DragonWave shares plunge following Q1 earnings, questions about Ottawa firm’s future

Peter Allen

As its losses continue to mount, Ottawa telecom firm DragonWave (TSX: DRWI) (NASDAQ: DRWI) says it’s close to releasing a plan to improve its liquidity that could include a sale of part or all of the Kanata company.

DragonWave shares plummeted more 22 per cent to $1.06 when markets opened Thursday morning after the local firm reported a first-quarter loss of $4.3 million. That compares with a quarterly loss of $4.1 million a year earlier.

The company’s share price partially recovered as the day progressed.

Revenues in the three-month period ending May 31 fell from $12.6 million in 2016 to $9 million this year.

“When we (discussed our fourth quarter results) in late May we communicated that we were in difficult operating conditions. This has continued with our current results,” DragonWave CEO Peter Allen told investors on a conference call Thursday morning. “Despite these difficulties, we’re making some progress.”

Nokia-Alcatel fallout

DragonWave, which develops and sells wireless networking equipment, has struggled to be profitable for several years. It suffered a major blow in late 2015 after Nokia – which historically provided a significant portion of DragonWave’s revenue as an original equipment manufacturer sales channel – acquired DragonWave competitor Alcatel-Lucent.

As a result, DragonWave sales through the Nokia channel are expected to rapidly diminish, and the Kanata tech firm said Thursday that the merger is already taking a toll on its top line.

In May, DragonWave announced it had hired restructuring consultants Alvarez & Marsal Canada ULC to help it identify and assess strategic alternatives. The term is often used by companies considering a sale of some or all of their assets, although the process can also lead to debt or equity financing, business combinations, joint ventures and strategic alliances.

Mr. Allen refused to discuss which options were on the table for DragonWave when asked by an analyst, although he said he expected to release the results of the review within the next quarter.

Reasons for optimism

During Thursday’s call with analysts, Mr. Allen touted DragonWave’s recently announced deal with SmartSky Networks to install Wi-Fi technology on planes as well as its successful cost-cutting efforts that led to operating expenses decreasing by 40 per cent year-over-year.

“I’m particularly pleased how everybody at DragonWave is engaged in seeking out improved efficiency in our business,” he told analysts.

This has helped improve DragonWave’s gross profit margin to 28 per cent. That’s up from 22 per cent in the company’s fourth quarter, but still below the 31 per cent mark a year earlier.

The company’s shares ended the day down 11.7 per cent to $1.21 on the Toronto Stock Exchange.

DragonWave faces the threat of being delisted from the Nasdaq because it no longer meets the minimum requirement of $2.5 million in shareholders’ equity. The company has received several extensions and now has until Oct. 17 to meet this requirement.