, if I kind of just do basic math then it -- it
seems like you guys are being overly conservative and
really expecting to ship barely any Versa links if I just
kind of use the rule of some that you send in the past
roughly two times the modem ASP?
Nicholas Hindman: Well, John just let me try to help you. The best
information we have today is that our--well, of our total
DSL product mix in the September quarter only less than
25% will be VersaLink and that's down from 47% in the
March quarter, down from 38% in the June quarter. So, it's
strictly--it is strictly a reduction in the VersaLink
units.
John Anthony: Okay, great. And over in the receivable can you just give
us a little explanation why the receivable went up and how
you expect them to trend in the September quarter?
Nicholas Hindman: Well, we typically like lot of companies, you have a lot
of shipments in the last month, the last week or two weeks
of a month. Either customers want to get product and so,
typically if you look at our receivable over history, they
probably increased in the last month of the quarter that's
typical. So, there is no reason for alarm. That coupled
with the fact that our revenue went down in the June
quarter compared to March is what really gave us the
short-term increase in DSLs, that is certainly not what
the customers we have, it's certainly not a collection
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issue, it's nothing to be concerned about. But, obviously
we have to indicate you know, what the reasons are.
John Anthony: So, I mean, is it safe to say then you think you are going
to decline in September?
Nicholas Hindman: Yes.
John Anthony: So, would you be willing you know, you guys don't normally
talk about free cash but just looking at how the balance
sheet is structured going into the quarter do you think
you would be able to generate free cash in the September
quarter?
Nicholas Hindman: I believe we will yes.
John Anthony: Okay, great thanks guys.
Operator: The next question is from Michael Perica from Brean
Murray, please go ahead.
Michael Perica: Thank you. I have a couple of questions, following on
John's questions with regard to profitability and pricing
and such. Do you think it's a depressed revenue level for
the CNE division in September that--it would be at least
break-even from an operating standpoint?
Nicholas Hindman: The -- the CNE division alone?
Michael Perica: Yes.
Nicholas Hindman: Oh, yes.
Michael Perica: Okay. So that still would be profitable even though, it's
probably gross margins are little depressed.
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Nicholas Hindman: Yes.
Michael Perica: Okay, all right. Now secondly, also talking about still
being cash-flow positive, have you folks given any thought
to potentially instituting your stock buyback program, you
know, the balance sheets improved quite a bit it's not as
large as you probably like, but have you given any thought
to that?
Nicholas Hindman: Yeah, in fact I--I am always looking about is something
that we always consider. I don't know do we have enough
cash really can--to really do that, but it's something
that we have done before as you know.
Michael Perica: Uh-huh.
Nicholas Hindman: And certainly if Van feels that's something that he like
to do, you know, he will take that to the Board. But, it's
a good point we always think about it, I don't think we
have enough cash to really undertake that at this point.
Van Cullens: At the same time Michael, we are looking at other things
that we might want to do with that cash to improve our
position in the marketplace. And we are spending quite a
bit of time on the that side of the sheet as well. We have
a lot of engagements going on, a lot of discussion, as you
know, most of those are don't pay them out, so you have to
have a number in place and we continue to do that and over
the next quarter hopefully we will see our way into some
targets, but the option for both is there.
Michael Perica: Now, going on to new customers, you talked about you know,
new products selling into the existing customer base and
we all speculate here things as far as being north of the
board or south of the board or some base modem new
customers. Do you see anything that could happen over the
next couple of quarters on that front?
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Van Cullens: Yes. As I have I cited in here, we have got obviously with
ProLine we have got some things that could happen if
everything fell in place for us and we moved through all
the trials positively and reached an agreement. Things on
the wireless gateway, we have got a tremendous amount of
interest and activity that's going to take a little bit
longer to turn into revenue, because I am sure there will
be engineering required there. Similarly on the TriLink,
which would be the next probably most active in the time
frame you are citing, I think we have possibilities there
again how quickly it gets up to volume production and then
the third is in our TriLink area with a video trial, that
I think we will see activity, but whether we will have any
revenue anytime early enough to effect the period you are
talking about is still an open issue on our mind. We have
a lot going on and well I knew there was going to be
reaction to this. I hope people don't lose site of the
positioning that we have been working hard to build and
that position I think is still out there for us to act on
and we are acting.
