DragonWave's revenue concentration on a single customer – Clearwire – and that customer's recent test of Huawei equipment represents a significant risk for investors for the forseeable future, wrote Kris Thompson, an analyst for National Bank Financial.
"DragonWave needs to rely on other customers to back-fill this 'air pocket', which management is diligently attempting to execute. But carrier sales cycles can be lengthy, lumpy and unpredictable," he said in a research note released Thursday morning.
Clearwire, however, has said that the type of Huawei gear it is testing does not compete with DragonWave's offerings.
John Lawlor, DragonWave's vice-president of investor relations, confirmed that the Huawei equipment being tested is for Clearwire's base station and radio-access portion of the network.
DragonWave's equipment deals with clearwire's backhaul portion of its network.
In a July conference call, DragonWave chief executive Peter Allen noted at the time that his firm had sent a great deal of equipment to Clearwire in recent months and the lull was because this customer just hadn't used up the existing inventory.
"We are always concerned that we continue to deliver the peer value of our competitors to Clearwire, and all customers as a matter of fact," Mr. Allen said.
"But I don’t believe the dynamics we are seeing are anything more than Clearwire consuming the inventory we’re shipping them."
DragonWave's guidance for the second quarter shows Clearwire at 25 per cent of revenue and non-Clearwire customers at 75 per cent.
Yet in his note, Mr. Thompson said there is a risk Clearwire's planned expansion of its network will be pushed back – placing DragonWave at risk.
"If this is the case, DragonWave may not receive any additional material orders from Clearwire until (2011), which we believe would result in significant downward revisions in consensus estimates (which are much higher than our estimates)," Mr. Thompson wrote.
"We do not expect non-Clearwire revenue to make up for the difference."
Given the "customer concentration" that Clearwire represents, Mr. Thompson wrote that he had serious concerns about revenue generation in the third and fourth quarters, and that his firm expects a miss in the upcoming second-quarter results, which will be released Oct. 7.
In an August interview, DragonWave's vice-president of investor relations, John Lawlor, noted that Clearwire specifically said DragonWave will be a partner as they increase their network from 120 million points-of-presence to 270 million in the coming two quarters.
On the strength of ClearWire's business, DragonWave posted first-quarter revenues of $48.7 million – up 275 per cent from the $13 million in the first quarter of fiscal 2010.
In July, Mr. Allen noted DragonWave is courting Asian and Middle Eastern customers to fill the breach, and said two customers – who were not disclosed due to ongoing negotiations – could each account for 10 per cent of his company's revenue in the second quarter.
Dragonwave reported profits of $9.7 million in Q1, compared with a net loss of $2.4 million last year.
