DragonWave F3Q08 (Quarter End 11/30/07) Earnings Call Transcript

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DragonWave, Inc. (DWI)

F3Q08 Earnings Call

January 11, 20088:30 am ET

Executives

Peter Allen – President, Chief Executive Officer & Director

Russell Frederick – Chief Financial Officer, Vice President, Secretary & Director

Analysts

David Hudson – BKF Asset Management

Dennis Fong – Orian Securities

Kevin Dede – Morgan, Joseph & Co, Inc.

Todd Copeland

Peter [Mesick]

[Kathy Rissick]

Presentation

Operator

Good morning ladies and gentleman. Welcome to the DragonWave, Inc. third quarter 2008 financial results conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. (Operator Instructions) As a reminder this conference is being recorded today, January 11, 2008. It is now my pleasure to introduce Russell Frederick, Chief financial officer. Please go ahead sir.

Russell Frederick

Good morning. Thank you for joining the DragonWave Inc. Q3 fiscal 2008 results conference call on this 11^th day of January 2008. Happy New Year. Our speakers today are myself Russell Frederick, Vice President and Chief Financial Officer and Peter Allen, President and Chief Executive Officer. Please note that our results for the third quarter fiscal year 2008 ended November 30, 2007 were issued via our wire service at the end of business day on Thursday, January 10, 2008. I will begin the call by reviewing the financial results for the quarter and then Peter will provide a business update and discussion. We will then open the call for questions. We plan to finish by 9:30 this morning.

Slide 3 - Before we begin I would like to remind everyone that this conference call contains forward-looking statements that are based on current expectation, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. For a complete description of such risks and uncertainties see article four of our Annual Information Form dated May 22, 2007. Which we filed with the Ontario Securities Commission. At this time I would remind everyone that you may access our presentation today on our website at www.DragonWaveInc.com inthe investor relations section.

Slide 4 - I should mention at the outset that all references to dollars refer to Canadian currency unless we specifically mention otherwise. On slide four you can see that revenues in our third quarter of fiscal year 2008 came in at $11.5 million. This represented year-over-year growth of 139% and a sequential growth from the second quarter from fiscal year 2008 of 17%. So, we have continued to deliver strong revenue growth in the third quarter and I am happy to report that this quarterly revenue is the highest quarterly revenue in the company’s history.

If you now turn to Slide 5 you will note that in North America revenue from customers grew to $5.7 million, a 70% increase from $3.4 million of revenue in the same quarter of fiscal year 2007. Revenue from customers outside North America grew to $5.8 million up 300% from $1.4 million in Q3 of fiscal year 2007. Revenue from outside North America accounted for 50% of the quarterly revenue. This is a result of DragonWave’s continuing initiatives to increase its customer penetration into regions outside North America.

DragonWave sold to 51 customers in the third quarter and out of this number 14 were new customers, ten of which were outside North America. During the quarter the company had three customers that generated more than 10% of revenue. It is also of note that these customers are in three different areas of the world meaning that DragonWave had a 10% customer in each of North America, Europe and the Middle East in Q3FY08. We are extremely pleased with this traction as it means that we are broadening our large customer base around the world. As we have said in the past with large customers and the project nature of their deployments we can expect to experience fluctuations in our quarterly revenue flows. While we have not experienced this lumpiness this year we do see that this dynamic is such that we will have lower growth in Q4.

I will now address Slide 6 which shows our statement of operations. Having talked about the revenue I would like to turn your attention to the remainder of the profit and loss statement. Gross margin for the third quarter was 39%. This represents a 2% increase from the 37% gross margin reported in the second quarter and is comparable to the previous year. The quarterly trend in fiscal year 08 has gross margins increasing from 35% in Q1 to 37% in Q2 and to 39% in the current quarter. This increase is a result of continued cost reduction programs and a favorable product mix with increasing sales of our Horizon Compaq product line. You will see expenses overall in Q3 increased year-to-year by $2.4 million to $5.8 million. This resulted in an operating loss of $1.3 million for the quarter compared to a $1.5 million loss for Q3 in the previous year and a decrease sequentially from a $1.8 million loss reported in Q2 of this year.

R&D spending increased from $1.5 million to $2.7 million compared to Q3 last year and up slightly from $2.5 million in the second quarter this year. The increase in R&D spending is mainly due to investment in the Horizon product line, market driven R&D associated with major near term opportunities and market expansion activities which require a broader spectrum offering and the local certification and approval process to be addressed.

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