Michael Perica: Uh-huh. Before I pass it on, just going back to the issue
at hand, do you think your largest customer perhaps is
just assessing it's overall DSL business on a calendar
year basis trying to improve that bottom line and then
maybe go back to status-quo in the new year as the
budgeting process starts over again?
Van Cullens: Yeah, it's a very interesting question John, but we
don't--we have learned not to speculate on what our
customer's plans are and don't speak for them but you
know, that would be a customer for you to--I mean a good
question for you to put directly to them.
Michael Perica: Thank you. Have a good gentlemen.
Nicholas Hindman: Thanks.
Operator: Our next question is from Ken Muth from Robert. W. Baird,
please go ahead.
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Ken Muth: Hi guys, on the DSL solution a lot of pricing going on
between the RBOCs and the cable companies and the price
kind of a--in full kick off season here. Can you just
elaborate maybe on what you are seeing right now from
their perspective and how these guys are looking at it,
some of the shift away from a high-end to a low-end in
anyway shape co-related to their lower pricing schemes.
Van Cullens: Well again Ken, it's a good observation. You know, we are
tracking all of these price reductions and program changes
and promotional changes. We can speculate, but I would be
speculating for our customers and that's not generally
well received when we do that you know, I think you could
certainly make a logic argument that they are connected,
but that's not for me to say, I think you should discuss
that with them.
Ken Muth: Okay and then on the new product side with Verizon One
product, can you give us an update there obviously this is
going to be the first quarter you had some shipments going
out, they came out with a rebate program right around
SuperComm and lowered the pricing on that any kind of
update you have on the Verizon One take rates?
Van Cullens: Again I am not trying to be evasive here but there's you
know, this is for Verizon to come in or not. What I would
say about this is a--as derivative product, do we have our
selling the Westell maybe a gateway into the international
market is getting a considerable amount of interest. Now,
we haven't launched it in a broad scale sense like Verizon
is intending to do or is in the process of doing. We have
been more targeting in some very large perspective
customers outside the US and that engagement is pretty
interesting and pretty encouraging. Inside as I well--you
should just ask Verizon to comment on how that's rolling
out. I would just only say it's early days and we still
have a very high-level of confidence in the ultimate
success of this product.
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Ken Muth: Do you still have your--that kind of confidence in the
roll out of that product picking at the Verizon One in the
December quarter like you originally thought last quarter
that's why you talked to us, you told us?
Van Cullens: Yeah, that would have to be--that's going to be reassessed
on whatever Verizon would tell you, you know, I don't know
if they are going to still push for that Christmas rush or
if they are going to take a little bit more feedback and
then go harder beyond that. That is one of the things we
at this point quite honestly have not nailed down.
Ken Muth: Okay. And then anything given kind of a -- the redirection
here of the product mix, how you are going to react and
kind of your internal--what you can control as the
operating cost in the sales and marketing side and R&D
side, what in initiative in place to try to take those
down over the next couple of quarters or do you--?
Van Cullens: We are engaged already in a number of discussions about
how we will do some things and over the next week or so
that will become more intense. So you know you always go
through periods where you probably need to comeback and
look at your model--business model and look at the way
things are structured. So we will probably be doing some
things in that area.
Ken Muth: Okay thank you.
Operator: Our next question is from Todd Koffman from Raymond James,
please go ahead.
Todd Koffman: Yeah, just a clarification on the Unit trends. You
indicated that in the September quarter you are likely
going to experience a pretty significant sequential
decline in units with the VersaLink box. Are you seeing a
noticeable sequential increase in your old ProLine or our
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ProLine units remaining about sequentially flat from June
to September based on what your guidance is implying?
Nicholas Hindman: Yeah, Todd it's Nick here. Yeah, the ProLine units would
be going up, that is--it is an exact correlation, but it
definitely go up we really not looking--we really don't
believe that DSL deployments will go down, it's really
more of a shift on products mix. So we really don't see an
overall decline just primarily of update mix change.
Van Cullens: And this is Van again. Again this is an area where we are
working without precise information. No one and I am sure
even if you talk to our customers when they work these
promotions or plan these promotions no one knows exactly
how the consumer is going to react to promotion. Sometimes
they are rarely successful and sometimes they are not so
successful. We are left for trying to plan around on some
certainty and what you are hearing from us here is what we
are putting into our models to try to drive our production
and to get to these guidance numbers but it's still in
some flex.
