DragonWave Management Discusses Q4 2013 Results - Earnings Call Transcript

May. 9.13 | About: DragonWave Inc. (DRWI)

DragonWave (NASDAQ:DRWI)

Q4 2013 Earnings Call

May 09, 2013 8:30 am ET

Executives

Russell James Frederick - Chief Finance Officer, Vice President of Finance, Secretary and Director

Peter Allen - Chief Executive Officer, President and Director

Analysts

Doug Taylor - TD Securities Equity Research

Peter Misek - Jefferies & Company, Inc., Research Division

Todd Coupland - CIBC World Markets Inc., Research Division

Brad Erickson

Robert Young - Canaccord Genuity, Research Division

Kris Thompson - National Bank Financial, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the DragonWave Fourth Quarter Fiscal Year 2013 Financial Results Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference call, Mr. Russell Frederick, Chief Financial Officer. You may begin, sir.

Russell James Frederick

Thank you, Kevin. Good morning, everyone. I would like to welcome you to our Fourth Quarter Fiscal Year 2013 Financial Results Conference Call. With me today is DragonWave Chief Executive Officer, Peter Allen. I am sure many of you know that John Lawlor has retired, and so I wanted to thank him publicly for his contributions at DragonWave, and wish him health and happiness in his retirement.

As a reminder, today's call is being webcast live on the DragonWave Investor Relation website at www.dragonwaveinc.com. You can access the presentation slides from the same site. The webcast will be archived on our site and available for replay shortly after we conclude the call.

I hope you had an opportunity to read the press release we issued last night, which provided detailed financial information on DragonWave's fourth quarter and full year fiscal year 2013.

On Slide 2, please. Before we begin, I would like to remind everyone that today's call contains forward-looking statements or information, including statements relating to the changes to the operational framework with Nokia Siemens Networks. Actual results could differ materially from the conclusions, forecasts or projections in the forward-looking information.

The forward-looking information reflects certain material factors or assumptions. Factors which could cause actual results to differ materially or that were applied in drawing such conclusions or making such forecasts or projections are contained in the Risk Factors section of our Annual Information form dated May 11, 2012, which has been filed on SEDAR and EDGAR.

Material factors include our expectations regarding our customers' plans and requirements, volume and timing of orders, shipments and revenue recognition and our plans and strategies to balance cash flows and expenses, as well as material factors and assumptions relating to the changes in the operational framework with NSN, including the parties' beliefs regarding the industry end markets in which the parties operate, and expectations regarding potential synergies and prospects for the business.

On Slide 3, please. I will now review the company's financial results, and Peter will provide a business update and discussion. Following Peter's remarks, we will open the call for questions, and we do plan to finish the call by 9:30 this morning.

On Slide 4, please. I will now discuss our fourth quarter and full fiscal year 2013 financial results, followed by an overview of the key terms related to our renewed framework agreement with Nokia Siemens Networks, which we announced in a press release on April 10, 2013. Before I get into the details, I would like to remind everyone that all currency figures are in U.S. dollars and were prepared in accordance with U.S. generally accepted accounting principles, unless we specifically state otherwise.

On Slide 4, you can see that total revenue for the fourth quarter of fiscal year 2013 was $28.3 million compared to $38.5 million in the third quarter of fiscal year 2013 and $9.2 million in the fourth quarter of fiscal year 2012. In the fourth quarter, DragonWave had one customer who generated more than 10% of total revenue. Revenue from the Nokia Siemens Networks channel was $17.3 million or 61% of revenue in the quarter.

On Slide 5, please. Gross margin for the fourth quarter of fiscal year 2013 was 5% compared to 19% in the third quarter and 13% in the fourth quarter of fiscal year 2012. There were 3 main contributors to the gross margin being lower than last quarter: an inventory provision, a higher mix of large account discounts and higher-than-expected contract manufacturing and logistics costs associated with moving production out of NSN plants and into new contract manufacturing sites.

As we noted in the press release that while some of these pressures will continue in the short term, we expect to return to Q3 fiscal year '13 gross margin levels over the next 2 quarters. The gross margin for the full fiscal year 2013 was 16% compared to 36% for fiscal year 2012.

