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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Westell Fiscal Year 2020 Fourth Quarter Earnings Call. My name is Richard, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Jeniffer Jaynes, Westell's Interim Chief Financial Officer. Jeniffer, you may begin.
Thank you, Richard. Good morning and welcome to our conference call to discuss the Fiscal Year 2020 Fourth Quarter Results for Westell Technologies. The news release we issued yesterday afternoon is posted on our website, westell.com. On this call, Tim Duitsman, Westell's President and Chief Executive Officer will begin with a discussion of our business and growth initiatives. I will then update you on our financial results for the quarter and we will conclude by taking your questions.
Before we begin, please note that our presentation and discussion contain forward-looking statements about future results, performance or achievements, financial and otherwise. Words such as should, believe, expect, trend and similar expressions are intended to identify such forward-looking statements. These statements reflect management's current expectations, estimates, and assumptions. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Westell's actual results, performance, or achievements to differ materially from those discussed. A description of factors that may affect our future results is provided in the company's SEC filings, including Form 10-K for the fiscal year end March 31, 2019, under the section Risk Factors.
The forward-looking statements made in this presentation are being made as of the date and time of this conference call. Westell disclaims any obligation to update or revise any forward-looking statements based on new information, future events, or other factors. Please also note that we present non-GAAP financial information in our news releases because we believe that non-GAAP measures provide meaningful supplemental information to both management and investors. The non-GAAP information reflects the company's core ongoing operating performance and facilitates comparisons across reporting periods. Our discussion of results today will include non-GAAP financial measures. We've provided reconciliations to the most comparable GAAP measures in our news release. I will now turn the call over to Tim.
Thank you, Jeniffer and good morning everyone. In our call this morning, I will give you an update on our business, including the impacts of COVID-19, which began during our fourth quarter. Westell is an essential business and our operations remained up and running during the statewide stay at home orders resulting from COVID-19. This situation is clearly affecting our customers and suppliers, and it has made many things challenging for our own operations. Safety is our first priority for everyone. We've implemented CDC and state guidelines for mitigation and prevention in our facilities, including social distancing, frequent cleanings, masks, temperature checks, and other actions to help keep our employees safe and healthy. Our sales force and office staff employees are working remotely whenever possible. I'm thankful for the resilience of the Westell team as we navigate these uncharted waters.
The pandemic affected Westell’s business in two primary ways during the fourth quarter. Average daily orders dropped in March likely due to a combination of the recently adopted stay at home orders and the economic uncertainty that is affecting everyone. We also experienced delayed deliveries from our suppliers due to COVID related factory shutdowns and piece parts supply chain interruptions. Customer orders that were affected by these delays in most part were not canceled, the deliveries were shifted out often into the following quarter. These COVID related issues reduced our fourth quarter revenue and its profit contribution. They were the major reasons for our revenue ending approximately $1 million below the previous quarter.
We proactively dealt with these issues from the start. When we first experienced supply chain issues, our operations group formed a crisis team to find and qualify alternate suppliers. We've temporarily sourced some products in the U.S. at higher cost and air-shipped some critical parts from Asia. We were able to pass some of these additional costs along to customers, but we expect some related margin compression in the next few quarters due to higher costs. Finally, we also responded by taking action to reduce our costs. Our higher paid employees took a 20% pay cut for seven weeks. Our Board of Directors reduced their cash compensation for this new fiscal year by 26%. We also clamped down substantially on other expenses. Based on our shipments and orders scheduled to ship, we expect revenue this quarter to be similar to last quarter. It is difficult to forecast beyond the current quarter in this uncertain and rapidly changing business environment.
I also want to note one other positive development during the current quarter, Westell received a PPP loan for $1.6 million on April 14th that helped to sustain our workforce and keep our employees working. This loan is being used to cover payroll, utilities, and rent. The company expects to apply for loan forgiveness against the applicable expenses. Jeniffer will be reviewing our financial results in a moment so at this time I would like to share the actions Westell is taking towards our number one priority, which is profitable revenue growth. We continue to drive our revenue expansion strategy in three key markets; the in building wireless, remote monitoring, and rural broadband deployment. I will touch on a few of our specific efforts.
