You know there's sufficient buzz about a burgeoning Canadian company when the investment banks start circling. Eager to eventually win investment banking business, the dealers initiate research coverage to signal to management that they've been there from the early days.
This very scenario is currently playing out with Ottawa-based DragonWave Inc., a tech infrastructure company with a market value of just $145-million. Although profits have yet to materialize, there is hope that DragonWave will make a major global mark, ultimately offering up juicy banking fees and create another Canadian tech success story in the process.
The trouble is DragonWave still hasn't proved that it's worth the attention. Since the start of 2011 the company's had a rough go, and its share haves slid to $2.47 from roughly $8.50. Lately there's been hype, stemming from a major Indian contract, but that still doesn't offer any long-term certainty.
DragonWave's game plan is to connect cellular towers to the Internet using special wireless equipment that is supposed to be better than fibre optic cables. Cell providers are experiencing serious surges in data usage, and DragonWave's business model is tied directly to this growth.
For the most part, investors and analysts understand this appeal; fibre optic cables can't run everywhere. And in May the company announced a major purchase order from Reliance Jo Infocomm Ltd to help build out their 4G/LTE network in India. The stock popped on the news, and has more than double dsince.
But nobody seems to be able to answer this crucial question: Where does DragonWave go from here?
"The destination is clear but the path and timeframe of the journey is not yet certain," Canaccord Genuity analyst Robert Young wrote in a research note.
Even though India looks promising – the hope is that DragonWave will now secure more contracts there – the company still relies heavily on revenues from its acquisition of Nokia Siemens Networks' microwave transport business, and that stream has had hiccups.
"We estimate the Nokia channel needs to grow back to [approximately] $30-million per quarter and gross margin of 20 per cent-plus for DragonWave to have a shot at break-even," Raymond James analyst Steven Li wrote in a report. The company reported negative earnings of $4.4-million before interest, taxes, depreciation and amortization this week.
No one can forget about the company's cash struggle, either. As Chris Umiastowski wrote for the Globe's Strategy Lab in May, there are constant questions about DragonWave's ability to fund its operations because its cash pile keeps falling. By the end of next quarter analysts expect the company will only have $12-million to $13-million in cash on hand.
That's bad news for investors, but good for the investment banks, because it means DragonWave may need to raise money, or borrow some, soon. On a conference call this week management was asked about its financing options and the reply didn't shut the door: "We'll just keep all our options open in that vein."