Total expenses in the fourth quarter of fiscal year 2013 were $18.5 million compared to $19.9 million in the third quarter and $13.7 million in the fourth quarter of fiscal year 2012. The higher level of spending in the last 3 quarters of fiscal year 2013 relates to incremental costs associated with the acquisition of the Nokia Siemens Networks' microwave business on June 1, 2012.

In the fourth quarter, the loss before amortization of intangible assets and other items was $16.9 million. This compares to a loss of $12.8 million in the third quarter and $12.6 million in the fourth quarter of fiscal year 2012. The net loss applicable to shareholders was $27.2 million in the fourth quarter compared to a net loss of $13.9 million in the third quarter of fiscal year 2013 and $13.4 million in the fourth quarter of fiscal year 2012.

Please move to Slide 6, which highlights some of the key balance sheet metrics. Day sales outstanding for the fourth quarter of fiscal year 2013 was 102 days based on ending balance. This compares to 71 days in the third quarter of fiscal year 2013 and 107 days for the fourth quarter of fiscal year 2012. Fourth quarter DSO performance was impacted by the Nokia Siemens Networks transaction, where, before the execution of the renewed framework in April 2013, there were payments delayed in both directions.

Inventory at the end of the fourth quarter stood at $32.7 million compared to $29.7 million at the end of the third quarter. Inventory turns in the fourth quarter was 2.4 compared to 4.1 in the third quarter. The company ended the fourth quarter with $23 million of cash, cash equivalents and restricted cash compared to $36.8 million at the end of the third quarter and $53 million at the end of the fourth quarter of fiscal year 2012.

Our cash position decreased by $13.8 million in the fourth quarter, of which $14.8 million came from the cash adjusted loss and $1.3 million came from the purchase of capital assets and software and $0.4 million from the payment of capital leases. Changes in non-tax written [ph] capital provided $2.7 million of cash.

Now turning to our transaction with Nokia Siemens Networks, we announced in a press release on April 10, 2013, that we have reached a renewed operating framework with Nokia Siemens Networks. I will elaborate on the financial impact of this announcement. And later on in the presentation, Peter Allen will comment on the sales rejuvenation aspects of this announcement. I want to emphasize that the impacts from the changes we announced on April 10, 2013, are not included in the fiscal year 2013 results, but rather are a subsequent event.

The first important element of the announcement I want to speak on is the payment we received from Nokia Siemens Networks of USD 13.8 million on April 10, 2013. There were provisions in the original agreement that stipulated payments to DragonWave if certain levels of sales were not achieved through the channel.

These payments were to be paid over 6 quarters following the June 1, 2012, closing. Since the USD 13.8 million has now been paid to DragonWave in cash, the contingent receivable that you will have noticed on our balance sheet is now cleared. This has the obvious benefit of helping liquidity immediately.

The second element of the announcement I want to highlight is that Nokia Siemens Networks will take on the additional commitments and cost, so that DragonWave can continue to develop roadmap microwave products and focus on excellence and quality and supply.

There were approximately $14.2 million of billings we had received under services arrangements that no longer have to be paid to NSN. Therefore, you will see that this amount will be removed from our accounts payables liabilities on the balance sheet at the end of our first quarter. Again, this has a favorable impact on the demands on our cash resources.

The final element of the announcement I will comment on is the termination of the Italian services agreement. While there is a termination fee of approximately $8.8 million to be paid over the balance of the fiscal year, we also expect that expense savings will be approximately $3.9 million per quarter.

When you combine these operating expense savings with the progress we have already made through the end of February 2013, we can see that our operating expense run rate will have decreased from $25 million in the first quarter following the closing of the NSN transaction to under $15 million per quarter as we move forward, and we will continue on the journey.

Before I turn it over to Peter, I want to update you on our credit facilities with Comerica Bank and Export Development Canada. We have agreed to amend our credit arrangements to allow DragonWave to have access to an additional $5 million in cash, such that we can increase our current borrowing from $15 million to $20 million. We are currently working on the definitive agreements.

This concludes my remarks, and I will now turn it over to Peter Allen.

Peter Allen

Thank you, Russell, and good morning, everyone. Thank you for joining us on the call this morning. Today, I would like to cover a number of important changes in our business. Together with Nokia Siemens, we have announced changes to renew the operating framework of our partnership.

In this -- firstly, I would like to cover Italy, where we had been receiving support for R&D, product management and operations planning through a services agreement. This was being done against the backcloth of Nokia Siemens' announced plans for overall restructuring of their Italian operations.