In our IBW segment, public safety is a key opportunity and focus for Westell. Shipments of Class B repeaters and battery backup units were strong during the quarter. Class A repeaters were down versus last quarter as customer orders and installations of these systems were delayed due to the pandemic. We also experienced strong demand for ancillary DAS components connected with public safety and we expect that to continue. Looking forward new public safety products are in development for introduction later this fiscal year.
There is good news on the sales channel front for public safety. In February Westell signed an exclusive nationwide agreement with Johnson Controls, a worldwide leader in building control systems. Johnson Controls will be distributing and specifying Westell public safety products throughout their direct and indirect channels. Our agreement covers all Johnson Controls company owned offices that offer Simplex fire alarm systems, as well as their auto call dealer channel members. Westell has already trained many of Johnson Controls technical, field engineering, and training support teams and more than 100 auto call dealers nationwide. We have started designing public safety systems for new buildings with their staff. Having a quality partner like Johnson Controls should help to place more of these important public safety systems in buildings throughout the United States.
In addition, I am pleased to announce we have a new product line in the IBW portfolio named CrossFire. Last year, we signed a sales agreement for a digital DAS platform which delivers cellular and Wi-Fi coverage inside buildings. This technology has been deployed throughout the world, particularly in Asia, Australia, Canada, and the UK. Our in building wireless experience, consulting with customers, and selling DAS components makes this product a great fit for the Westell IBW sales team. Many of our cellular and public safety integration partners can also sell and install this new digital DAS platform. We received our first customer orders last quarter and we shipped our first two CrossFire systems to customers in May.
In our ISM business we saw a drop in demand for remote devices and installations during the fourth quarter, likely due to the stay at home orders. Installers were asked to stay at home and did not travel to sites to install new equipment during that quarter. During the quarter we made significant development progress on prototypes and software for our new lower cost remote monitoring platform, which is named Edge Link. We also started business development and marketing of this new product. Customers are excited about the ability to deploy a low cost solution for energy management, industrial IoT networks, and broadband radio monitoring. Customer field trials are currently planned to begin late this summer. COVID may have increased the demand for this product since customers are looking for new ways to remotely monitor and control locations. This low cost product and associated monitoring can improve their efficiency and reduce the number of maintenance truck rolls. I would also like to highlight one other positive development in ISM. We've recently hired a new VP of ISM Sales and Business Development, who is now responsible for the entire ISM sales team. This person has extensive experience in the remote monitoring industry and is known and respected by our customers.
In our CNS business, power and network connectivity products had a solid quarter and that revenue can be attributed to a mix of applications, markets, and customers. Rural broadband using [CBRS] [ph], 5G, wireline and other fixed wireless services continue to drive demand for network infrastructure, and we continue to create solutions that help our customers. We entered the new fiscal year with a backlog of integrated cabinet orders for rural broadband customers. We also recently added two rural broadband customers. The sales, product management, and engineering teams worked closely with these new customers to model their cabinet designs. Both cabinets were approved by the customers. We've already shipped the first production cabinets to one customer and the other customer's cabinets will ship next month.
In summary, Q4 was a difficult quarter due to the pandemic. Although it may be delayed I believe the company turnaround is in process. Our number one priority is to grow profitable revenue and that is where we're focused. As such, we are developing new products for in building wireless, rural broadband deployment, and intelligent site monitoring and bringing on new customers to expand Westell’s customer base. With that said, let me now turn the call back to Jeniffer.
