Globe and Mail articleDragonWave Inc.(14.17-0.32-2.21%)hasincreased its financial guidance three times in less than a year,giving rise to an important question for investors: Is the wirelessequipment maker embarking on a long period of supercharged growth, oris management just dealing with an unexpected burst of sales?
The stock price of the Ottawa firm has risen 12-fold over the pastyear, largely based on business from a single major U.S. phone company.
This month, DragonWave reported quarterly results that saw sales surgeto more than four times year-earlier figures, and operations swing froma small loss to a $12.6-million profit.
Clearwire Corp. accounted for 82 per cent of DragonWave's $55.8-millionof revenue in the last quarter. The Kirkland, Wash.-based carrier hastapped DragonWave as one of its suppliers as it builds next-generationwireless services in major U.S. cities. Clearwire counts among itsfinancial partners, Intel Corp., Google Inc., Sprint Nextel Corp. andTime Warner Inc., which have all invested in Clearwire's latestwireless network.
Buying shares of DragonWave now amounts to a bet on whether the10-year-old company can add other big telecom companies to its clientlist before revenue from Clearwire begins to dwindle.
Investors' eyes are on two major contracts up for grabs over the nextsix months from AT&T Inc. and Verizon Wireless, the two largestoperators in the United States.
Ted Whitehead, manager of the Manulife Growth Opportunities Fund, saidhe is confident after meeting with DragonWave's leadership last weekthat the company's business with Clearwire is not about to "fall off acliff," and that a contract with AT&T or Verizon would put thecompany at a new level.
"It's now an established player in [the market] and we're confident that the deals will continue for them."
If DragonWave can secure contracts with even one of AT&T or Verizonwithin the next six months, that should power the stock price to $20,he added.
The Manulife Growth Opportunities Fund is a small- andmid-capitalization fund with about $650-million of assets. It owned 1.3per cent of DragonWave's outstanding shares at the end of the year,according to its most recent filings.
"Management has been guiding upwards and earnings have been better thanexpected, and I suspect that will continue," Mr. Whitehead said.
DragonWave's microwave radio technology moves voice and data wirelesslybetween cell towers and the phone companies' core networks on theground. The high-speed ethernet microwave technology can be deployedmore easily than running fibre-optic cables from towers to the core,which is an important attribute for carriers that are managing rapidtraffic growth.
The company plays in a growing marketplace. With mobile phone companiesnow drawing more than one-quarter of their revenue from data,representing about 16 per cent more than a year earlier, they are beingforced to upgrade their networks to handle more traffic, according toSanford C. Bernstein & Co. LLC.
Globally, wireless carriers will build about 600,000 base stations forhigh-speed, third-generation (3G) networks this year, up from about445,000 in 2009, write Bernstein analysts Pierre Ferragu and RobinBienenstock.
They estimate that AT&T will increase capital spending on wirelessby 33 per cent to $8.4-billion (U.S.) this year from 2009, and Verizonby 15 per cent to $8.5-billion.
"There is a lot of public awareness on mobile broadband and pressure onoperators to increase their 3G spending to keep up with the explosionof mobile data," they said in a recent report.
For DragonWave, the trend points to an enormous opportunity if it can secure deals with the major carriers.
Business from Clearwire should last longer than first expected, givingDragonWave more time to find other big customers, says Kris Thompson,an analyst with National Bank Financial Inc.
He raised his price target on the stock last week to $17 (Canadian)from $15, maintaining his "outperform" rating, in part on expectationof new supply deals with AT&T and Verizon.
"Investors want to own this stock before the AT&T Mobilityannouncement," Mr. Thompson wrote in a research note. "The stock mayexhibit more volatility over the next several months as speculation onAT&T and Verizon plays out. This stock is better suited forinvestors with a higher appetite for volatility."
DragonWave recently won contracts to supply two new entrants toCanada's wireless market, Globalive Wireless Management Corp. andVidéotron Télécom Ltée. Those contracts should produce $12-million, butdeals with smaller carriers will not be the main driver of DragonWave'sgrowth, Mr. Thompson says. "DragonWave's growth momentum will bederived from a small number of large customer deployments."
He thinks the market opportunity for DragonWave's technology isworth about $1.4-billion a year as carriers move to improve theirnetwork capacity and speed.