As I indicated in previous calls, there were, for an extended period, a number of industrial work stoppages and workplace disruptions and a services approach had become quite unproductive. To resolve this, we have reached alignment with Nokia Siemens to terminate the services agreement effective April 10, 2013.

There are some transition effects -- impacts being borne in our current quarter, but we are making necessary adjustments in Ottawa and Shanghai to address these and ensure that all functions are covered within directly controlled DragonWave resources, and we expect that these will all be resolved within our current quarter.

Our manufacturing transition is making good progress, where we have reduced the number of factories from 4 to 2 for the products that we acquired through the transaction. We have streamlined our organization to reflect that we have many of our integration tasks now completed.

These are all important moves in our integration and cost-reduction activities. As Russell pointed out, I can report that our expense base has been reduced by 40% since the middle of last year, and we expect to see some further reductions over the next couple of quarters.

A second and critical part of our amended arrangements are a strong alignment on the sales environment. Nokia Siemens have reaffirmed across their entire organization that microwave transport is an integral part of their mobile broadband strategy. Marc Rouanne, Executive Vice President of Mobile Broadband at Nokia Siemens Networks said, "Nokia Siemens believes that by 2020, mobile networks will need to be ready to deliver 1 gigabyte of personalized data per user per day profitably. And Nokia Siemens are committed to offering customers the best mobile broadband solution possible, including the microwave that DragonWave brings to the table." There's a strong alignment between the 2 companies now on the approach to sales push, business model and incentives for the microwave business as a part of mobile broadband.

Several years ago, the center of gravity of our business was firmly in North America, a strength and an exposure, as became evident. Today, we have a much more diverse business. Over recent months, I have personally met with many customers as well as Nokia Siemens region heads and customer teams, and I am excited by the increased activity level that I see in these meetings. I would like to give you a sense of activity across the various regions. You will understand that I will have to refrain from discussing individual customer accounts for nondisclosure obligation and commercial confidentiality reasons.

You will have seen from many press releases that have been issued that Nokia Siemens is generating traction with its 4G value proposition. This gives us a strong backdrop for the microwave sales funnel, which we see is increasing along with trial activity.

Asia as a region is among the strongest now in our revenue base. We have revenues in Japan, Malaysia, Indonesia and expect to be adding a customer in the Philippines shortly. Enhancements to our supply chain being introduced soon will further improve service to customers in this region, reflecting that our manufacturing base is in this market.

In India, we are already involved with a number of operators. We recently agreed a trial with one of the country's largest service providers, and we continue to believe that we are well-placed in an important procurement competition that is underway with decisions expected shortly.

Middle East and North Africa is another strong region for DragonWave. We have adjusted our organization to reflect the situation where a number of North African operators have ties to service providers in the Gulf. This region can suffer variability in deployment time scales, but we see now a broad balance of business in Saudi Arabia, several upper Gulf countries and new penetration opportunities in lower Gulf countries. In North Africa, our funnel covers all countries and there is a high level of RFP activity for operators in these countries.

I will be visiting some customers next week in East Africa. And this, along with other activities underway, will permit me to get an important first-hand assessment on the African region. We have business today in West Africa, primarily in Nigeria; East Africa; and of course, Southern Africa. I travel with a view that there is a growth potential for us in this continent.

Europe is a region where we have some key existing anchor customers. But at the same time, we have significant opportunities to broaden our share in this market. A recent success was Nokia Siemens announced 4G penetration of Orange Switzerland, which is an example of the opportunity to be successful for us in this region.

Our channel business is growing in North America, and I see some positive steps in the penetration of new verticals for us like public safety, and we are working with some integrators who are focused on this. We are also expanding our channel partners in key Latin American countries. Key account activity in North America is low at this moment. I am, of course, keen for the current competing bids for Sprint and Clearwire to be resolved, and that any uncertainty of this that is impacting their future plans is eliminated. I would mention again that Softbank is a user of DragonWave products.

Service providers in Latin America also represent a growth opportunity. Today, we have some customers in Brazil, Argentina, Peru and Ecuador. But in all cases, we have tried to build a funnel to either expand share or penetrate new customers in these countries.

