{"id":3617,"date":"2013-12-17T15:54:46","date_gmt":"2013-12-17T20:54:46","guid":{"rendered":"http:\/\/www.cusjc.ca\/ottawainsight\/?p=3617"},"modified":"2017-11-19T20:26:15","modified_gmt":"2017-11-20T01:26:15","slug":"burning-cash-to-fuel-opportunities","status":"publish","type":"post","link":"http:\/\/www.cusjc.ca\/ottawainsight\/?p=3617","title":{"rendered":"Burning cash to fuel opportunities"},"content":{"rendered":"

DragonWave is burning through cash fast, while management is trying to find an extinguisher.<\/strong><\/p>\n

The networking hardware company believes continued tinkering with its Nokia Solutions Network (NSN) agreement, along with burgeoning opportunities in India and the United States, will help bust the company out of its string of consecutive quarterly losses.<\/p>\n

\u201cThere\u2019s a great competition going on in India right now. There\u2019s a new entrant in India known as Reliance Industries,\u201d says DragonWave\u2019s CFO Russell Frederick. \u201cWe\u2019ve been competing very hard for that business. Our position right now seems to be favourable. We haven\u2019t won it yet, but we\u2019re working hard on it.\u201d<\/p>\n

Reliance Industries, an Indian energy conglomerate, announced plans to build India\u2019s most advanced telecommunications network in 2010. Since then, the company has spent US$3 billion on spectrum covering all of India. According to the Wall Street Journal,<\/i> the project, which will need cell towers and other networking equipment to be completed, could cost as much as US$10 billion. If DragonWave gets its way, it will be a lead supplier for that development. However, Reliance is in no rush to announce when it will roll out its network.<\/p>\n

\u201cAs they say, there are no clocks in India,\u201d says Frederick. \u201cThe process of acquiring the contract has been going on for two years.\u00a0 Everybody wants to get going, including them. So hopefully it\u2019ll be a contributor, if not this fiscal year, then hopefully next fiscal year.\u201d<\/p>\n

Mobile carrier expansion in the U.S.<\/strong><\/p>\n

In the meantime, mobile carriers in the United States are releasing plans to expand their networks, as well. Shortly after Japanese telecom giant SoftBank purchased a controlling interest in Sprint, its CEO, Masayoshi Son, announced the mobile carrier would invest US$16 billion in network expansion. DragonWave\u2019s management believes the company is in a good position to capitalize on Sprint\u2019s expansion, because of its previous business history with the company.<\/p>\n

\u201cEveryone knows that we did a huge amount of business with Clearwire, [which was absorbed by Sprint],\u201d says Frederick. \u201cWe do sell to Sprint today through our partner Samsung. Softbank also uses our products in Japan through the NSN agreement. So, all three of those parties who are part of Sprint know the DragonWave products.\u201d<\/p>\n

Capital investment in telecommunications has steadily declined over the last five years to US$69 billion from US$88.3 billion in the United States, according to a report by Euromonitor International. That\u2019s not deterring Frederick\u2019s optimism, however.<\/p>\n

\u201cI think Sprint in the United States is a big catalyst,\u201d says Frederick. \u201cI think if they start to do anything like the plans they\u2019ve announced, soon that will spur more spending by other carriers in the United States. And then that will flow around the world.\u201d<\/p>\n

More telecom investment is good news<\/strong><\/p>\n

Increased telecommunication investment anywhere in the world is good news for DragonWave. Its customers are spread internationally, largely due to its agreement with NSN. Since its completion in 2012, the NSN agreement has accounted for a large portion of DragonWave\u2019s revenues, but it\u2019s also dragged with it significant operating costs.<\/p>\n

The company\u2019s last quarterly US$13.2 million cash deficit marked its eleventh straight. It\u2019s a problem the company\u2019s management team is diligently working to fix.<\/p>\n

\u201cWe have to get to that cash flow break even point,\u201d says Frederick. \u201cI don\u2019t want to describe that as easy, it\u2019s certainly challenging.\u201d<\/p>\n

The company is in a restrictive cash position. An equity issue in September generated US$23.5 million to bolster its cash reserves. If the equity selloff was reported in the last quarter, DragonWave would have $32 million in cash on its balance sheet. On top of operating costs, the company also needs to tend to a US$8.9 million termination fee related to a cancelled service contract and deal with its US$15 million line of credit, which comes due at the end of May next year. The company\u2019s burn rate is not sustainable.<\/p>\n

The cost of integration<\/strong><\/p>\n

\u201cThe company will continue to burn cash during the integration of the NSN business,\u201d says Desjardins telecommunications analyst Maher Yaghi through an email. \u201cWhile we expect cash burn to stabilize as some of the inventory is sold in the upcoming quarters, the company\u2019s sales funnel is still unpredictable. We expect DragonWave to continue to post negative earnings well into [the next fiscal year].\u201d<\/p>\n

Last quarter, the NSN channel brought in 61 per cent of the company\u2019s revenue. And despite a poor experience from heavily relying on one client\u2014Clearwire–in the past, management says it\u2019s different this time around.<\/p>\n

\u201cNSN distributes [our products] to their customers around the globe. The NSN channel is actually quite a diversified stream of revenue, if you think about it from an end user point of view,\u201d says Frederick.\u00a0 \u201cIt\u2019s not like a Clearwire where it was the single customer buying tons of products. When [Clearwire\u2019s] capital funding stopped, of course the revenue for DragonWave started to dry up. In the case of NSN, we really don\u2019t see that\u2026 the NSN channel is very powerful for us because NSN has thousands of sales people and offices all around the world.\u201d<\/p>\n

DragonWave’s NSN future<\/strong><\/p>\n

Analysts agree the NSN pact is important to DragonWave\u2019s future success, according to a report by Desjardins Securities. However, expenditures related to the agreement need to be substantially cut. Management is restructuring the organization and has managed to cut its operating expenses by 50 per cent, compared to last year\u2019s second quarter, to US$12.4 million. Yet, DragonWave still needs to tinker. It can\u2019t keep up with its current expenditure rate.<\/p>\n

In short, DragonWave has yet to see a positive return from the agreement. Its stock price reflects its struggles. On the TSX, DragonWave\u2019s stock has tumbled to $1.28 from $3.38 when the deal was announced in May 2012. Last quarter, the company posted a US$10.5 million net loss. In the same period last year, the company only posted a loss of US$1.2 million, however DragonWave recorded $19.4 capital gain after the acquisition of NSN in the same quarter. Its revenues dipped likewise to US$22.5 million from US$44.2 million. Despite this, its management remains optimistic.<\/p>\n

\u201cIt\u2019s a very pivotal time for the whole industry,\u201d says Frederick. \u201cThe technology that we have is the best technology in the world for the space we\u2019re in. It\u2019s really that market dynamic that will fuel DragonWave\u2019s opportunity in the future.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

DragonWave is burning through cash fast, while management is trying to find an extinguisher. The networking hardware company believes continued<\/p>\n","protected":false},"author":86,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[256],"tags":[294,293,295],"class_list":["post-3617","post","type-post","status-publish","format-standard","hentry","category-corporate-profiles-2013","tag-charles-crabb","tag-dragonwave","tag-nokia-solutions-network"],"_links":{"self":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/3617","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/users\/86"}],"replies":[{"embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3617"}],"version-history":[{"count":14,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/3617\/revisions"}],"predecessor-version":[{"id":4530,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/3617\/revisions\/4530"}],"wp:attachment":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3617"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3617"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3617"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}