DragonWave roars back on Clearwire clarity

Shares of DragonWave (TSX:DWI) have roared back to life this December, closing over the $9 dollar mark for the first time since April. DragonWave’s incredible run of 2009, in which the company went from trading under a dollar on the Canadian Venture exchange to a full NASDAQ listing and share price over (US) $13, was interrupted when Q4 2010 data revealed that 87% of the Ottawa company’s revenue was derived from one customer; Clearwire.

DragonWave provides wireless microwave transmission systems for internet protocol networks. These products that enable the rollout of broadband voice, video and data. Many analysts believe that as large carriers like AT&T and Verizon roll out into suburban and rural areas, where microwave equipment has natural advantages over fiber, companies like DragonWave will be natural benefactors.

But halfway through the rollout of its own mobile WiMAX network Clearwire hit a cash crunch. At the UBS Global Media and Communications Conference last Monday, CFO Erik Prusch confirmed rumours that Clearwire might be forced to sell of some of its spectrum assets. Prusch said the sale “could result in a $2 billion profit for Clearwire”.

DragonWave, however, has been rallying since the beginning of this month. The reason? Some believe that Clearwire’s plan to raise over $1.1 billion through the offering of debt securities in private placement transactions, announced December 2nd, removed a lot of the uncertainty around DragonWave’s largest customer. Shares of DragonWave have risen from $7.88 to $9.02 since the Clearwire announcement, but the company has not had a press release themselves since November 8th, when they actually lowered their third-quarter revenue forecast.

The fortunes of Clearwire are clearly a big deal to DragonWave. In the MD&A reported after DragonWave’s Q2 the company said it was “focusing on three key objectives”. The first listed was “satisfying and working closely with our largest customer”. Investors surmising that DragonWave’s fortunes are simply a reflection of Clearwire’s, however, should take note of DragonWave’s second objective, which is “pursuing our market and customer diversification agenda…” In the second quarter of fiscal 2011 Clearwire ended up accounting for just 59.3% of sales, as revenue from customers not named Clearwire nearly doubled, from $6.3 million in Q1 2010 to to $11.1 million.