As I have said, the interactions that my team and I have had over recent months has allowed us to feel comfortable that activities are in place to now maximize the effectiveness of the channel partnership with Nokia Siemens. Having said that, there is still work to be done to improve and optimize between the companies, and at this stage, we do not have adequate synchronization for us to be able to provide reliable, accurate revenue guidance. I do not want to present this in any way to negate my previous comments about the positive steps taken to reshape our relationship. And I am completely convinced that right steps are being taken to maximize the value of this partnership.

Our product development activities now benefit from much broader customer input and in some instances, deep interaction about product requirements. Our current and wide portfolio, taken together with our roadmap, supports the important trends in mobile broadband requirements. These are high-capacity products for macrosale deployments, which build on our leadership in 2048 QAM, and bulk compression capability. Our wide portfolio of products, supporting both licensed and unlicensed spectrum, positions us well for packaged optimized microcell backhaul solutions.

Through the combination of the cost base realignment, strong focus on funnel development and guided product development, we are focused on the journey to reach our cash flow breakeven point in a couple of quarters. I see this as a key foundation to build upon with leadership products for the future.

That concludes my prepared remarks. And I'd like to turn the call over now to the operator to initiate the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Doug Taylor with TD Securities.

Doug Taylor - TD Securities Equity Research

I just want to start -- I know you're not providing formal sales guidance anymore for the next quarter, but in light of the stronger pipeline that you have, can you talk a bit about when you expect that to translate into revenue growth? Do you expect sales in the next quarter to be comparable with this quarter or to show significant growth?

Peter Allen

I'll give you what I can here, Doug. There are some transition impacts associated with the end of the services agreement that we are bearing this quarter. I think the funnel -- as I indicated in remarks, the funnel is building strongly, I would say. As I've indicated on this call, I think -- and on -- I think you would have seen it from other microwave players in industry, sales cycles can be problematic to be sure about. At the end of the day, customers determine the sales cycle more than the suppliers. So I am not, I think, able to give you any reliable guidance about the exact timing of how I see that funnel translating into revenue growth. I am, as I said, convinced that it will. I would imagine that it's going to take a little bit longer than one quarter.

Doug Taylor - TD Securities Equity Research

Okay. You mentioned the goal of achieving breakeven cash flow in a couple quarters. Is that -- would revenue growth be required to do that, or do you think you could get there with expense reductions alone?

Peter Allen

I think revenue growth has to be a part of this. And again, as I said, the sales cycle can be a little bit indeterminate. So as I've said on previous calls, we are prepared to course correct as we go. At this stage, our plans indicate that most of that journey now will be from the anticipated revenue growth that we can see from the stronger funnel. But there are still -- whilst most of the integration tasks are behind us, they're not all behind us, and we do see that some of the activities that we've completed, and ones that are underway, have yet to yield some further reductions in our operating cost. So it will be a bit of both, but I would say more strongly now, the journey will be dominated by the revenue growth from the funnel.

Doug Taylor - TD Securities Equity Research

Okay. Just a clarification, you mentioned that $13.8 million you collected for the contingent receivable as a part of the revised NSN deal. Am I correct in reading that it's $19.4 million was the net cash inflow from the conclusion of that agreement?

Russell James Frederick

Yes, and that's right, Doug. And the difference is really -- I kind of alluded to it in my comments where there was some payments due both ways that were delayed, and the net of those 2 amounts added that incremental amount.

Doug Taylor - TD Securities Equity Research

Okay. And the $8.8 million that's going the other way over the coming year, how is that going to be spaced out over the course of fiscal year '14?

Russell James Frederick

Yes. I think -- I don't think we'll see anything in our first quarter. I think it's probably Q2, Q3, Q4 on the profile, Doug, but that's really all the intelligence I would have on that.

Doug Taylor - TD Securities Equity Research

Okay, that's helpful. I guess the last one for me and then I'll pass the line, you've provided some projection of what you thought the cash usage would be in the upcoming quarter over the last couple of quarters. I wonder if you're willing to do the same for Q1?

Russell James Frederick

Yes, for Q1, I would think about a number similar to Q4.

Operator

Our next question comes from Peter Misek with Jefferies.

Peter Misek - Jefferies & Company, Inc., Research Division

Are you noticing customers taking longer in the RFP process and the deal process is extending a bit, or is it pretty consistent with what you've seen in the past?

