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DragonWave (DRWI) Appears to Be Cheap

January 08, 2010 | About:
I was a little fortunate on DragonWave (DRWI) - although we discussed its prospects yesterday - I had forgotten earnings were coming so early in the month. The results last night were a smashing success which should not of been a surprise considering in October the company pre-announced some huge order flow which we noted in item #6 in our original piece on the company. Conservative analysts seemed blind sided but those are the opportunities one can every so often find in the market. I also wrote in that piece earnings were to come out January 7th


The company next reports January 7th so we'll have more updates then and hopefully some more guidance. Analysts are all over the map with guesses anywhere from 17 cents to 29 cents in EPS. It will also be interesting to see if the order flow from Clearwire came in anywhere near their Q2 levels.


I really need to start reading my own material ;)

Consensus was revenue of $48.1M and 23 cents on the quarter, but as noted above a huge range from the 5 analysts; DRWI smashed even the most bullish of estimates of 29 cents. The stock was up 8% in after hours last night. Unfortunately, the company reports in Canadian dollars - looks like the current exchange rate is $1.00 USD to $1.03 CAD, although that can change daily. For simplicity I will use the Canadian data.

Summary from Briefing.com:
DragonWave beats by $0.14, beats on revs; guides FY10 above consensus

Reports Q3 (Nov) earnings of [b]CDN$0.37 per share, CDN$0.14 better
than the First Call consensus of CDN$0.23; revenues rose 421.5% year/year to CDN$55.8 mln vs the CDN$48.1 mln consensus.

Co issues upside guidance for FY10, sees FY10 revs of CDN$170 mln vs. CDN$151.55 mln consensus.

Gross margin for the third quarter increased to 43% (consensus is for 41.3%), up from 42% in the prior quarter of fiscal 2010, while operating margin increased to 23%, from 18% in the prior quarter.


[/quote]The margin story is excellent; both gross margins and operating margins ripping higher. The EPS was even more impressive because the company issued shares and had 34.1M shares outstanding on the quarter as opposed to 29.7M in the previous quarter

Via Press Release

  • Revenue for the third quarter of fiscal 2010 increased 421% to $55.8 million, compared with $10.7 in the third quarter of fiscal 2009. Revenue from customers within North America increased to $52.7 million, compared with $6.4 million in the third quarter of the prior fiscal year.
  • Net income doubled to $12.6 million or $0.37 per diluted share for the third quarter of fiscal 2010, compared with $6.3 million or $0.21 per diluted share in the second quarter of 2010.
  • Gross margin for the third quarter increased to 43%, from 42% in the prior quarter of fiscal 2010, while operating margin increased to 23%, from 18% in the prior quarter.
  • Cash generated from operations $12.2M
  • Cash/cash equivalents on balance sheet: $104M
  • Clearwire up to 82% of all revenues (was hoping to see more diversification)
  • 13 new customers were shipped to in the quarter, bringing year to date (fiscal) to 32 new customers
Guidance:

  • Based on continuing strength of the DragonWave business, the Company expects revenue of approximately $170 million in fiscal year 2010.
The first 9 months of the year DragonWave now has $107.3M in revenue, so the $170M in guidance implies a whopping $63M in revenue for their last fiscal quarter of 2010. Analysts are in for only $50M with a range of $47 - $54.4M. That's a huge difference for such a small company and that means estimates need to go up for the next quarter as well (currently at 24 cents) To put it in perspective they did $56M this quarter and punched out 37 canadian cents. A $63M quarter would imply well over 40 cents on the quarter. Boo Yah.

************************************

Not much to find worry with other than the continued reliance on Clearwire business. As long as the build out continues with CLWR, so should benefit DragonWave. One hopes some AT&T or Verizon business begins to pick up to help balance the scales. Otherwise this could be a shooting start kind of story - wonderful in a limited amount of time but with expectation for much slower growth "down the road".

As for valuation, with 51 cents already in the bag for fiscal 2010, with 1 more quarter to go (which should be a >40 cent quarter) we should see DragonWave worst case hit 91-93 cents on the year. At $12, the multiple of this stock is a fraction of some retailers (picking a completely different sector) which are either shrinking or barely growing. Throwing a 20 multiple on year end 2010 (their fiscal year ends Feb 2010) gets us a $18 price. That's 50% appreciation from here. Is a 20 PE too high for the company? Hard to tell because the long term growth rate is unknown - obviously it won't be growing 400% a year like it has in the past 12 months. Feel free to throw a 16 multiple or whatever you wish and work backwards - it still appears cheap to me.

*please note, I am not sure if the full dilution is yet reflected from the recent share offering, so the analysis above assumes the shares outstanding will be 34.1M next quarter - it could be higher which would marginally reduce earnings per share. For example if they produce $41M in net income next quarter on the same 34.1M shares outstanding that equates to 41 cents in EPS; if instead there will be 37M shares outstanding that will mean only 38 cents. I have an email into the company to ask what the figure will be for Q4 fiscal 2010.

Long DragonWave in fund; no personal position

Trader Mark

http://www.fundmymutualfund.com/

About the author:

Trader Mark
Ravi Nagarajan is a private investor and Editor of The Rational Walk website. Ravi focuses on applying value investing techniques to find securities trading well below intrinsic business value. Ravi has over 15 years of experience in the financial markets and started investing on a full time basis in 2009. From 1996 to 2009, Ravi held a number of technical and executive level positions in the commercial software industry. Ravi graduated Summa Cum Laude from Santa Clara University with a degree in finance. Visit his website The Rational Walk

Visit Trader Mark's Website


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