Thank you, Tim. I will provide some key financial highlights on our quarterly results, beginning with revenue. For the fourth quarter of fiscal 2020 ended March 31, 2020 total revenue was $6.2 million, compared with $7.2 million in the quarter ended December 31, 2019 as lower ISM and IBW segment revenue was partially offset by increased revenue from our CNS segment. Our IBW segment produced our highest public safety Class B revenue since the quarter ended June 30, 2018 and our largest quarter of battery backup unit sales to date. Those increases were more than offset by lower revenue from active and passive DAS conditioners and RF system components. In the ISM segment revenue decreased across all product lines with the primary decline driven by lower sales of remote units. Increased revenue in the CNS segment was driven by higher sales of product distribution and network connectivity products, partially offset by lower sales of fiber access solutions and integrated cabinets, which were delayed due to COVID related supply chain challenges.
Looking at the rest of the operating results, consolidated gross margin was 32.8% in Q4, compared with 38.8% in Q3. The margin decline was primarily driven by a vendor purchase order cancellation fee, higher consumable and period cost, and fixed costs allocated over lower revenue during the quarter. There were no significant A&O [ph] charges in Q4. As Tim mentioned, to support our customers during the pandemic we are sourcing higher cost materials from alternative sources and incurring expediting fees, all of which may not be passed along to our customers. These actions are expected to compress gross margins in the near term. GAAP operating expenses were $4.9 million in the fourth quarter, which included a $1 million non-cash impairment charge for an IBW intangible asset related to product licensing rights for a specific Class A -- for specific Class A public safety products compared to $4.4 million in the third quarter.
The non-cash impairment was triggered by uncertainties due to site access limitations and delayed project planning and approval due to COVID. The potential deferral of revenues within a fixed license period created an impaired value. Although the asset was impaired we remain excited about our ability to grow in this space and are fully committed to pursuing these public safety opportunities, which we believe have a significant long-term potential for Westell. On a non-GAAP basis operating expenses in the fourth quarter were $3.5 million, down from $3.7 million in the previous quarter. The decrease was primarily a result of having a full quarter of the benefits from our third quarter restructuring. Near-term, we expect non-GAAP operating expenses to be in the range of $3.4 million to $3.7 million per quarter. We believe next quarter results will be towards the lower end of that range. GAAP net loss in the fourth quarter was $2.8 million or $0.18 per share, compared to a net loss of $1.5 million or $0.10 per share in the third quarter. Non-GAAP net loss in the fourth quarter was $1.3 million or $0.09 per share, compared with $850,000 or $0.05 per share loss in the third quarter.
Turning to the balance sheet, on March 31, 2020 our cash totaled $20.9 million, compared with $22 million at December 31, 2019. The $1.1 million decrease in cash during the quarter was primarily driven by the net loss and the payment of $700,000 that was in accounts payable at December 31, 2019 in connection with the license agreement. At this time, we will open the call for your questions.
Thank you. [Operator Instructions]. And our first question online comes from Mr. Marc Silk from Silk Investment Advisors. Please go ahead.
Hey, thanks for taking my questions. I just had a quick one. Tim, you didn’t really discuss about your -- you talked about getting to profitability in the second half in fiscal 2021, is that still on the table?
Good morning, Marc. Thanks for asking. I've got to say this, right now we're not sure. I'm not sure how 2020 will play out. There's a lot of talk about a second round of the pandemic and so on. We're working as hard as we can to watch our expenses and grow sales. There's some bright areas, the public safety, CrossFire platform, Edge Link, and rural broadband expansions that are bright areas for potential new growth. But we also are concerned about our supply chain. We've had some delays in the supply chain. So net-net I really can't project the rest of the year. We're just trying to figure that out right now.