Peter Allen

As our business diversifies across this wider geographical area, and as we have a different operating model where we work through, a lot of our business now is -- a good part of our business is through the channel. I think it's hard for me to kind of draw complete conclusions, comparing current activity to the past because we have such geographical differences, and we have the impact of the channel. But in general, I would tell you that certainly, in some regions, the sales cycle can be hard to predict. Middle East, I think, is a very good example where sales cycles can tend to be a little bit longer. Some parts of Asia, that's certainly as well, India, for example. Less so, I would say in -- it's still in the Americas and in Europe.

Peter Misek - Jefferies & Company, Inc., Research Division

Got it. And then just another one. In terms of India, the spectrum option there, I guess how's that process affecting your business there. I know you have that one trial with the customer, but...

Peter Allen

Well, we have more than one trial going on actually in India. Well, we have more than one trial planned in India for sure, one is going on and the other's under trial planning at the moment. I would say that my expectation from that spectrum option is that there is going to be some degree of consolidation in India. The quality [ph] of the spectrum is not insignificant. And I imagine that there is already a very large number of operators covering India, and it's going to be increasingly difficult to sustain the investment spectrum for all of them, so I expect to see some consolidation. I am fairly comfortable that the customer base that we have are likely to be -- that we work with, are likely to be among the operators still standing when we -- when the dust settles from what I expect. The operators who we work with have a very strong pedigree, so I'm comfortable that we'll be pretty unaffected by that dynamic.

Peter Misek - Jefferies & Company, Inc., Research Division

Got it. And sorry, just last quick one. In terms of the NSN gross margin, did you say that it was around 16%? Or did I mishear that?

Russell James Frederick

No, I don't think we -- we don't segment the business that way.

Operator

Our next question comes from Chris Harrington with [indiscernible] Incorporated.

Unknown Analyst

Just a quick clarification question. Did you say that $14 million of the accounts payable is going to be extinguished since we have $14 million gain in that respect in the first quarter?

Russell James Frederick

That's correct.

Unknown Analyst

Okay. Well, that's a positive development. I had a couple of questions, if you guys don't mind, this morning. Maybe it's a little presumptuous, but the FlexiPacket product, now Harmony product, envisions having the revenue share with Nokia Siemens, assuming it isn't the highest gross margin product to begin with. So can you give me an update on when you guys are expecting the Harmony refresh to be? And all else being equal, do you expect that to be a higher gross margin product?

Peter Allen

So a couple of comments to your question. Firstly, when you use a business approach to the one that we're using, you will obviously have to share the market margin available between the channel partner and the product partner. And the aspiration of doing that is that, that will give you a better leverage from the operating expense that you can put -- the product guy can put in, and it can leverage the broader sales -- existing sales channels that are in place with your channel partner, and that's the case here. Nokia Siemens has a really strong presence worldwide, much stronger than DragonWave could ever invest in. And very good enduring relationships with operators in every part of the world. So we're looking to capitalize that. But of course, you have to share the margin available in the market to do that, but the leverage should be better. In terms of the product, I won't get into exactly the timescale for the new product, that's a little bit competitively sensitive for us. But what I would tell you is that, I do think that product has the capability of being brought together reasonably easily because of the common technology platforms between FlexiPacket and Horizon. I do think that we have the opportunity to raise it to the highest level denomination because of the strong attributes available in both products. So I think we'll get a very good product out of it. Of course, every time we touch a product, we seek to make it more cost-effective. And so I do think the emerging product will achieve that as well. As to margins, I think -- yes, I do see some opportunity to improve here. But at the same time, I would say, price competition remains fierce. And whilst there are such a large number of players in the market, I don't expect that to change.

Unknown Analyst

Okay. A quick high-level question. And when I think about this simplistically, I think of a microwave backhaul market associated with mobile operators closing in -- or close to maybe $4 billion. Nokia Siemens has what seems like about a 20% base station share. So just -- and they actually seem to be a little bit stronger in areas that would perhaps use microwave backhaul. So just doing quick math, it would almost seem something like $800 million worth of microwave would be put into backhaul, some NSN base stations in a given year. Am I thinking about that correctly? Or maybe you could put some color of that in terms of your addressable market, so please let me know.

