Market Bearish on DragonWave Despite Bullish Deal in China

DragonWave Inc, maker of packet microwave radio systems for carrier and access networks, put out big press last week about a deal with China’s Xi’an Potevio to distribute DragonWave’s services and products throughout China. Sales of DragonWave’s Horizon Compact all-outdoor radios have already begun in selected regions.

The news should be a boost for DragonWave since China is the fastest growing telecom market with massive potential for expansion still available. More than one billion mobile subscribers are served by three state run providers who, up until last year, focused on voice. Dragonwave’s equipment will be part of the transition to 4G, which promises to loose demand for high speed data service. In fact the recent award of Chinese 4G licenses to the three networks has even pulled Apple into the arena, beginning sales of the iPhone on January 17.

Despite what appears to be prime positioning for growth for DragonWave some market analysts are skeptical that the deal will be enough. Market watchers at TheStreet still give the company a D- grade and list it as a “sell.” Detriments included in their analysis include:

• Underperformance in net income year to year compared to market standards and competitors. Dragonwave’s income fell 836 percent from the same quarter a year ago.
• Low gross profit margin of 10.98 percent. The net profit margin of -41.28 percent significantly trails the industry average.
• Compared to last year, net operating cash flow has fallen by 2913 percent to -$12.8 million.
• Return on equity has decreased compared to one year ago. (Analysts consider this a sign of major weakness in the company.)

The full analysis can be viewed by subscription here.

Following the announcement on January 15 DragonWave’s stock price rose 23.24 percent to hit a high of $1.81. It closed the trading week at $1.70.

But keep an eye on DragonWave, who was recently also chosen by MADA Communications in Kuwait to supply single source microwave backhaul services. China’s telecom system is diverse and great digital gaps exist between rural and urban areas. DragonWave’s packet microwave equipment serves 2G, 3G and 4G networks and is touted as ideal for supporting transitioning networks. With only three services providing all of China’s internal connectivity it may put the company in an ideal spot to garner a lot of business. Whether it’s fast enough to turn the company’s spiral around will be the question.