Westell Technologies, Inc.

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Westell Technologies, Inc.

750 N. Commons Drive
Aurora, Illinois 60504
U.S.A.
Telephone: (630) 898-2500
Fax: (630) 375-4931
Web site: http://www.westell.com

Public Company
Incorporated: 1980
Employees: 967
Sales: $210.0 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: WSTL
NAIC: 334210 Telephone Apparatus Manufacturing; 334290 Other Communications Equipment Manufacturing

Westell Technologies, Inc. is the second largest manufacturer of digital subscriber line (DSL) cable modems in the United States. Westell Technologies, Inc. is a holding company for a telecommunications equipment manufacturing company, Westell, Inc., and a provider of conference call support services, ConferencePlus, Inc. Westell is a leading provider of technology that allows telephone companies to deliver high-speed data, voice, video, and Internet access over existing copper wires. It sells its equipment directly to telecommunications companies, which then install the modems in customer homes and businesses. Westell’s products allow its customers to provide enhanced communications products to their own customers, without the costly renovation or replacement of existing phone lines. Westell’s principal markets are the United States and Great Britain. The company operates a manufacturing plant in Aurora, Illinois. Its ConferencePlus subsidiary operates out of Schaumburg, Illinois. Robert C. Penny, son of the company’s founder, and one other investor control more than 60 percent of Westell’s stock.

New Technology in the 1980s

Westell, Inc. was founded by Clint Penny in 1980 in Willowbrook, Illinois, as a company to manufacture special equipment for the telecommunications industry. Its first products were signaling and transmission equipment, which it sold directly to telephone companies. Westell’s equipment allowed telephone lines equipped for voice transmission to be bumped up so they could handle bulky data transmission. At one point, Westell’s equipment was considered state of the art, and revenue rose to around $15 million. The company sold its technology to the regional phone companies, including Ameritech, Bell South, and Bell Atlantic. But the company’s early success did not last. Revenue dropped to $8 million as its product lines were surpassed by newer equipment from competitors. The company began losing money, and its directors searched for a new chief executive who could turn the company around.

Westell picked Gary Seamans, an electrical engineer who had spent more than a dozen years working for AT&T. After AT&T, Seamans moved to MCI Communications Corp., where he became head of marketing for the midwestern region. Seamans had a reputation as a problem solver. The customer service division he oversaw at MCI had ranked absolutely last in customer satisfaction rankings when Seamans took over. Within a year, he had moved its customer service ranking to the top of the pile. Seamans was eager to get to work at Westell, which he had been told was having difficulties. But according to Crain’s Chicago Business (July 8, 1996), Westell was actually in very bad shape by 1987 when Seamans came in. “They told me (the company) had a few problems,” he told Crain’s. “They didn’t tell me it was dead.” One of Westell’s bankers confirmed for Crain’s that the company was only a year or a year-and-a-half from bankruptcy when Seamans became president and chief executive.

Seamans worked quickly to repair Westell’s damaged reputation, going out to its major customers and listening to their complaints and suggestions. Seamans soon decided that what the company really needed was a new product line. In 1988 Westell came out with the Tl Network Interface Unit, or NIU. This was a diagnostic device that allowed telephone company workers to find problems on a customer’s wire without having to go physically to the customer’s house or office. The NIU was apparently a rapid hit with Westell’s major clients, and by 1988 the company was able to move to expanded facilities in nearby Oswego, Illinois. Westell debuted another product the next year, which it sold through a subsidiary company, ConferencePlus, Inc. ConferencePlus offered a high level of service for conference calls, that is, calls that linked more than two parties. ConferencePlus offered conference call service that also supported video and data sharing. It sold this service both to telephone companies and to multinational corporations. In 1992 this subsidiary company moved to its own quarters in Schaumburg, Illinois.