Todd Koffman: Yeah, I understand that so generally speaking and I
realize this, there is a lot of moving part here, your
best guess is that the unit volume in September is likely
to remain about sequentially flat with June.
Nicholas Hindman: It's a bit downside I mean, it's not substantially down,
but it is a bit down, but it is not as perhaps you might
think.
Van Cullens: Based on our model.
Todd Koffman: Okay. I am just curious regarding the lineary you have
seen in the business, the last few months including the
most recent trends. What is the linearity of your business
look like the last you know, two or three months.
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Van Cullens: Well, I think, if you look at it over you know, a period
of a quarter for instance any three months period you
probably has reasonably linear but there it's like a duck
swimming across the pond, it looks pretty steady on the
top but underneath there is a heck of a lot of paddling
going on and we see all the fluctuations coming and going
almost on a weekly basis. Some get advanced, some get
delayed, pushed back out so we--it is a highly dynamic
process that usually you give the compensating errors and
it says reasonably linear but the big fact here Todd as
you know, is the promotional activity and those can come
online quickly, they can go off-line quickly as I
mentioned earlier like you can have varying impacts. That
is what gives us the most difficulty in trying that and
product transition. When we don't know exactly what
product transition is going to take place, we know
approximately when it's going to take place we have done
our managing inventory on both sides, the inventory of the
existing product, inventory of the new product and trying
to get those--hit those points. So it maybe at a very
high-level has been kind of linear for the last year but
in the weekly planning it is highly dynamic.
Todd Koffman: If I could ask just one last follow-up question regarding
the BellSouth VersaLink win. I thought I heard you say you
won't--will not be recognizing revenue on that until you
work down existing inventory of your older product.
Van Cullens: Not our older product, the incumbent's older products.
Todd Koffman: The incumbent's product, what time frame would you
estimate that--that would be, I mean how much inventory
did they have to work down and--
Van Cullens: Again you know you are asking me to comment on a customers
business and plans and that's difficult to do. I would go
so far as just to try to give you some sense and our own
internal planning we are looking kind of at the end of
August, early September.
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Todd Koffman: Thank you very helpful, good luck.
Nicholas Hindman: Thank you.
Operator: The next question is from Bill Choir from Kaufman
Brothers. Please go ahead.
Bill Choi: Okay thank you. One of the items that you had listed as
part of your remedial efforts was to sort of continue to
work on the cost of production efforts and try to get that
back in line with maybe perhaps our customers are looking
at. If the customers are looking to shift back into the
lower-end modems, what kind of price points are they
asking you to get to, let's say by the end of this year,
or end of next year and then what kind of cost improvement
efforts do you have to get, you know make decent margins,
let's say to seek out lower price modems?
Nicholas Hindman: Bill, it's Nick. I am not going to answer the first
question. That's just too far out there and you know, we
kind of got quarter at a time. But, cost reductions there
is a lot of opportunity there, we have major cost
reductions on going with Verisonic now, ProLine and
reductions to follow that. So there is--so, I can't say
that there is we believe substantial ability to lower our
cost or are we are going to have lower SPs of course we
are. But we believe that we can stay at least status quo
on our margin percentage. That's always been our stance.
But we do think we have a lot of ability to take product
at cost out and stay competitive.
Van Cullens: I mean and just to give you--we are working and have been
and since all of this came up about three weeks ago, we
have been feverishly meeting with our silicon suppliers
and our other major suppliers were looking at a variety of
options that we could take to start trying to get back in
front of this pricing curve and we just have to work, it's
on going. We set up targets internally and there are times
we even put bonuses on teams to go out and find additional
things that we can do and we will also be engaging our
customers quite honestly and challenging as to whether
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some of the traditionally required things that are adding
cost, but we don't perceive of being used are really
necessary. So this is going to be a fairly energetic
activity over the next five or six months.
Bill Choi: So we should definitely see some kind of a new cost
improved version within the next--?
Van Cullens: I think everybody in this game is going to have to do
that.
