WSTL A $1.04 Stock With 63c/Share Cash, Game-Changing Products, And Global Expansion Could Triple

Summary

• New products launched in 2014 (UDiT & TMAs) were major revenue contributors in fiscal 4Q 2015 ended March 31, 2015.
• Westell launched a game-changing new product on June 25, 2015 designed to eliminate DAS Near-far problem and to optimize in-building wireless (IBW) optimization and commissioning.
• Westell is expanding into high-growth Latin America and Africa and is pursuing more a diverse client base to grow revenues.
• The company is working on several initiatives to raise gross margins from the current mid 30's to a sustainable 40%+.

Westell Technologies, Inc., (WSTL) provides in-building wireless, cell site optimization, intelligent site management, and outside plant solutions to telecommunication service providers, cell tower operators, and other network operators to reduce operating costs and improve network performance.

Recent positive developments have gone unnoticed while the stock has slowly drifted to the $1/share area (near the 5-year-low). I believe Westell offers a significant upside potential for several reasons: 1) recent product launches have been very successful, 2) carrier spendingis expected to recover the remainder of 2015, 3) the company seems serious about diversifying its currently limited customer base, and 4) new CEO Gruenwald is focused on increasing gross margins to 40%+. The latest product launch was announced on June 25, 2015. According to company executives this product platform will be a game-changer in the in-building wireless (IBW) space. In my opinion, WSTL is a couple of quarters away from returning to sustainable profitability. The downside is limited because Westell has 63c/share cash and no debt.

Westell Reported revenues of $18.6 million in fiscal 4Q 2015, up 33% from $14 million in fiscal 3Q 2015. Fiscal 4Q 2015 (ended March 31, 2015) was the first quarter under the lead of new CEO Tom Gruenwald. During the 4Q 2015 conference call CEO Gruenwald gave a few clues suggesting that 1Q 2016 to be reported in July will continue the positive trends seen in 4Q. Here are a few 4Q 2015 highlights extracted from the earnings release and the conference call:

1. Bookings quarter-to-date are ahead of prior quarter, suggesting a solid start of fiscal 1Q 2016,
2. Gross margins will improve as a result of not selling as much excess and obsolete inventory,
3. Sales of DAS and TMA equipment will continue the uptrend established in 4Q,
4. The expanded sales force is showing initial signs of success as demand for some products have increased during the quarter.
5. Westell hired new personnel to go after the Latin American and African market,
6. The company expects to launch a new "game-changing" IBW product during 1Q 2016,
7. Severance charges taken in 4Q 2015 will not reoccur in 1Q 2016,
8. WSTL hinted that carrier spending patterns are improving from the end of 2014, but that spending is very "targeted,"
9. Verizon was the only 10% client during the quarter,
10. Westell is working hard on several fronts to increase gross margins to a sustainable 40%+,
11. In the interim, WTSL expects to GAAP breakeven in the $25 to $27 million revenue range,
12. The company ended fiscal 2015 with $37 million in cash and investments or 62c/share and no debt.

I will now elaborate on why I believe the positive sings seen in 4Q 2015will continue at least through the end of fiscal 2016.

Increased carrier spending trends

In a May 7, John Celentano in his "Carrier CapEx All-In for 2015!" article gives projections for carrier spending for the rest of 2015 and FY 2015. He expects spending to increase 10% in the quarter ended June 30, 2015 compared to calendar 1Q 2015. Mr Celentano expects calendar 2Q 2015 ending June 30, 2015 to grow close to 10% compared with 1Q 2015 to nearly $8 billion. He expects a jump to $8.9 billion in 4Q 2015 to meet the estimated yearly forecast of $31.7 billion.

Overall, he expects 2015 spending to exceed 2014's despite a relatively weak 1Q 2015 (please note that calendar 1Q 2015 corresponds to Westell's 4Q 2015). In his article he illustrates that the largest spenderswill be Verizon with 33% and ATT with 31% followed by Sprint and T-Mobile.

Verizon and ATT have historically been two of the largest Westell clients. In 4Q 2015 Verizon was Westell's only 10% customer. There have been quarters where ATT constituted over 30% of Westell revenues.