And just to follow-up, so when you were hired, obviously, to grow the revenue figure out what products work and get to profitability. And since it's been a revolving door of CEOs, when you were hired was there something that says get to profitability whenever it is fine, but if it doesn't happen under your watch is it a situation where you fail so you bring another CEO or it's like you know what, we should definitely figure out what to do with the company as far as hire an investment bankers as opposed to hopefully you stay there and you get the profitability. But I'm just saying, I think as shareholders we need to kind of know if there's an end game, meaning, sustained profitability, which is great. But if it's not sustained profitability, I think it's fair for the shareholders that we know that if what you're doing doesn't work out, then at least we know that our investment can be salvaged because it's been very painful. And as you know, we're going to go through another reverse stock split, which is the second time in four years. So I would love your comments on that and we'll talk more offline?
Marc, there's no specific agreement. The Executive Team and myself are all focused on getting this company to profitability, growing our revenue and getting it to profitability, because that will solve a lot of problems.
Tell me about it. Alright, we'll talk offline. Thank you.
Thanks Marc.
[Operator Instructions]. Our next question online comes from Mr. Harry Sellers [ph] from Sellers Value [ph]. Please go ahead.
Hi, Tim. I really appreciate you taking my questions today.
Morning Harry.
Yeah, let's get started. How aggressive would you say that you've been in cutting any kind of discretionary costs this quarter?
Well, discretionary costs we've really cut back. We've also seen, obviously, due to the pandemic, we've seen travel and entertainment down. I'm not sure whether that's a good thing or not because it's difficult to get in front of customers. But customers have been accommodating. There's been an awful lot of Zoom calls going on back and forth and a lot of telephone calls. But anything that we absolutely don't need, we have not spent money on.
Okay, I'm a little curious about the PPP loan. Do you anticipate that that will be forgiven in its entirety?
You know, we obviously hope so. The rules have been changing. I don't know if you've seen how many interim rules they've published on this thing. We plan on applying for forgiveness and following the process and we'll see how the rules end up. So I can't promise it, but obviously we will apply for forgiveness.
Okay, we've seen -- I mean, obviously, the revenues have been collapsing this quarter. As far as flexibility with suppliers, equipment, financing, any of that what does it look like on that front?
As far as the suppliers that we have, we've been working hard on getting our inventory turns up and our suppliers have been working with us on that to try to reduce our inventory. And you'll see that our inventory is coming down. We also have looked at setting up a consignment agreement so that we can reduce our costs. But so far it's mostly been a focus on inventory turns.
Right, well, of course, I think we would all love to see a higher rate of inventory turnover here. I mean, I don't need to stress that Westell is small. Do you believe that it has the ability to compete with others in its current state?
Yes, yes, I do.
Why?
I will believe that because we are close to the customers and we've got good relationships we can react quickly to give them a custom product when they need it. Some of the larger customers or larger companies don't react quite as quickly. So our engineers end up working directly with the customers, developing a product exactly for what they need and they appreciate that. So -- and we can go after -- a large company may not want to go after anything less than a couple of million dollars, and our company if its $500,000 opportunity that's a significant opportunity that could grow in the future. So -- and then the Johnson Controls agreement is a big agreement for us. That gives us leverage across the U.S. with all the new partners.
Yeah, can you speak to any of the numbers behind that agreement?
No, it's too early. The systems that we've been designing are going into new buildings. So it's just started. So we're going to see how that matures but it's looking very promising I will say that.
Okay, and can you comment on what you're doing differently as a CEO compared to your predecessors, because -- I mean obviously you do have a strong background in this and you're brought on to grow revenue and do so profitably, but obviously, with the COVID thing we're not seeing a whole lot of revenue growth here?
The COVID I think was a setback and I don't know how long a setback. Many of our customers weren't ordering and were at home. I really can't comment what's different about the previous CEOs. I just know that the Executive Team now is working as a team. We're focused on a very clear strategy in the three areas of growth that we're working on. So -- and I think we've got a new focus on expenses, watching our expenses and getting those new products to market and working with customers directly.
What do you mean by working with customers directly?
Actually, while we're developing the products, having a customer sponsor and working with them on their needs. So, in the past some of the products were developed mostly internally, and then they would go to market with it. On the products that we're doing today like Edge Link, we're actually working with a customer sponsor right now and developing exactly what they need. So that puts us in a lot better position when the customer -- when the product comes out.