Bill Choi: Okay. And would it be fair to then assume based on your
comments that obviously that your customers are now
looking at price points where they are trying to pressure
you for more than 20 percent year-over-year declines in
these existing product lines.
Nicholas Hindman: Bill it's Nick. All I can really talk about is this fiscal
year and we are confident that the number that we gave you
less than 20 percent is what we believe will happen. So
you can--to your first question, before you can probably
figure out where the pricing would be, we are engaged
looking at you know, the next year that's not done. But we
don't believe that what we have telling you, what I told
you today is going to be anything different for this year.
Bill Choi: One final question. I believe Westell Limited probably was
somewhat of a meaningful contributor outside of your two
largest modem customers for Verizon and BellSouth. Can you
help me understand just exactly what happened in terms of
their demand for modems and what we will get that coming
back into the near future?
Van Cullens: Well what was reported to us is that a couple of our
distributors did not put in their normal run rate of
orders. We are trying to test to see exactly why that was.
It seems to be timing certainly on the--the IQ 2030, our
VoIP product, that was timing on the orders and those
orders should be coming back in, in the second quarter.
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But as I had said before, I think on the last earning
call, Bill we were--we have been pushing our UK operation,
our European operation to move over to try to get into the
larger account. And they appeared to now have done that
with the Westell Media Gateway and we are hoping that,
that product will have us over time pulling additional
products. So we are going to focus a lot of activity to
try to secure those deals and that's going to take some
time, because there are certain adaptations that will have
to be made for their particular requirements and I am sure
they are going to want some customization. But they are
seriously looking at these things and have the capacity to
generate significant volume if they would like to go
forward. So, that's kind of where we have redirected a lot
of the activity.
Bill Choi: Another question. I can certainly understand pricing
pressure from customers, but you mentioned pricing
competition. Unless I am reading too much into this, but
are--that a competitive pressure for your existing
customers business?
Van Cullens: Well I--when I dated one and the same, because when
customers comeback to us, they are normally sitting
pricing that someone has offered them or promised them.
You know, we generally try to look at it, just to make
sure we are talking about apples and oranges or apples to
apples here. But that's why I use the term competition,
because it's indirect. They just--our customers go out and
get close. They get lots of people bringing them close, so
what could be had for China develop a product. We then go
look and see what are the deficiencies of those products
and try to go back and make our case. But it is a fairly
constant activity.
Bill Choi: Thank you and good luck.
Nicholas Hindman: Thank you.
Operator: The next question is from Robert Starbuck from Schroders,
please go ahead.
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Robert Starbuck: Hi guys. There has been discussions that you have had with
a major customer, have they concluded at this point or are
they still ongoing?
Van Cullens: The discussions on the VersaLink and Gateways, I think we
are close to having those nailed down, they still have to
be converted into formal contractual language, but I think
we are past most of those issues, for the other products,
the more the newer products versus the Verizon One and
subsequent iterations of that product. There are still
ongoing discussions.
Robert Starbuck: Okay and do you have a sense of your customers inventories
of the both the modem and the VersaLink and where they
stand currently?
Nicholas Hindman: Yeah we do Robert, it's Nick here. They are pretty much in
normal levels. We haven't seen any big increase on any
problems, Verizon we believe and of course this is there.
We don't think there is an issue there, BellSouth not a
big issue. So it's--we don't think it's a problem of too
much inventory in the channel. It's again going back to
this mix issue, which is really giving us the issue for
September.
Robert Starbuck: Okay. And have they given the expected change in the mix,
have they changed their order patterns as of yet?
Van Cullens: We have seen some and that's what really got us going
three or four weeks ago as when we were looking and our
operations people who track the source of things really
carefully, I believe that they were seeing a shift. But
then, you know, subsequently we have got some additional
orders. So we are not sure exactly what's going on there
and we would advised that you direct those questions
directly to the customer. We have to do some detective
work here and then make our own model and estimate,
because we don't always--we are not always perfect to the
specifics of the details. And as I mentioned early, even
when we get a sense of what a promotion might look like in
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terms of it's parts we then have to kind of speculate as
to how is the customer going to actually respond to that.
Is that going to be how wildly successful or is it going
to mildly successful. And we are trying to then balance
our supply chain and make sure that our ability to supply
the right mix is done, it's not easy for us and right now
as I said earlier, all of this is kind of in real-time.