The June 17, 2015 announcement that the The Federal Communications Commission (FCC) plans to fine AT&T Mobility $100 million for misleading customers about its unlimited data plan offering. This might be one reason that would prompt ATT to step up spending to remove bottlenecks. It's a fact that there is an ever-increasing appetite for faster and faster speeds and capacity not only in the US but also globally. This will force service providers to build-up their infrastructure to cope with demand thus benefiting telecom suppliers like Westell.

In-Building Wireless Spending

One of the areas in telecom equipment expected to enjoy the largest gains is in In-Building Wireless (IBW) spending both globally and in the US. In the June 3, 2015 article "In-Building Wireless - Big Market, Big Money!," John Celentano projects that IBW spending in the US alone will reach $47 billions by 2020.

So the market is there, the question is "what does Westell have to offer to address the growing IBW market?"

CEO Gruenwald partially answered this question during the 4Q 2015 conference call as follows:

"Revenue for the IBW segment was $7.1 million in the quarter, up 31% from $5.4 million last quarter. The sequential revenue increase was driven by record quarterly sales of our active DAS conditioner or UDiT."

Westell launched UDiT, The ClearLink Universal DAS Interface on May 13, 2014. In the announcement, Scott Goodrich, President of Cellular Specialties, Inc. (a Westell subsidiary) explained:

"In-building wireless deployments are growing rapidly as mobile device users demand quality and reliable services inside large venues such as office buildings, airports, and stadiums. The introduction of theClearLink UDIT solution allows wireless service providers and integrators active monitoring of their DAS and small cell networks with the ability to troubleshoot problems remotely, significantly reducing site visits and ultimately, overall operating costs."

Also in the 4Q 2015 conference call, CEO Gruenwald boasted:

"We are excited about a new product being developed by our Manchester engineering team for our IBW business. We are on target to announce more details about this product in the next couple of months and why we believe it is a game-changer in the In-Building Wireless (IBW) market."

We did not have to wait long to get an announcement about this new product. On June 25, 2015 Westell officially launched this product named ClearLink® DAS. The company claims that this product was designed to enhance cellular coverage within buildings while simultaneously addressing the ever-growing DAS Near-Far problem. Much has been written about the DAS Near-Far problem in IBW installations, but I could not find another solution that addresses this problem as robustly as ClearLink® DAS does.

What is the Near-far problem? Westell asserts:

"One critical issue not normally considered when designing or selecting equipment for an in-building DAS is Near-Far. Near-Far is a term describing performance reduction when a mobile device is operating within a DAS coverage area, but is being serviced by a distant macro cell tower. The Near-Far performance reduction, which includes degraded voice and data service, reduced battery life, and/or complete loss of service, can be experienced by DAS participants as well as non-participants."

This video depicts very clearly how the Near-Far problem affects cellular reception inside buildings for all occupants. This problem affects users and also providers. Cellular clients frustrated with poor reception may opt to change providers not fully understanding the nature of the problem.

Westell's new ClearLink® DAS solution to the Near-Far problem and to address IBW optimization can best be explained in this video.

When asked a question about this new product commercial prospects, CEO Gruenwald mentioned that a "couple large prospects are interested." My guess is that these two large prospects are ATT and Verizon - two of Westell's historically largest and most loyal clients.

I expect that ClearLink® DAS will start generating meaningful revenues in the latter part of 2015 after the prospective clients complete successful testing and verification trials.

Judging by the success achieved with two of the largest revenue contributors in 4Q 2015, the new UDiT DAS conditioner and tower mounted amplifiers (TMA), I feel confident that ClearLink® DAS will be a hot product in the future. On August 8, 2014 Westell received the 2014 LTE Visionary Award for its TMAs.

Westell has focused most of its R&D dollars on developing a comprehensive set of IBW solutions. The ClearLink in-building wireless technology platform is designed to improve network performance while minimizing operating and capital costs. The solution includes the following: Antennas, Bi-directional amplifiers (BDAs), ClearLink DAS, Digital Repeaters, DAS RF Conditioners, and other system components.

Global expansion primarily into Africa and Latin America

Latin America and Africa will grow faster than the US in terms of new smartphone subscriptions according to the following graphic (source: 2015 - 2020 Ericsson Mobility Report):

(click to enlarge)

Without significant investments, carriers globally will not be able to keep up with the demand being put on wireless networks. This is particularly true in buildings where the growth and need is starting to get out of control. This is the area where Westell's comprehensive set of IBW solutions should gain market share going forward.

