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DragonWave Inc (DRWI)

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DragonWave, Inc. (DRGNF.PK)

F1Q09 Earnings Call

July 11, 2008 8:30 am ET

Executives

Russell Frederick - Vice President and Chief Financial Officer

Peter Allen - President and Chief Executive Officer

Analysts

James Faucette – Pacific Crest

Eric Kainer – ThinkEquity

Sera Kim – GMP Securities

Kevin Dede – Morgan Joseph

Peter Misek – Canaccord Adams

Dennis Fong – Macquarie

Todd Coupland – CIBC

Rich Valera – Needham & Company

Eyal Ofir – Canaccord Adams

Presentation

Operator

Welcome to DragonWave, Inc. first quarter fiscal year 2009 financial results conference call. (Operator Instructions) Speaking this morning will be Russell Frederick, Chief Financial Officer and Peter Allen, Chief Executive Officer. At this point I would like to turn the call over to Russell Frederick, CFO.

Russell Frederick

Thank you for joining the DragonWave, Inc. first quarter fiscal year 2009 results conference call on this 11 day of July 2008. 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 quarter ended May 31, 2008, were issued via our wire service at the end of business day on Thursday, July 10, 2008.

I will review the financial results for the quarter and then Peter will provide a business update and discussion. We will then open the call for questions and we plan to finish by 9:30 this morning.

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 7, 2008, 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 in the Investor Relations section.

I should mention at the outset that all references to dollars refer to Canadian currency unless we specifically mention otherwise. On Slide 4 you can see that revenues in our first quarter fiscal 2009 came in at $10.7 million. This represents an increase of 24% from the $8.6 million reported in the first quarter last year.

If you now turn to Slide 5 you will note that in Q1FY09 North American revenue grew to $8 million a 34% increase from $6 million in Q1 last year. Revenue from customers outside North America was $2.7 million in Q1 representing 25% of total revenue. During the quarter DragonWave sold to 56 customers of which 14 were new and 11 of these new customers were located outside of North America.

DragonWave had one key customer that generated more than 10% of revenue in Q1 fiscal ’09. This customer represented $4.2 million or 39% of revenue for the quarter. This compares to $1.9 million or 22% of revenue in Q1 of the previous fiscal year.

I will now address Slide 6 which shows our statement of operations. Having talked about the revenue I’d like to turn your attention to the remainder of the profit and loss statement. Gross margin for the first quarter was 41% this represents a 6% increase from the 35% gross margin reported in the first quarter of last year and consistent with the gross margin of 41% reported in Q4FY08. This increase is a result of continued cost reduction programs, a favorable product mix with increasing sales of our Horizon product line and in keeping with our strategy to increase gross margins.

You will see expenses overall in Q1 increased year to year by $1.9 million to $6.8 million. This resulted in an operating loss of $2.4 million for the quarter compared to a $1.9 million loss for Q1 in the previous year. R&D spending increased to $3.1 million in Q1FY09 from $2.4 million in Q1FY08.

The increase in R&D spending is mainly due to higher compensation related spending due to the growth in the number of R&D resources, investment in the Horizon product line, market driven R&D associated with major near term opportunities and market expansion activities along with the associated certification and approval processes.

Sales and marketing spending increased from $1.8 million in Q1FY08 to $2.6 million for Q1FY09. The increase in spending year over year was primarily a result of growth in sales headcount and increased sales in marketing activities such as travel and compensation expenses associated with the international expansion.

G&A spending increased to $1.1 million in Q1FY09 from $1 million in Q1FY08. This increase was driven by higher headcount related costs in head office functions as well as higher costs incurred to support a publicly traded company. At the net income level the company lost $1.9 million in Q1FY09 versus $2.7 million in Q1FY08. This loss included a foreign exchange gain of $0.3 million due to weakening of the Canadian dollar relative to the US dollar in the first quarter.

I will now turn to Slide 7 which highlights some balance sheet metrics. If we look at cash and cash equivalents you can see a decrease from $33.5 million at the end of Q4FY08 to $31 million at the end of Q1FY09. Cash was used during the quarter to support the cash adjusted loss in the quarter of $1.3 million, to fund working capital of $0.7 million and to purchase $0.3 million in capital assets. During the quarter the company’s bank exercised warrants in exchange for common shares which resulted in proceeds of $152,000 being paid to the company.

Read the rest of this transcript for free on seekingalpha.com