Tuesday, December 22, 2009

Bookkeeping: Starter Stake in DragonWave (DRWI)

I beginning a new stake - about 0.9% exposure - in a DragonWave (DRWI).  On fundamentals I would like to be buying more, but the stock is very extended versus its moving averages so I am going to get our feet weet just over $11.00 (0.9% exposure) and hope for a pullback to $10 - $10.50 to make the position larger. This stock is also running into a "double top" with mid October highs so I want to see how it handles that.  First, the chart...

This is an interesting $300M market cap, Canadian company that we're going to throw into the pile of 3G/4G global suppliers that we either currently own, have owned, or one day plan to own.  As a fan of secular growth, the convergence of wireless electronics and all the applications involved is one of our top themes.  Website here.

Here is a technical description

DragonWave® is a leading provider of high-capacity packet microwave solutions that drive next-generation IP networks. DragonWave’s carrier-grade point-to-point packet microwave systems transmit broadband voice, video and data, enabling service providers, government agencies, enterprises and other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of DragonWave’s products is wireless network backhaul. Additional solutions include leased line replacement, last mile fiber extension and enterprise networks.

In English, that is translated to

Voice, video and data needs are growing at an astounding rate. This growth is putting pressure on today’s existing backhaul networks. DragonWave enables service providers to meet that demand by offering high speed, high capacity solutions which allow the service provider to rapidly expand and augment their network to support full-feature applications, such as streaming video and IPTV. Our product portfolio offers the service providers with an "invest as you grow" scalability to leverage profitable growth.

The closest competitor I can think of would be Ceragon Networks (CRNT), although I'm a generalist and someone who lives and breathes the wireless sector might have a better suggesion.  Ceragon also has one wickedly good chart, and is a promising candidate as a stock to own as well.

Here are some of the interesting things about DragonWave

1) They moved to the NASDAQ mid October - hence the huge spike in volume you see in the chart above.  This is very important for liquidity purposes and allowing people like me visibility into the name.
  • DragonWave Inc. (TSX:DWI)(NASDAQ:DRWI) announced today that it has commenced trading on the NASDAQ Global Market under the symbol "DRWI". DragonWave's common shares are dual listed on the Toronto Stock Exchange and the NASDAQ Global Market.

2)  There were only 13M shares from this offering - bringing up the total shares outstanding to 43M or so (the last earnings report showed under 30M shares outstanding); lower is better in my mind as earnings can flow right down to the bottom line, and earnings PER share can surge.
  •  DragonWave's registration statement has become effective under the United States Securities Act of 1933 and the Company has obtained a receipt for a final short form base PREP prospectus in connection with a public offering consisting of 12,972,300 common shares (the "Offering") at a public offering price of US$10.00 per share for aggregate gross proceeds of US$129,723,000.

3) Unlike many companies who immediately take the newly IPO shares and hand just about all of them to executives to cash out and buy the yacht, DragonWave actually seems to be using some of these shares for (gasp) corprate purposes.  Of the 13M shares, only 5.5M went for the new yachts, the other 7.5M actually went to the company.  Those socialists in Canada do not understand capitalism, what an affront! (I am obviously being facetious)
  • DragonWave expects to use the net proceeds from the Offering (excluding any net proceeds to the selling shareholders) primarily:
  • ...to strengthen the Company's balance sheet in preparation for new mobile broadband network deployments and to better position DragonWave to be selected as an equipment vendor for large network service providers;
  • ...to fund working capital requirements associated with accelerating sales and production of DragonWave's products, and
  • ... to continue to fund efforts to increase sales penetration in regions outside North America.
  • ...Any remaining balance of the net proceeds will provide an available source of funding for potential future acquisition opportunities.

4) The company is massively dependent on 1 customer, Clearwire (CLWR) which is a huge risk for any company.  Some 77% of revenues in the last quarter were from CLWR, despite the company having some 50 customers.
5) That said, the last earnings report was fantastic. Please note, what I am about to type is SEQUENTIAL growth (3 months), not year over year.
  • Revenue, from $15.95M to $35.5M (+123%)
  • Gross Profit from $5.5M to $14.9M
  • Gross Profit % from 35% to 42%
  • Net Income from -2.3M to +6.8M
  • EPS from -0.10 to +0.21
These numbers are astounding and obviously directly related to Clearwire's WiMax buildout. 

6) My first thought was maybe this was a one time burp, but 2 weeks after the NASDAQ filing, the company offered this press release.
  • DragonWave Inc. (TSX:DWI - News)(NASDAQ:DRWI - News) announced today that it has recently experienced strong order intake such that its order backlog has increased by approximately 60% since the end of fiscal Q2.
  • These new orders have been received over the last week from DragonWave's customers in the United States, Canada and EMEA. DragonWave will assess the impact of the order activity along with other business factors and provide an update in connection with the release of its fiscal Q3 results.

Hence, whatever they are doing with Clearwire, is helping grab attention from other customers as a budding backlog build is a great thing.  60% growth in backlog is obviously rare, but this should provide some visibility in the next few quarters and we can worry less about DragonWave being a one quarter wonder.


The company next reports January 7th so we'll have more updates then and hopefully some more guidance.  Analysts are all over the map with guesses anywhere from 17 cents to 29 cents in EPS. It will also be interesting to see if the order flow from Clearwire came in anywhere near their Q2 levels.  There are 5 analysts on the stock according to Yahoo Finance, with a range of .51 to .70, and consensus .61 for year end Feb 2010.  That gives an under 20x forward estimate for DragonWave - the question is what type of growth rate to expect in the quarters ahead.  And I do not know if these estimates include the news shares floated in October. 

But for comparison purposes Ceragon Networks is trading at a similar stock price ($11) for .40 EPS (estimate) for year end Dec 2010.  This is about 28x forward estimates for a year end that finishes in December, versus DragonWave's year end that finishes February 2010.  Hence DRWI wins hands down on valuation as long as the growth metrics of the two are comparable.

Long DragonWave in fund; no personal position

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