DRWI

DragonWave Inc (DRWI)

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DragonWave Inc. (DRGNF.PK)

F2Q09 Earnings Call

October 10, 2008 8:30 am ET

Executives

Russell Frederick – Chief Financial Officer

Peter Allan – President, Chief Executive Officer

Analysts

Peter Misek – Canaccord Adams

Sera Kim – GMP Securities

Todd Coupland – CIBC World Markets

Dennis Fong – Macquarie Securities

Chris Uniastowski – TD Newcrest

James Faucette – Pacific Crest

Kevin Dede – Morgan Joseph

[Ile Osier – Canaccord Adams]

Presentation

Operator

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

Russell Frederick

Good morning and thank you for joining the DragonWave Inc. second quarter fiscal 2009 results conference call on this tenth day of October, 2008. Slide 2 please.

Our speakers today are myself, Russell Frederick, Vice President and Chief Financial Officer and Peter Allan, President and Chief Executive Officer. Please note that our results for the quarter ended August 31, 2008 were issued via our wire service at the end of business day on Thursday, October 9, 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 this morning by 9:30.

Slide 3. Before we begin I would like to remind everyone that this conference call contains forward-looking statements that are based on current expectations, 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 4 of our annual information form dated May 7, 2008 which was filed with the Ontario Securities Commission.

At this time I would remind everyone that you may access our presentation today on our web site at www.dragonwaveinc.com in the Investor Relations section.

Slide 4 please. 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 second quarter, fiscal 2009 came in at $10.6 million. This represents an increase of 7% from $9.9 million reported in Q2 last year.

If you now turn to Slide 5, you will note that in Q2 fiscal year '09, revenue from customers outside North America was $2.9 million representing a 73% increase from $1.7 million in Q2 last year and accounting for 28% of the quarter's total revenue. Revenues from customers within North America dipped to $7.7 million, a 7% decrease from $8.2 million in Q2 last year. DragonWave had two customers that each generated more than 10% of revenue in Q2 fiscal '09. During the quarter, DragonWave sold to 65 customers of which 13 were new. Nine of these new customers were located outside of North America.

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 second quarter was 34%. This represents a 2% decrease from the gross margin reported in Q2 fiscal year '08 and a 7% decrease from the previous quarter.

I will address the change in gross margin from last quarter in some detail. About one-half of the decline is associated with customer activity. We incurred some start up costs associated with winning our new 10% service provider by assisting them with the restocking costs associated with displacing a competitor's product as part of their selection of DragonWave. Our product mix was slightly less favorable and we adjusted for increased costs to complete forecasts for some service contracts.

A further 1% is associated with high in-bound freight costs. This has occurred because of a reduced instance of directly drop shipping, but also high transportation rates reflecting increased fuel costs. Our strong innovation cycle resulted in us launching a high level of new products into production. The initial cost of this impacted margins by about a half percent.

Lastly, we estimate that the pricing impact after these other factors were taken into consideration resulted in just over a 1% decline in gross margin.

You will see expenses overall in Q2 increased year to year by $1.1 million to $6.5 million. This resulted in an operating loss of $2.8 million for the quarter compared to a $1.8 million loss for Q2 in the previous year. Although expenses increased year over year, I do want to point out that they decreased by $0.4 million sequentially.

R&D spending increased by $0.01 million to $2.6 million in Q2 from $4.25 million in Q2 FY08. Sales and marketing spending increased from $1.9 million in Q2 FY08 to $2.8 million for Q2 FY09. The increase in spending year over year was a result in growth of sales head count outside of North America to support our objective of capturing new customers globally. Travel costs and expenses to support new international offices also contributed to the period over period increase. G&A spending remained flat at $1.1 million in Q2 FY09 versus Q2 FY08.

At the net income level, the company lost $1.7 million in Q2 fiscal year '09 versus $2.1 million in Q2 fiscal year '08. This loss included a foreign exchange gain of $1 million due to the strengthening of the U.S. dollar relative to the Canadian dollar in the second quarter.

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