Robert Starbuck: Uh-huh, okay. The interesting thing is, you know, when I
went on their website a few days ago, it looked like they
were really still leading with the VersaLink I don't think
I even saw the -- the ProLine at all.
Van Cullens: Now, again we--you know, that would be--we would be
delighted if that were to be the ultimate direction that's
taken, but--and the customer makes those decisions not us.
Robert Starbuck: Uh-huh. Okay, when--in your discussions on pricing, would
you anticipate that you might take the price of the
VersaLink or I guess maybe those are done at this point,
that the VersaLink price would come down more than the
modem and therefore you might end up in the future with a
better mix of the VersaLink?
Nicholas Hindman: Bob, Nick here. I don't think so. I think there is going
to be a price differential there. And--you know, we
wouldn't entertain bringing down that price enough to make
it, you know, too compatible with the basic modems. So, I
don't think that's kind of where we are going I think,
that this whole process is going to have to shakeout,
customers are going to have to determine what's the best
product for them to deploy and then we will, you know,
will meet their needs. So, it isn't an issue of -- of
trying to significant lower the VersaLink price. We will
just have to sit through this then hopefully it will take
care of itself.
Robert Starbuck: Uh-huh, okay and I doubt you can answer this, but do you
have any color on, you know, on a relative basis what the
promotions might be looking at, so that we can judge the
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relevance of the product mix that, you know, you are
currently forecasting?
Nicholas Hindman: Yeah, we don't we will probably see it when you see it --.
Robert Starbuck: Yeah, okay.
Nicholas Hindman: --on the website.
Robert Starbuck: Okay. Great, okay.
Nicholas Hindman: Thank you Bob.
Operator: As a reminder if you would like to ask a question please
press "*" then "1" on your touch-tone phone. The next
question is from Eric Kainer from Needham & Company,
please go ahead.
Eric Kainer: Thank you very much and congratulations about your win
with BellSouth, that sounds really interesting and we are
looking forward to hearing how that rolls out. First area
I would like to investigate is international, what
percentage of the business in quarter was international?
Nicholas Hindman: A very small Eric, just a few percent.
Eric Kainer: Okay. The driver for potential increases in the business
there, is that more of Voice over IP, is it video or is
it--I know you said that, you know, the media here where
it was going to be a big part of what was developing
there. And then also if you could address kind of you go
to a market strategy there you mentioned specifically
that, that you are working on getting into larger
accounts. I guess that's specifically in Europe and I had
seen some success there. Do you primarily serve those
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through channels, through distributors or do you have a
direct sales force that you approach the larger customers
with.
Van Cullens: In the large--in the case of the Westell Media Gateway,
which is a you know, a new brand new product, we are doing
that direct and we are doing that direct with support out
of the US. For the existing, the ProLine and LiteLine and
VersaLink, we have been working both direct and with
agents on--in the main land. And they have had success,
but it's been in smaller accounts as I have referenced on
the last call. And we are trying to either move that up or
to just shift our focus to the newer products. And also we
will have TriLink there and the video we have not really
pushed the UltraLine products there too heavily yet. We
are kind of focusing on the Westell Media Gateway and
TriLink at this point in time as the two primaries.
Obviously if we get good engagement and can get you know,
at the right levels with these larger carriers, then we
have the opportunity to start socializing the rest of our
products and as we have mentioned and have not talked
about a lot here, we have designs to move further along
towards the whole networking market and we have some
concept products under development there that we think
would be a very differentiated new kind of product that
would get higher-level of interest. So, if the
answer--long answer to give you a sum on it, is we are
trying to reposition with our higher and newer products in
Europe at this point.
Eric Kainer: Thanks. Now when we talk about international are we
talking exclusively about Europe have you--?
Van Cullens: No.
Eric Kainer: Okay.
