Cash-rich Westell Technologies worth a look
With its stock price trading for approximately its cash value and a new CEO at the helm, it may be worth taking a flier on shares of telecommunications equipment company Westell Technologies Inc. (Nasdaq:WSTL).
Following several quarters in a row of disappointing financial results and missed guidance, on July 8 Westell announced the resignation of CEO Thomas Mader. New interim Westell CEO Bernard Sergesketter, a former Westell director, has his work cut out for him. At a recent price of just $0.80 a share, Westell’s shares are down over 40% since the start of the year and 60% since mid-February. At current stock price levels, and with over $0.80 a share in net cash on hand, investors are clearly indicating that they have meager confidence in Westell’s future.
Founded nearly three decades ago, Aurora, Ill.-based Westell operates in three segments: customer networking equipment, outside plant systems, and conferencing services. The customer networking equipment segment provides broadband digital subscriber line (DSL), fiber-to-the-home (FTTH), voice-over-Internet protocol (VoIP) and Internet protocol television (IPTV) products for telecom carriers and cable companies. Last year, Westell outsourced its networking equipment manufacturing to China. Operating under the name OSPlant Systems, the outside plant systems segment provides outdoor cabinets, enclosures, remote monitoring and related network protection solutions.The conferencing services segment, called ConferencePlus, manages and hosts voice, video, IP applications and back-office services for corporate clients.
While the OSPlant Systems and ConferencePlus segments continue to be solid performers, the performance of the company’s customer networking equipment segment has fallen off a cliff in recent quarters. This segment has been caught between a sharp falloff in demand and pricing for Westell’s basic DSL modems, while revenue for the company’s next generation products remains slow to ramp. On the plus side, Westell did recently receive an order in excess of $20 million from Verizon Communications Inc. (NYSE:VZ) for its next-generation broadband home router. Volume shipments are expected to start this month. With legacy product revenue expected to keep declining and next-generation revenue still gaining traction, this segment’s outlook is ugly.
The collapse in customer networking equipment revenue is reflected in Westell’s latest results. For the fiscal first quarter ended June 30, Westell reported total revenue of $38.1 million, compared with $58.4 million a year ago. The loss for the quarter was $5.5 million, or $0.08 a diluted share, compared with a loss of $0.9 million, or $0.01 a diluted share, a year ago. The actual operating cash flow loss for the quarter was approximately $4.7 million, compared with positive operating cash flow of $3.5 million in the year-ago period. Compared with the quarter a year ago, customer networking equipment revenue declined 65% to $10.7 million, OSPlant Systems revenue increased 8% to $14.9 million and ConferencePlus revenue declined 7% to $12.5 million. Westell ended June with nearly $60 million in cash on hand and no debt. Westell expects fiscal second quarter revenue of $37 to $39 million and an EPS loss of $0.10 to $0.11.
Mader’s resignation as CEO may have been hastened by the announcement in mid-June that Westell had decided not to sell its ConferencePlus unit for the foreseeable future. Westell had previously told investors that it was exploring strategic alternatives for the unit, but was apparently unhappy with the offers it received for ConferencePlus. New interim CEO Sergesketter, a veteran of AT&T Inc. (NYSE:T), says he is focused on getting the company back to profitability, but has offered few details to date. Given Westell’s disappointing financial performance in recent quarters, Wall Street has so far ignored this management change. Sergesketter is expected to unveil a turnaround plan at Westell’s annual meeting in September.
There has been modest insider buying in the stock in recent weeks. Three company insiders, including Sergesketter, have scooped up roughly $26,000 worth of stock around the $0.85 a share level. Back in February, some of the same insiders were buying the stock above the $1.80 level. While these insiders have been wrong so far, this buying at higher price levels, combined with a lack of insider selling, suggests the situation at Westell may not be as dire as its stock price indicates. Thanks to their ownership of super-voting Class B shares, Westell insiders Robert Penny and Melvin Simon collectively hold an over 50% voting stake in the company. The Class A shares, which are freely traded, are the same as the Class B shares except for the voting rights.
Under Sergesketter, Westell could very well continue to trip on its own two feet, keep tolerating losses in its broadband equipment unit and further burn up its cash. On the flipside, its OSPlant Systems and ConferencePlus units are both profitable and there’s a stock buyback program now in place. Liquidity in the stock is good. For those of you who enjoy “bottom-feeding” in cash-rich, neglected microcaps, Westell looks like a turnaround worth picking at below $0.75 a share.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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