Marketing DSL in the 1990s

By 1991, Westell’s financial troubles seemed firmly behind it. The company was once again profitable, and revenue reached slightly more than $24 million that year. The company had at least two viable products, and it had orders from the large domestic telecommunications companies. But Gary Seamans at that point took the company in a new direction. This was a new technology called ADSL, for asymmetrical digital subscriber line. By the early 1990s it was clear that consumers were ready for more advanced communications technology. While traditional phone lines carried simple voice communications, new technologies seemed just around the corner that would allow consumers to use their phones to get pictures, video on demand, computer data, or remote access to appliances. Technologies that had been the stuff of science fiction were now plausible, though many practical considerations stood in the way. One roadblock was the expense of replacing existing telephone lines with new wire that could carry broadband (high-speed voice, data, and video) communications. Westell began developing ADSL products, which allowed copper phone wire to handle broadband. ADSL gave phone companies the same speed as fiber-optic cable over their existing networks. By 1992 Westell had completed a prototype of what became known as its Flexcap modem, and Seamans began flogging it to telecommunications companies across the United States and overseas as well. Seamans soon found almost two dozen customers, including British Telecom, Bell Atlantic, and US West. These companies initiated trials of ADSL. An initial customer group in Virginia was fitted with Westell modems to receive video on demand. Westell continued to improve its ADSL technology as the trials went on around the world.

Sales at the company doubled between 1992 and 1996, reaching $83 million. But much of this money was plowed back into research and development, and Westell lost $500,000 in 1996. Seamans remained ebullient about the possibilities of Westell and ADSL. The company held an initial public offering in November 1995, raising $33.3 million, and it raised another $62 million months later in a second offering. The company anticipated continuing to lose money, yet Seamans saw big things to come. “I honestly see this company as having the very real opportunity to become the next Microsoft,” he told Crain’s Chicago Business in an article entitled “Turning Copper to Gold.” The potential sales for Westell’s high bandwidth products seemed enormous. In anticipation of coming orders, the company moved into larger quarters in Aurora. But Westell was not the only company that had discovered the copper-based broadband niche. In late 1996 a number of the regional telecommunications companies that had been running Westell ADSL trials announced that they would switch to a competitor’s product. The competitor was the French company Alcatel Alsthom S.A. Sales fell off slightly for Westell the next year, apparently because of the loss to Alcatel, and Westell ended up much more deeply in the red, losing $14.7 million.

Westell gained new contracts with British Telecom, Bell Atlantic, and other domestic phone companies in 1997. It introduced new products, and also formed partnerships with more established technology firms, including Texas Instruments, Fujitsu, and Lucent Technologies. In 1997 Westell also announced a merger with the San Jose, California-based firm Amati Communications Corp. Amati focused on a technology called DMT, for discreet multitone, that allowed ADSL to work over longer wire lines. The merger, which was to have been effected by a stock swap valued at $394 million, would have given Westell a boost over its competitors in the DSL world. Electronic News (October 6, 1997) claimed the merger would make Westell “the first supplier with the most to offer.” Unfortunately, Texas Instruments stepped in at the last minute and scotched Westell’s deal. It offered Amati $395 million in cash, and Amati took it, paying Westell $14.8 million to terminate their original merger plans. Westell went on to form an arrangement with Texas Instruments that still gave it access to Amati’s technology.

Company Perspectives

Westell’s own ability to optimize broadband technology through its understanding of and expertise in local loop characteristics enables the delivery of the highest quality products and solutions. This achievement has been recognized for years by Westell’s customers and partners, and by industry peers and market experts who have bestowed numerous awards to Westell. As Westell continues to work closely with its customers in offering broadband solutions that maintain quality network performance and high access speeds, it will remain committed to delivering high-quality products that prolong the original investment and life of the copper communication networks. This is the value of Westell.