Peter Allen

Yes. So I think that when an operator is looking at backhaul, particularly as he -- at the macro-cell level, he has a number of options, one of which is fiber. Historically, in the 2G world, a lot of base stations were backhauled with copper, but as we move to 3G and 4G, increasingly the pressure, capacity pressure negates the ability to use copper. But I do think you're thinking about it the right way in terms of -- there is an element of microwave backhaul-driven opportunity, driven by base station penetration. I think where the world is heading, of course, is 4G mobile broadband, and NSN's focus is -- has been narrowed. So focus on that opportunity and through their -- the various announcements you see from them about penetration with their 4G proposition. You can see they're having some success with that.

Obviously, what we want to do is, recognizing the 4G value proposition. We'll, in many instances -- in some instances, we'll use fiber; in some instances, we'll need microwave backhaul, and we seek to work with Nokia Siemens to provide that. Now in some cases, customers want to buy that all-in-one bundled solution. But in others, they may separate the procurement decision, and it is -- becomes less hard bundled but becomes more softer bundled. They're looking for perhaps to buy it from the same guy, but want to run a separate procurement competition or sometimes, it's completely unbundled. So depending on the customer's purchasing behavior will depend on how we think about an approach to that opportunity. I think, further, however, the -- as you then look at the densification of 4G, undoubtedly, small cells will be required. And as you get to smaller cells hanging off more nontraditional structures than cell sites, one, as backhaul becomes more and more important. And so one of the things that we seek to do is work with Nokia Siemens to make sure that our value proposition and their value proposition are very synergistic, helping them with the small cell product with an equally strong backhaul solution. And I think that is -- amplifies then the penetration opportunity.

Unknown Analyst

Okay. And then you mentioned a hard bundle aspect. Care to put a percentage on where do you think that is and where it's perhaps heading to, maybe with the renewed focus on the selling? Do you want to perhaps put some estimates on -- where do -- I mean, where do you think the larger players, like Ericsson and Huawei, that seem to bundle -- do a lot of bundling, seem to get the microwave when they get the base station? What do you think holds back NSN from getting that?

Peter Allen

Well, I think -- firstly, I think, again, you're think about it right. I think the -- one of the whole reasons for us to get into this relationship was to recognize that a good part of the market was being served by people who were bundling. There's a good part of the market -- reflects the purchasing behavior of operators like that. And so if we hadn't got into this formation, that part of the market would be -- would not have been available to us. I think over time, I think we can make that proposition stronger through our product development and our synchronization on the commercial approaches. But that is the fundamental tenet of why we would want to do this. I think that Nokia Siemens has undoubtedly gone through a period where it has had to reshape its company from being a very wide, broad telecom equipment supplier and they've chosen, in my view rightly, to narrow their focus to mobile broadband. And that's taken them much publicized activities, that's taken them a good 6, 9 months, and I applaud them for grasping the nettle and doing that. But of course, during that period, that was their priority and perhaps microwave wasn't as high a priority as I would have liked it to have been. But now, they are very -- they are focused, they are clear that mobile broadband is their key strategy and they're very key [ph] -- clear that microwave is an integral part of that. So I think that whilst I would have liked -- to be in this position 9 months ago, I am pleased that I am in this position now.

Unknown Analyst

Okay. A quick last question and I'll hand it off. In the past, you guys had talked about sort of a 2/3-1/3 split between your expectation, NSN channel getting 2/3 and other business getting 1/3. How do you see that progressing over the next year or 2? Do you think those get [indiscernible]?

Peter Allen

We think that's -- it's not where we are right now, but it's certainly where I would believe we can get to because it reflects, I think, what I said earlier about the leverage and the breadth of the channel coverage and the purchasing behavior of operators.

Unknown Analyst

Last one real quick. Are you guys selling any Compact or Quantum products through NSN channel or is that all Harmony?

Peter Allen

Yes, well, we've certainly sold -- I mean, our whole relationship with Nokia Siemens started because they were selling Compact in Japan.

Operator

Our next question comes from Todd Coupland with CIBC.

Todd Coupland - CIBC World Markets Inc., Research Division

Russell, I just wanted a couple clarifications in [indiscernible] market questions. So your point on the cash is that you basically have $15 million and pro forma, the roughly $20 million less the $9 million, you'll be adding $10 million, is that what you said?

