DragonWave hits 'unexpected problem' in India
India accounts for more than a quarter of DragonWave’s total revenues
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DragonWave’s drive to recovery has hit a major speed bump.
The Kanata wireless technology firm reported Tuesday that its next-generation product had developed “an unexpected problem,” discovered as it was being deployed in the network of an Indian carrier.
DragonWave chief executive Peter Allen acknowledged the development was “highly undesirable” but added the unspecified technical issue had been isolated and shouldn’t affect longer-term sales at the unnamed carrier. However, the Indian firm required the microwave technology right away, meaning it has had to install gear from another supplier in the meantime.
The result is that DragonWave’s revenues will be somewhat lower than forecast for the second quarter ended July 31. Sales had been predicted to grow between 30 per cent and 60 per cent compared with the first-quarter result of $26.3 million U.S. However, Allen said Tuesday the final result will be at the lower end of that range.
If there is any good news here, it’s that DragonWave’s biggest Indian customer — Reliance Jio — has been installing an earlier version of the Kanata firm’s technology, and performance there has been solid. Nevertheless, India accounts for more than one-quarter of DragonWave’s total revenues and is considered a vital market. A third Indian carrier is putting DragonWave’s technology through field trials.
Competitors will certainly emphasize the technical issues in an effort to blunt DragonWave’s momentum.
The difficulties in India surfaced just months after DragonWave learned that its largest distributor, Nokia of Finland, planned to acquire Alcatel-Lucent. This, too, was bad news for Allen because Alcatel-Lucent makes microwave technology in competition with DragonWave.
Indeed, sales of DragonWave products through the Nokia sales channel began weakening last spring. Allen on Tuesday revealed that Nokia has agreed to help DragonWave deal with the impact of this decline, in part through a revised contract to provide product support and maintenance.
Still unresolved is the question of what role, if any, DragonWave’s products will play in Nokia’s universe after the deal to acquire Alcatel-Lucent is finalized. The merger had been expected to close during the first half of 2016 but regulatory approvals have already been granted and things could move ahead more quickly than expected.
Meanwhile, DragonWave’s prospects at least are improving in the United States, the market that first launched this company into fame. Whether sales there will improve quickly enough to make up for shortfalls elsewhere is unclear.
Not surprisingly, DragonWave’s continuing losses — it’s not expected to break even on a cash-flow basis until late this year — have harmed its share price. It closed at 34 cents on the TSX and 26 cents on Nasdaq — down more than 79 per cent from its 52-week high. Indeed, DragonWave revealed it has applied for a 180-day extension to meet the minimum conditions of a Nasdaq listing — which include a share price in excess of $1 for a certain period.
If Nasdaq grants the extension, DragonWave will have to promise to implement a reverse stock split if it still can’t meet the listing conditions. (Consolidating 10 shares into one, for example, would give DragonWave shares a value of $3.) Publicly traded firms don’t like going this route because it’s usually a sign of weakness.
Allen has the rest of this year and a bit to show DragonWave is simply weathering an unusual stretch of bad luck, and that the recovery that seemed so close early this year, is still within reach.
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