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John Engle
John Engle
Articles (597) 

This Small Telecom Stock Is Aiming for a Big Turnaround in 2020

A cost-cutting effort is at the heart of Westell's recovery

January 07, 2020 | About:

Westell Technologies (WSTL) is a telecommunications company that promotes itself as “a leading provider of high-performance network infrastructure solutions focused on innovation and differentiation at the edge of communication networks where end users connect.”

Westell is focused on the provision of in-building wireless telecommunications, as well as cellular site optimization, intelligent site management and outside plant solutions.

The past few years have been unkind to Westell, which has struggled to be profitable. Management has worked to ameliorate the situation, initiating a restructuring effort in October 2019 that promises to reduce costs significantly. If successful, Westell could see its financials improve substantially in the coming quarters, which would undoubtedly be reflected in a more generous share price.

Seeing too much red

Westell’s need for a meaningful restructuring has become increasingly obvious over the past five years as the company has struggled to grow meaningfully. Cost overhangs have dragged on both top and bottom lines, despite Westell’s persistently decent operating cash flow.

In the company's second quarter of fiscal 2020, which ended on Sep. 30, 2019, Westell reported another net loss on falling revenue. Revenue fell 15.5% quarter-over-quarter to $7.6 million, while gross margin fell to 20.9% from 36.1%.

While the total net loss expanded 63% in the second quarter, both GAAP operating expenses and non-GAAP operating expenses were reduced marginally. A net decrease in cash of $2.4 million left Westell with $21.7 million in cash at the end of last quarter.

Persistent losses, falling revenue and compressing margins hardly sounds like a recipe for success. However, not all is lost for the ailing telecoms company.

Cutting fat first

After reporting 2nd-quarter earnings, Westell’s new management promised a turnaround. In a Nov. 13 press release, CEO Tim Duitsman acknowledged the disappointing results but promised a major internal overhaul with an eye toward turning Westell’s business around:

“Second-quarter revenue and net loss continued our recent downward trend. In efforts to reverse that trend, we narrowed our product development to the most promising new products, with a keen focus on public safety, fiber connectivity solutions and remote monitoring. These areas play to Westell’s strengths and we believe offer the fastest paths to revenue growth. On the cost side, we executed a substantial restructuring in October that resulted in charges of approximately $0.2 million and reduced company expenses by at least $1.7 million a year. Going forward, we also do not expect inventory charges, which depressed our gross margins, to continue at the recent levels.”

Management claims it can reduce quarterly operating costs to $4.4 million on an ongoing basis through a range of operations. Still, it will take more to return Westell comfortably to the black.

While Westell’s third-quarter 2020 results will include a charge of about $0.2 million, the savings from reduced expenses will more than make up the difference over time. A $1.7 million improvement to costs would represent a major improvement, though not enough to return Westell to stable profitability.

More cuts needed

It will take further cost improvements to reverse Westell’s negative trend. Lower expenses from obsolete inventory, which spiked in the second quarter to $1.3, more than double that of the previous quarter. It appears Westell ate the bigger writedown in one go in order to clear the deck for the more expansive turnaround. During the company’s second-quarter analyst call in November, CEO Duitsman promised further economizing:

“Over the last two months we took direct actions to improve our results by reducing our operating expenses. This included a significant restructuring in October that covered the entire company. As a result we expect to bring down non-GAAP quarterly operating expenses to under $4.4 million for the near term.”

Such a reduction in operating expenses would certainly slow Westell’s cash bleed. However, cutting costs will only get Westell so far. To really turn things around, the company will need to restart its growth engine.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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