It has been an up and down kind of year for DragonWave Inc.
As one of the leading manufacturers of microwave backhaul equipment, the Ottawa-based firm saw its profits skyrocket in late 2009 and early 2010.
The demand from Clearwire helped the company’s profits skyrocket and DragonWave quickly became an analyst darling.
Driven by demand from US network giant Clearwire, DragonWave stock soared and analysts quickly jumped on the bandwagon.
But success left as quickly as it came. Clearwire ran into financial trouble in early 2010 and cut its orders. DragonWave’s share price and profits dipped while analysts quickly reversed their assessments.
Ultimately, the company weathered the storm and is looking to grow internationally in a market it says will continue to grow despite current troubles.
For cellular networks, backhaul refers to the technology that connects outlying stations with the central network.
“Backhaul has always been an essential aspect of providing wireless communications,” says Marc Choma, a spokesperson for the Canadian Wireless Telecommunications Association. The proliferation of users accessing mobile internet makes backhaul an even more critical technology.
“Backhaul is a natural stress point in mobile networks under these conditions,” says DragonWave VP of investor relations, John Lawlor, who adds that the high capacity backhaul equipment DragonWave sells is specifically designed for the high data traffic of new 3G and 4G networks.
ONE BIC CUSTOMER
Clearwire, the first company to build a 4G network in the United States, uses DragonWave’s product almost exclusively.
The network company, owned by a consortium that includes Sprint Nextel, Google and Time Warner Cable, has accounted for a majority of DragonWave’s sales since becoming a customer in 2009.
No matter how you slice it, any reduction in orders is going to have a negative impact.
The demand from Clearwire helped the company’s profits skyrocket and DragonWave quickly became an analyst darling.
However, some critics started to point out how much DragonWave relied on its largest customer. In the fourth quarter of fiscal 2010, sales to Clearwire accounted for 86 per cent of DragonWave’s revenue.
This came to head when Clearwire ran into cash-flow troubles in the first half of 2010. It scaled back across the board until it could secure more funding.
Not surprisingly, DragonWave felt the effects. Revenue for the second quarter of fiscal 2011, ending August 31, dipped to $27.1 million, a drop of 14 per cent from 2010, mostly a direct result of the reduction in Clearwire orders.
Profits also took a hit, dropping more than 75 per cent from the previous year to $1.2 million.
Gus Papageorgiou, an analyst from Scotia Captial, says DragonWave’s struggles were inevitable given its dependence on Clearwire.
“No matter how you slice it, any reduction in orders is going to have a negative impact,” Papageorgiou says.
SHARE PRICE IMPACT
With investors nervous, its share price, which had been as high as $14, dropped to below $10.
Lawlor admits it would be better if they had more information about the future of their largest customer.
Microwave backhaul will play a significant role in these 4G deployments, because it offers 4G capacity at lower costs than fibre.
“They’re not as open as they possibly could be,” he says. “But it’s not perfectly clear to them either.”
Lawlor also says analysts were too quick to downgrade DragonWave, and that the microwave backhaul market was one that would continue to grow long term.
“The investment community measures time with a stop watch,” says Lawlor. “In the industry here, we measure the passage of time with a calendar.”
He says there are almost four million network stations worldwide that will eventually need to be upgraded to high capacity backhaul. He says that number will rise as more and more 4G networks are built.
“We’re in the early innings here,” he says.
Fred Campbell, president of the Washington D.C.-based Wireless Communication Association International, says microwave backhaul will continue to be important because it is the best alternative for networks.
“Microwave backhaul will play a significant role in these 4G deployments, because it offers 4G capacity at lower costs than fibre,” he says.
Papageorgiou agreed that the industry will certainly continue to grow. The problem, he says, is investors have options.
“Why put your money into DragonWave stock now when you know orders are going to drop off?” he says.
He adds many of the company’s competitors are reporting growth in their earnings and revenue.
GOING INTERNATIONAL
In an attempt to diversify its client base, DragonWave has started to push into international markets, with sales teams in Europe, the Middle East, Asia and, as of this fall, Australia.
“Microwave backhaul makes sense in those markets and it will be a big market,” says Papageogriou.
He also says many of the major players do not have their own products, and could end up reselling DragonWave products.
We’re a young company, with a disruptive technology in an early stage market.
The company has put particular focus on India where Lawlor says the company expects major growth over the next couple year.
India’s government regulator just finished auctioning off 3G and 4G spectrum, and Lawlor says it is expected those who bought the spectrum will move quickly.
Given Dragon Wave’s track record, Lawlor adds he feels the company will have an advantage going into the Indian market.
“They certainly know who provided the Clearwire backhaul,” he says.
In October, DragonWave agreed to a partnership with Indian vendor Himachal Futuristic Communications Ltd. as a way of increasing their chances in India.
LOOKING FORWARD
Lawlor says the Himachal has an established marketing and sales base in the country, which will help them connect with major customers. He says the venture will go a long way helping them sell in the new market.
“It should certainly allow us to gain traction in India faster than if we were to go over there ourselves, plant the Canadian flag, and open a sales office and say here we are,” Lawlor says.
He adds that many of the Indian networks, companies that could eventually be Dragonwave customers, recommended Himachal.
While it is unclear how quickly Clearwire will rebound, DragonWave will continue to push forward, both in North America and internationally.
Lawlor says the company wants to remind people that this is a market that will only continue to grow as the demand for mobile data grows.
“We’re a young company, with a disruptive technology in an early stage market,” he says. “This isn’t only early innings; this is the top of the first here.”