Russell James Frederick

Let me say it the way I think about it, Todd, so we don't miss each other. So we had a burn in Q4 of just under $14 million. And I said earlier, we would expect a similar burn in Q1. We did pick up an accelerated payment, which is the part that eliminated the contingent receivable of a similar amount from NSN in the quarter, so those are kind of almost offsetting. That's the way I'm thinking about it right now. On the going-forward basis, Todd, the services invoices that we no longer have to pay is a reduction to future cash demand, but we never did pay them. So it's not -- well, that piece won't affect the burn going retrospectively, but only a demand that would have been placed on us in the future, okay?

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. And then the OpEx, you said your starting -- did you say the starting level in -- for Q1 fiscal '14 is $25 million, and over the course of the year at an undetermined point, you'll be at below $15 million?

Russell James Frederick

No. So the $25 million, Todd, goes back to the first quarter following closing.

Todd Coupland - CIBC World Markets Inc., Research Division

I see. My mistake. Okay.

Russell James Frederick

So that actually goes back to our Q2, I guess. [indiscernible] And so we've made some progress. The point is that the renewed framework and in particular, the elimination of the Italian services agreement, will allow us to achieve another step function down in expenses in the first quarter, which is not reflected in Q4.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. So you should be at that $15 million level fairly quickly in Q1 or Q2 or below that, right?

Russell James Frederick

Yes. That's correct, Todd.

Todd Coupland - CIBC World Markets Inc., Research Division

That's the goal. Okay. Sorry, I didn't understand that. Okay. And then, just in terms of the revised -- I know you're not giving guidance, but what would be the target -- what would be the revised target model in terms of gross margin and operating margin target at some level of revenue? How are you thinking about that now?

Peter Allen

I'd repeat. Our journey, Todd, is to get to a cash flow breakeven point a couple of quarters out. And we will have to adjust our model as we see events unfold between the different regions and the actual rate of growth.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. But is the revised deal, I mean, I think you were sort of targeting mid-20s gross margin. Is that still the kind of level of gross margin that this kind of product line can generate, or is it different from that?

Peter Allen

There's no -- there were no changes in the price structure associated with the revised -- the renewed amended arrangements, so nothing has changed as that -- in that respect.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. And if the business doesn't come through as you would hope -- as you hope, do you still have ratchets and mechanisms to make further adjustments, or is that going to be on your dime at this point?

Peter Allen

We will build -- it's a bit of an open-ended question, Todd. We will obviously have to deal with the circumstances as we see them. But there's no expectation that the funnel-building activities here won't be successful, so we are steely focused on getting the revenue growth from that.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. And then the revenue level that you reported in Q4, it's down, but certainly okay relative to a $28 million -- sorry, a $15 million OpEx number. Do you expect seasonality in the business in Q1 or would that have happened in the fourth quarter? I mean, I guess the typical calendar cycle would have happened in your fourth quarter. So should we actually see some positive seasonality in your Q1?

Peter Allen

I don't believe that I've seen enough history here to know that there's any seasonality in the business. And certainly, with the wide geography, where some regions are less active in some part of the year, and others are more active in certain parts of the year. My gut call would be that the seasonality is battened down by the much wider diversity of the customer base of the regional geography.

Operator

Our next question comes from Brad Erickson with Pacific Crest Securities.

Brad Erickson

Just a couple of follow-ups. First, you mentioned some geographic commentary already and kind of longer sales cycles, et cetera. Can you give us any sense of which geographies might be able to contribute to growth sooner or later, maybe put differently, where you might be most optimistic for the business to improve here in the near to medium term?

Peter Allen

Yes. I'll try and give you some sense of the -- of our geographies. As I look forward to the full year, I see about 30% of our business being in Asia, high teens being in the Middle East and North Africa. And I think both of those are -- of course, I would -- I still see opportunities for customer penetration and growth in those regions, but there are stronger opportunities in some other. And the next one is Africa where it's low teens, I would say, and I think there's a significant opportunity for us to gain some share in Africa. Europe is about 20% and the Americas overall is about low 20%s. So I would say America, in our business, has been -- the Americas, in our business, has been much higher with the various builds and the circumstances of -- our traditional customers suggest to me that any growth in North America is not likely in our current fiscal, more likely the year after. I do think an opportunity for growth exists still in Latin America, and that's one of the regions where we've got a stronger funnel being built than we've had before.

Brad Erickson

Great, that's useful. And then just relative to the cash flow outlook and commentary, can you give us a sense of kind of what your CapEx expectations are for the coming fiscal year?

Russell James Frederick

Yes. So CapEx is kind of in the $1 million to $2 million range.