If everyone believed that Westell is an undervalued stock with significant upside, the share price should be a lot higher than it is today. As with any investment in the market there are potential headwinds, some obvious and some unforeseen. I will now discuss potential stumbling blocks in Westell's path to profitability and growth.

Company's history of underperformance

Westell is trading near the 5-year low. This can be caused by several reasons. The most obvious one for me has been management's poor decisions and their inability to seize opportunities.

In my opinion, the biggest management flaw has been Westell's historical dependence on ATT and Verizon, and a few other minor US clients. To address this problem, new CEO Gruenwald (effective starting February 11, 2015) has laid out a plan to diversify its US customer base, and to expand into high-growth areas such as Latin America and Africa. As part of this plan, Westell recently hired several new sales people "with exceptional skills, great industry knowledge and solid industry relationships in target markets," according to CEO Gruenwald.

On May 11, 2015, Westell announced the hiring of Chuck Bernstein as Senior VP of Worldwide Sales. According to CEO Gruenwald, " Chuck is an outstanding sales leader with a record of significant success in our industry. He is also an exceptional team builder and will raise the level of performance of our entire sales team. We are thrilled to have Chuck as a key member of our executive leadership team as Chuck is a results driven leader."

Sound good right? but former CEO Richard Gilbert mentioned customer and geographic diversification several times before over the years and nothing came out from all that rhetoric.

This time however, CEO Gruenwald was a lot more specific than previous expansion/diversification chatter. We will know soon if this time the company succeeds in these endeavors.

Company's inability to effectively integrate acquired companies

When Kentrox was acquired in May 2013, one of the benefits seen at the time was to leverage Kentrox's large international presence to sell a wide range of Westell's products. That goal never materialized and for this reason I call it a failure to execute.

Heavy dependence on two or three large clients

This was mentioned several times before Westell's fortunes depend heavily on ATT and Verizon spending and other few US clients to a lesser extent. Until the company gains traction in attracting a more diversified client base, and until the time when Westell's fortunes don't depend on US carrier spending alone, the potential upside will be limited.

Potential problems doing business in developing countries

Doing business in developing countries can be very important to fuel growth as demand for telecom equipment is expected to surpass that of the US. There are however significant risks doing business in those countries. One in particular is getting paid for products and services rendered. Take Ceragon Networks for instance, the company was forced to take a charge of $19 million in its fiscal 4Q 2014 because the Venezuelan government makes it hard for companies to own dollars to pay their bills. Other countries in Latin America and Africa are also risky because of economic and financial instability.

Conclusions

Westell is making progress in several fronts: 1) technical leadership in the DAS-IBW area with new game-changing products, 2) expansion into high-growth Latin America and Africa, 3) customer diversification, 4) launching strong products in sectors other than IBW such as TMA's and complimentary products. For these reasons, and the forecasted increase in US carrier spending, I expect that revenues will start to ramp in 2H 2015 and will accelerate in 2016 and beyond. The flatrevenue/income estimates for 2015 and 2016 by the one analyst covering the stock seem too conservative and should be easily beaten. This analyst has a $2.25 target on the stock, a 100+ gain from the current $1.0/share.

Institutions continue to maintain about 50% ownership in the company.Insiders have been buying stock with the last purchase being made by CFO Tom Minichielo (20K shares). The $37.9 million cash (63c/share) no debt balance sheet provides downside protection.

I will give new CEO Tom Gruenwald the benefit of the doubt. I believe he will execute his growth and profitability goals more effectively than previous management's failed efforts. His profitability plan involves revenue and gross margin growth through improved products and services targeted to a more diverse customer base in the US and overseas.

Investors considering WSTL stock should carefully review all the risks and uncertainties detailed in the company's most recent 10-K filings. Besides the risks specified in the filings, the following are potential risks that could cause significant losses: 1) the company is unable to increase gross margins, 2) competitive products make Westell's products obsolete, 3) lack of success in Latin America and Africa, 4) price wars with low-cost competitors from Asia, 5) loss of talent to the competition, 6) Larger system vendor integration could reduce the need for certain Westell products. Please also consider the potential stumbling blocks to Westell's path to profitability and growth that I've discussed above.