It was the question that stock analysts, shareholders and even company executives must have been asking themselves during the summer of 2010: what was DragonWave going to do?
Despite the success of its initial public offering in 2007 and profits skyrocketing in 2009 after a major sale, the microwave wireless backhaul provider had been slowly sliding downward since early 2010.
The Ottawa high-tech company, 260 employees strong, had been bracing itself for the possibility of losses that year. Sales had been mediocre and shares had taken a beating.
Last summer, DragonWave reported revenues of $13.6 million, posting its fourth quarterly loss in a row. Many analysts gloomily predicted DragonWave would never recover from the slump, a key reason being that the company notoriously relied upon Clearwire Inc., a U.S. carrier, for the majority of its revenue.
In short, it looked like DragonWave would be a one-hit wonder. The story was all-too familiar – a one-off deal put the company in the black, only for future revenue to dry up when it failed to generate any more business.
A SURPRISE DEAL
All of that changed in November when DragonWave revealed it was buying Nokia-Siemens Networks’ microwave transport business for about $146 million.
Although NSN will continue to control its existing sales and services for microwave transport, DragonWave will be taking over its product line, R & D, product management and operations.
“It’s a big deal for a Canadian technology company. Usually Canadian tech companies are the ones being acquired,” says John Lawlor, vice-president of investor relations at DragonWave.
Investors and the stock market seemed to agree, as share prices for DragonWave jumped as high as 40 per cent the week the deal was announced, although it won’t actually go through until early next year. The deal was quickly touted as a transformative moment for DragonWave,
Although NSN will continue to control its existing sales and services for microwave transport, DragonWave will be taking over its product line, R & D, product management and operations.
Lawlor said the deal will be crucial in allowing DragonWave to focus on R & D, as well as boosting its product line.
Most importantly, he said, the NSN acquisition will give the company an edge in “massive sales distribution.”
“We come up against large companies, long-established companies, with a lot more muscle in the marketplace than we have,” says Lawlor. “We can’t match their sales channel.”
Adding NSN’s customers to DragonWave’s client roster will only benefit the company, he said, especially given its past dependence on Clearwire.
AN EYE ON INDIA
And to further diversify DragonWave’s clientele, the company cherishes hopes that the acquisition will also raise its profile in India and bring in customers from that country. India has long been on the radar for businesses eager to tap into a market that has over a billion potential customers.
Although he acknowledged that some of its competitors are already in India, like U.S. company Ceragon, Lawlor said the NSN deal will help DragonWave make new contacts.
Lawlor says DragonWave is particularly interested in India because its mobile networks have moved right from 2G networks to 4G, without even pausing to build a 3G infrastructure.
He estimates that only five to 10 per cent of North America’s data is stored via wireless backhaul, but unlike North America, India doesn’t have fibre optic cables or other remnants of older methods of storing data. That puts DragonWave in a good place for the future.
“Microwave [wireless backhaul] is just such an easy technology to deploy,” said Lawlor. “It has more than enough capacity…Our greatest opportunity is in India. We’re positioned and we’re pursuing it aggressively.”
Although he acknowledged that some of its competitors are already in India, like U.S. company Ceragon, Lawlor said the NSN deal will help DragonWave make new contacts.
NSN has already got a strong foothold in India, with almost 30 per cent of its revenue coming from that country.
DragonWave has also set up a joint venture with Himachal Futuristic Communications Limited, a telecom equipment vendor that has been in India for nearly 30 years, something that Lawlor called a “wise move…with people who have the relations necessary in the country.”
He was also careful to differentiate the situation in India from the one in Canada, saying that given the size of India’s market, DragonWave wouldn’t need to rely upon just one company for its sales.
The acquisition also has future implications for the high-tech industry closer to home.
A BOOST FOR LOCAL HIGH-TECH
In a period when many other Ottawa companies have either moved on, sold out or been acquired – the most recent examples being Mosaid and Zarlink – DragonWave is one of the few to hang on and actually grow.
“It’s rare that you see stock jump 40 per cent in a day. It really provides us with a kind of shot in the arm…The market really did vote with its pocketbook.”
Mark Choma, a spokesperson for the Canadian Wireless Telecommunications Association, says the NSN deal was a very positive sign for the local industry.
“Certainly Ottawa still has a very strong reputation as a technology sector in Canada,” says Choma. “At the same time, we see a huge growth in wireless tech growth…So certainly on the wireless side, I think there’s a big boom.”
“Any company that’s going to position itself for big demand will serve [itself] well, and certainly I would put DragonWave in that category,” he says.
But Lynda Leonard, the vice-president of the Information Technology Association of Canada, hesitated to say if the NSN deal would make a huge impact in Ottawa’s high tech sector.
“While we’re congratulating them on the sale, there needs to be some sort of larger view of what’s going on in the industry…” says Leonard. “There’s really positive benefits from foreign investment like this, but it’s not necessarily something that’s entirely benign.”
She says despite the good news about the DragonWave-NSN deal, there’s a “dearth” of venture capital in Ottawa and there still aren’t too many options for small companies like DragonWave.
In the meantime, Lawlor says DragonWave’s future looks bright – and the huge spike in the company’s stock price shows the market’s confidence in the company.
“It’s rare that you see stock jump 40 per cent in a day,” he says. “It really provides us with a kind of shot in the arm…The market really did vote with its pocketbook.”