Operator

Our next question comes from Robert Young with Canaccord Genuity.

Robert Young - Canaccord Genuity, Research Division

I was trying to get a feel for what the total borrowing capacity is now. You -- if my understanding is correct, you'd tapped out the component of the Comerica facility that you're currently allowed to draw on, but you've just announced that you've expanded that by $5 million. So you have an additional $5 million now of capacity, is that correct?

Russell James Frederick

That's right. So we have an agreement in place to allow us to have access to an additional $5 million. As I said in my comments, Robert, we have to get a definitive agreement. But the term sheet, if you will, is in place.

Robert Young - Canaccord Genuity, Research Division

Okay. And in your MD&A, I believe there's the discussion about a covenant breach which you were able to get on the right side of until April 30. So I was wondering, where are you relative to that, and is that part of the term sheet discussion you're just talking about now?

Russell James Frederick

Yes. So the -- we breached the -- a covenant at the end of February, but we have operated under waivers with the lenders since then. And the new term sheet was the culmination of those conversations, which we were happy that it ended up with -- allowing us more access to cash.

Robert Young - Canaccord Genuity, Research Division

Okay, that's great. And then the operating plan for the next couple of months to get to profitability. Are you -- is there any expectation that you're going to need to expand that facility further, or are you able to operate on the -- that additional $5 million and that's it?

Russell James Frederick

Yes. So we have all the positive elements of the cash demand that I described on this call. But as Peter alluded to earlier, we need -- we're going to continue on the cost base reduction plan, but we do need some help on the revenue side to help us achieve that cash flow breakeven in the next couple of quarters.

Robert Young - Canaccord Genuity, Research Division

Okay. I guess what I was kind of getting at is that increase in revenue, does that unlock more of the Comerica facility?

Russell James Frederick

I would say no. I would say that it is generally an asset-based line, Robert. But at this time, the new facility will allow us access up to $20 million, and then we'll go back to the banks and adjust that as we have more working capital needs.

Robert Young - Canaccord Genuity, Research Division

Okay. And last one for me is just on the payments to Nokia Siemens over this year. You'd said that probably it wouldn't hit Q1, but might be later. Is there any flexibility on their part to flex that if you need additional room through 2013 here?

Russell James Frederick

Well, I would hope so. But I couldn't possibly comment on that right now, Robert, because it's in the future.

Operator

Our next question comes from Kris Thompson with National Bank.

Kris Thompson - National Bank Financial, Inc., Research Division

Peter or Russell, are you guys relying on any large deals closing in the next couple of quarters in order to reach that breakeven cash flow target?

Peter Allen

Relying, I don't know about relying. We certainly see a number of significant deals in our pipeline and in our funnel that we hope to either close directly ourselves in some instances or with Nokia Siemens in other instances. There are both renewal of revenues with existing customers and some new customers in the funnel, so absolutely.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. I'm just trying to think about what happens in the next couple of quarters if you don't hit that breakeven. My math suggests that you'd pretty well burn through all your available cash. What happens then? Are there other opportunities for you to raise capital?

Peter Allen

We will judge the circumstances as they come.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. And just last, I mean, I'm really trying to get my head around this target model. I know you're doing your best to reach breakeven on the cash flow, but if your gross margin guidance only gets you out to 20% and your operating at $50 million of OpEx a quarter, you need to hit $75 million in revenue just to breakeven on the EBIT line. Is my math accurate? I mean, are you expecting that you're going to get up to $75 million quarter?

Peter Allen

No. I don't think the -- through the culmination of, as I said, the forward cost-improvement activities that have been completed, but not yet fully flown through, together with the things that we still -- integration task still have to done [ph]. We think the breakeven point will be lower than that. But as I said, we'll course correct to see as we go.

Kris Thompson - National Bank Financial, Inc., Research Division

Okay. So the -- in 2 quarters, you expect to get back to the Q3 gross margin, which is around 19%, but it sounds like you might have some wiggle room to get a higher gross margin than that.

Peter Allen

As I say, we'll judge the circumstances as it occurs, depending on the mix of the business.

Operator

And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

Russell James Frederick

Listen, everybody. Thank you very much for attending the call this morning, and we hope you have a great day. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

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DragonWave (DRWI): Q1 EPS of -$0.71. Revenue of $28.3M misses by $3.57M. Shares -8.7% AH.