And what exactly is entailed in being a customer sponsor?
There's no dollars. It's more they have a need that they need solved and we have a product that can do it and we work with them to deliver the prototypes for exactly what they need. We'll do a field trial with those prototypes and prove that it works. And then they've agreed that if it works, they have interest in it long-term.
But they just agreed that they had interest in it long-term but not necessarily -- they're not necessarily bound to anything, you're not guaranteed to help you develop or tailor a feature or something to that effect?
No, there is occasionally NRE, but most of the time it is just they have a very urgent need they need to fix and we work with them to fix that need.
Okay, thank you. That definitely clears that up for me. Looking at it this past quarter, and the past really, since I've even known who Westell was, I've been afraid that we are only looking at our current rate of cash burn of about a million a quarter. Everyone here is going to be out of a job in about five years if we don't seriously look at some strategic alternatives, if our growth initiatives fail. So my question is, what strategic alternatives have you and the Board taken a serious look at over the past quarter?
I really can't share that. The Board obviously has talked about strategic alternatives, but no decisions have been made and we can't share that. As soon as decisions are made we would share them.
Alright. I mean, I think my take on that is I voiced that before, I think selling at least a part of Westell would let you extend that cash runway, extend that profitability. And I think we've got to fix the dual class share structure and that would keep Westell in line with original vision, is that something that management at all would be interested in facilitating as maybe a buyout of that dual class?
The dual class has been there a long time and since we went public, I think our problem or the thing we need to really focus on is developing a profitable company, growing our revenue, watching our expenses, and coming out with these new products to grow the company. I really think that'll fix our problems more than any changes in our structure.
Thank you. Our next question online comes from Mr. Steve Busch from Everglades Resources. Please go ahead.
Good morning. Thank you for taking my call. I got to say that last comment, I wasn't going to comment on the dual class structure because it's pointless. It's good politics for you to say that, but it's all up to the pennies. There's no logical reason to have two classes at this point and the stock has been destroyed. So that should be clear. But I'll move on. You said in your earnings and in talk that sales were down this quarter and you made up mostly pushed to the next quarter. But then you just said the quarter we're in is going to be the same, so how does that square?
Yeah. We're still seeing some push in the next quarter. There's only a couple of weeks left in this quarter. And for example, cabinets we have a backlog. It's been difficult through the supply chain to get enough of the cabinets that we need. So there are some of the business that has moved from this quarter into next. And we've also got some in some of the other product categories. It's just -- it's interesting that every couple of weeks we get a new supply chain surprise. So we had a plant that was giving us product out of Mexico and they call us up and said, hey, we had to close a plant for two weeks because we had a big infection in the plant. So we're shutting down for two weeks and sorry, we'll get you parts after that. So it's been a challenging quarter due to the pandemic.
Right. That’s fair, I mean you can't -- you're not in charge of the Pentagon. I like what you say. I like your honesty about not knowing what the future holds. It's probably a first for Westell. This question regarding the Board, what does the Board get paid?
The new salary is 20,000 and then there is an equity component.
And I would just on that point, it's good to save costs. The stock has gone nowhere in 10 years. The Board has gone through multiple CEOs. I would say the Board should get really paid zero until we regain some post the next reverse split high of last five years or something. That's my opinion. Good luck and stay safe.
Alright, thank you.
[Operator Instructions]. Our next question online comes from Mr. Mark Spiegel. Please go ahead. And it looks like we have no further questions at this time. Do you have any closing comments?
Well, first I'd like to thank all of you for joining us today. As mentioned previously, driving profitable revenue growth is our highest priority. That growth will come from developing new products for the in building wireless, rural broadband deployment, and intelligent site monitoring markets and adding new customers for those products. I hope that you and your family stay healthy and safe through this pandemic and look forward to speaking to you again. Thank you.
And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.