Van Cullens: Thank you for raising that we also have had--we have a lot
of activity going on in Canada, we have had some activity
in Mexico, those are still open and certainly a couple of
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them up in Canada are active and we have you know, we have
certain expectations there are hopes. Beyond that, we have
been entertaining discussions very early on with people
that might represent some of these products and so for
instance the Pacific Rim I don't want over sell that or
over state it, because we are in early days. But, there
are possibilities that we could do that. We also to remind
you have a relationship that we structured last year with
Nortel. And Nortel is representing and pursuing some large
opportunities internationally and has something working in
the southern pacific for next year where we would be or
the CPE supplier should they be successful. There are
other conversations that we are being approached about
possibilities of representing some of these products in
markets that we are not going to directly. So we are, you
know, we are looking to try to open up additional channels
but we are staying fairly conservative and fairly patient
in how we do that.
Eric Kainer: Yeah outstanding. Let's see couple other areas, one is for
the 10 percent customers, could you give us the amounts on
how much each of those were?
Nicholas Hindman: Yes, it's Nick here. Verizon 56%, BellSouth 17% and SBC
11%.
Eric Kainer: Okay, great thank you. And then the last issue is are you
seeing any new competitors in any of the--I guess your
major accounts especially you know, any--you know, is that
kind of where the competition is coming from the new price
pressure or you know, what's the gestation of that?
Van Cullens: Well, I don't think we have seen any really new ones. The
ones that are presently I think it's the usual suspects
that have been there for the last couple of three
quarters, where we have see Netopia and 2-Wire and Action
Tec, those are the main four. But that doesn't present a
lot of other companies coming in and throwing down you
know, very low pricing in order to get attention and that
pricing is immediately picked up and used as in
conversations with companies like us and we have to deal
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with that. But the one of the companies that actually
appeared to have any sort of engagement are the ones that
I talked about.
Eric Kainer: Thank you very much and good luck.
Van Cullens: Thank you.
Nicholas Hindman: Thank you.
Operator: The last question is from Gary Jacovi from Morgan Stanley,
please go ahead.
Gary Jacovi: Good morning thanks. I was just wondering if you could
talk a little bit about the process whereby you sit down
with your major customers and outline what they are
expected or desired. It would seem to me that you know,
historically Verizon has tried to work with it's producers
to give them some indications as to where they are going
and when they are going there, so that the producers can
give them the best prices and the best service. Could you
just talk little bit about the ongoing discussions you had
with your leading customers about how you are going to
meet their supply and demand requirement?
Van Cullens: You are right Gary on that. All our customers will talk to
us in very general terms about what their objectives are
maybe over a given year, this is what they want to do.
What's not in that in very much detail is, you know, they
will state we would like to have `X' number of new DSL
subscribers or broadband subscribers over this budget
year. What we don't then get into is a lot of insight as
to have the promotions are going to be timed or configured
what their mixed strategies are going to be they will give
us some indications of what this is what they think it
will likely be, but often times when we are dealing with
the interfaces we have, they are not always the marketing
people who are doing the individual promotions. And then
of course like any company, our customers undergo changes
during a year when for whatever reasons they decide that
their plan needs adjustment and they might be a up
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promotion or cut promotion to conserve capital or
whatever. And we are then forced to react to that pretty
much dynamically. We often times don't get a lot of
insight or lead time on that, that's why we then try to
stay very flexible in our inventory management and try to
keep our supplier channel, our supplied pipeline under
pretty good management so that we can flex quickly when we
have to. But when we get something that is this dynamic
where you are going from a much higher product price
product that could conceivably get flipped with the lower
priced product that's pretty difficult to deal within one
quarter and that's what's happening here.
Gary Jacovi: Is there any advantage for you to guys to enter into some
longer-term contracts with them you know, take their pay
type contract where you might get a lower margin but, you
can better manage your you know, production and shipping
and supply chains?
Van Cullens: I just think that the market itself is too dynamic and the
competition that goes on between the various service
providers is very difficult to predict and they are always
you know, actions and counter actions of a competitive
nature that I think are typical for any business but
particular with the competition it's going on in the
broadband space. I mean, I think both sides would like to
do that I don't think our customers are trying you know,
are trying to make our life miserable by any means I think
they would like certainty just as much as we would like
certainty. But the reality is that that's hard to achieve
in this market.
Gary Jacovi: All right, thanks.
Nicholas Hindman: Thank you.
Operator: We have no further questions at this time.
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Van Cullens: Okay, thank you very much for your questions and joining
us today. This call is now adjourned.
Operator: Thank you. Ladies and gentleman this concludes today's
teleconference. Thank you for participating you may now
disconnect.