Why Westell's Segment Sale Makes Sense

Broadband networking specialist Westell Technologies (Nasdaq: WSTL  ) is not a stock for beginners right now. You need to know your way around non-GAAP numbers to make sense of this company at the moment.

The just-reported fourth quarter was bent out of shape by a one-time tax benefit of $53 million. Warning flags should fly when you see a company reporting $55.6 million of GAAP earnings on revenue of just $49.6 million, you know.

On an adjusted or non-GAAP basis, earnings increased a more modest 26% year-over-year to $3.4 million, or $0.05 per share. That's on 31% higher revenue. The only analyst to offer an estimate was looking for adjusted EPS of $0.04 on sales of $49.1 million, so the numbers were a pleasant surprise.

And the next quarter won't give you easy apples-to-apples comparisons either. The accounting picture will be distorted by the $33.5 million sale of Westell's customer networking solutions division to consumer-level networking expert NETGEAR (Nasdaq: NTGR  ) .

That transaction closed in mid-April, about two weeks into the first quarter, and so the sales and operating income contributions from that segment will be minimal starting with the next quarterly report. To give you some idea of how significant this deal is, consider that Westell saw CNS sales spiking by 65% year over year this quarter to $23.3 million, or 47% of total sales.

On the other hand, the division delivered an operating loss of $0.7 million and NETGEAR's mass-market operations should be set up to squeeze much more blood from that high-volume stone.

The deal removes a lot of pressure from Westell's gross margins while giving NETGEAR access to large telecom accounts including AT&T (NYSE: T  ) and Verizon Communications (NYSE: VZ  ) . For example, this article was sent to Fool HQ through the Westell modem that came with my Verizon FiOS installation.

I think we can call this deal a win-win, as it lets both parties play closer to their respective strengths. And a year from now, you can stop worrying about using non-GAAP numbers to make annual comparisons. Just remember to keep an eye on that tricky stuff for now.

The new Westell is less of an all-around provider of broadband gear and more of a specialist on the service provider side of things. That's not a bad place to be -- Westell's shares have gained more than 160% over the last year. In fact, a Foolish special report points out a player in this exact space as the best stock for 2011. Click here to grab a copy and find out more right now -- it's 100% free.