**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: Westell Technologies
Price: 6.21
Recommendation: Buy
Notes: a,b,f
Date: 5/24/99
1 of 6 Unveiling the Hidden Value: Initiating Coverage with a BUY Rating
With this report we are initiating coverage of Westell Technologies (WSTL)
with a BUY recommendation and an initial six-month price target of $13.00 per
share. We believe that the Company's stock is currently undervalued by the
market and that the Company is poised to show significant earnings and revenue
growth over the next several years.
1999 A 2000 E 2001 E
Q1 EPS $(0.18) $(0.13) $(0.01)
Q2 EPS (0.28) (0.07) (0.00)
Q3 EPS (0.26) (0.04) 0.01)
Q4 EPS (0.21) (0.02) 0.03
FY EPS (0.94) (0.28) 0.03
FY REVS (M) 93.2 102.4 122.8
CY EPS (0.46) (0.03) NA
CY P/E NM NM NA
FY Ends Mar Current Price $6.21
52-Week Range $3-12 Market Cap(M) $225.9
Shares Out(M) 36.4 Book Value $1.57
Net Cash/Share $0.68 3-Year EPS Growth 40%
CY00 Rev Multiple 2.2x
Investment Thesis:
With this report we are initiating coverage of Westell Technologies (WSTL)
with a BUY recommendation. We believe that the Company's stock is currently
undervalued by the market and that the Company is poised to show significant
earnings and revenue growth over the next several years. We feel that the
Company's stock is undervalued for several reasons. First, many investors may
not be cognizant of the complete gamut of Westell's businesses or the multiple
growth opportunities that may be afforded them over the next several years.
Second, some investors may not be aware of some of Westell's strategic
initiatives allowing it to better compete in some of its more traditional
businesses. Finally, an energized management team is now ready to capitalize
on important markets that appear to show the beginning signs of sustainable
growth.
In general, we believe that investors have an excellent opportunity to invest
in Westell as it just begins to enter a new phase of sustained growth. While
most investors probably know Westell as a leader in the growing xDSL equipment
market, we feel that many may not realize the enduring profitability and
growth of its other two businesses. Its Telco Access Products (TAP) business
has consistently shown sustained growth and profitability over the past
several years. Moreover, the Company's conferencing services business,
Conference Plus, is continuing to produce accelerating revenue and earnings
growth. In fact during the recently reported March quarter, Conference Plus
grew over 28% sequentially and nearly 55% year-over-year. Finally, we believe
that the Westell's revised strategy will afford it numerous opportunities to
successfully compete in the exciting xDSL market as it continues to develop
over the coming quarters.
Overall, we believe that the fundamentals of the Company's businesses have
strengthened and expect that Westell is beginning to experience a sustained
period of accelerating earnings growth. We are especially excited about the
explosive demand for conferencing services and the subsequent potential for
continued accelerating growth in Westell's Conference Plus business.
Similarly, we expect to continue to see strong demand over the coming quarters
for carrier class, local loop access solutions. Consequently, we believe that
TAP's competitive product line and new initiatives will afford it the
opportunity to continue to be a strong contributor throughout FY00 and well
into FY01. Throughout FY00, we expect that the accelerating growth of xDSL
deployment will allow Westell another strong catalyst for revenue and earnings
appreciation.
Currently trading at only 2.2x our conservative CY00 revenue estimate, we
believe that WSTL has substantial opportunities to exceed our estimates over
the coming quarters. We are very excited about this Company's opportunities to
continue to grow its sales to its already strong customer base. Similarly, we
believe that Westell will have many opportunities to expand its customer base
by continuing to develop its product portfolio over the next several years. In
addition, we believe that this Company's product lines will continue to
experience extraordinary growth as Westell's targeted markets continue to
expand over the coming quarters.
Summary of Recommendation Points:
Our primary reasons for recommending this stock include the following:
*The Company's current corporate valuation is quite attractive considering its
competitive positioning and its significant market opportunities over the
coming quarters.
*Westell's maintains a market leading position in the growing conferencing
services business.
*New product initiatives may afford the Company significant growth
opportunities in its Telco Access Products (TAP) business over the coming
quarters.
*Strong strategic partnerships with Lucent (LU/$57.56/Buy) and Fujitsu
Telecommunications Europe Limited (FTEL) may allow Westell to be more
competitive and, consequently, capitalize on the significant growth expected
from the emerging xDSL equipment market
*WSTL maintains an established set of blue-chip customers with a broad product
set to aggressively enter new markets.
*The Company has the operational and manufacturing capabilities to allow it
successfully meet an accelerating market's demand.
*The depth and breadth management team allowing the Company to execute
according to plan.
Westell Technologies:
Westell Technologies, Inc. (WSTL), founded in 1980, is a holding Company that
includes two subsidiary organizations -- Westell, Inc., a products focused
business and Conference Plus, Inc., a services business. Westell, Inc.
currently is comprised of two related business units -- Telco Access Products
(TAP) and xDSL Products.
Since inception, Westell has developed a number of "last mile" or local loop
telecommunications products. Generally, the Company's products assist telcos
in upgrading their network infrastructures to deliver advanced data and voice
services to their customers. Many of these products allow the telcos to better
leverage their existing copper telephone wire plant. Westell sell both direct
and indirect with primary customers including all of the RBOCs, Bell Canada,
British Telecom, several IXC's CLEC's and ISP's.
Westell continues to be a leading manufacturer of broadband telecommunications
access systems using Asymmetric Digital Subscriber Line (ADSL). ADSL systems
allow telcos and other local access providers to provide interactive
multimedia services over existing copper wire, thus offering a more cost-
effective and faster deployment alternative to fiber optic cable in the "last
mile" of the local access network. Today, largely driven by the accelerating
growth of the Internet, telcos are desperately seeking a solution to the data
bottleneck in the "last mile." ADSL systems offer a very cost-effective
solution and open up a number of new digital services and applications.
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