Shortly after the Amati merger failed, the company got more bad news. CEO Seamans, who had been such a vigorous salesman for Westell, announced he was taking a leave of absence for medical reasons. The temporary leave became permanent, and the company found a new chief executive in 1998, 36-year-old Marc Zionts. Westell’s stock price, meanwhile, rose and fell rapidly. In 1996, Westell had traded for as much as $56. By late 1997 it was trading around $27, and a year later it was down to less than $10. The company had developed an array of DSL products with different acronyms, including vDSL and xDSL, and it continued to sell its NIU line. In 1997 the company also incorporated a subsidiary company that specialized in customer service and product maintenance, called Westell Worldwide, Inc. Westell was holding steady with revenues in the late 1990s in the $80 million range. But increasingly, larger companies had cut in on Westell’s market. Where it had had a strong early lead with ADSL, by 1998 there were nearly 100 companies marketing similar products. Some large competitors, like Alcatel, got larger in the late 1990s through acquisition. Alcatel picked up a Texas company, DSC Communications, in 1998, while Cisco Systems bought an ADSL maker called NetSpeed Inc. Westell itself made a significant acquisition in the last days of 1999, when it paid $205 million in stock for its competitor Teltrend, Inc.

Turning the Corner in the 2000s

Finally in 2000 Westell’s main customers, the regional Bell telephone companies, seemed ready to deploy DSL on a large scale. For the first quarter of 2000, Westell’s revenue jumped by close to 350 percent. “We’re in full-fledged ramp-up,” Westell’s CEO Zionts told Crain’s Chicago Business (July 10, 2000), and the company was expecting sales to increase by a factor of six over the next year. The telecommunications companies that had dragged their feet through the late 1990s were now placing large orders for DSL equipment. Westell’s stock, still around $10 since 1998, surged in early 2000 to more than $40. But by the end of the year, it was clear that the DSL revolution would not happen overnight. Local phone companies experienced delays and bottlenecks in getting the systems installed for their customers. Sales of Westell’s DSL modems fell 20 percent over the quarter ending September 30, and the company’s stock swung downward again, falling to around $5. The company also faced a lawsuit brought by stockholders, who claimed the company had misled them by not revealing that a major customer was cutting its orders. The suit also alleged that CEO Zionts and other top executives had made about $15 million between them by selling their own shares just before the bad news brought the stock price down. Of that amount, $10 million went to Zionts, who had sold some 500,000 shares when Westell’s price was close to $30. (In a similar case, in 1999 two Westell sales executives and another man paid $70,000 to settle Securities and Exchange Commission charges that they had benefited from inside knowledge, selling off stock before the price fell on a customer equipment cutback in 1996.)

Zionts left the company in 2001 to become president and CEO of a small technology start-up firm called Airslide Systems. He was succeeded by E. Van Cullens. Van Cullens had worked for almost 30 years in the telecommunications industry, running Harris Corporation in Florida, and also working in a variety of positions for Siemens ICN and GTE Telephone. Over the next year, the economy slumped, and the telecommunications sector was particularly hard hit. Perversely, this seemed a good thing for Westell. Its technology had long been the cheap alternative to fiber optics and cable modems. Whereas in the early 2000s cable modem high-speed Internet access outsold DSL by a ratio of two to one, phone companies were getting more eager to push DSL, seeing it as a last chance to squeeze profits out of stagnant markets. The market for home high-speed Internet access was rising, and the phone companies needed to act quickly to prevent cable companies from sweeping up their customers. In February 2003, the Federal Communications Commission (FCC) issued a ruling indicating that telephone companies did not need to share their DSL service networks with competitors. Orders for Westell’s modems picked up, and it ended fiscal 2002 with two profitable quarters. Westell’s share price rose more than 600 percent over the first half of 2003. The company’s sales volume for its DSL equipment was expected to go up at least 25 percent over the year. Westell had been counting on a wide rollout of DSL service since the early 1990s. Ten years later, it may finally have gotten its wish. Now its mission was to keep its position in the market, and not let newer or bigger competitors push it aside.