DragonWave's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

Oct.10.13 | About: DragonWave Inc. (DRWI)

DragonWave (NASDAQ:DRWI)

F2Q 2014 Earnings Call

October 10, 2013 8:30 am ET

Executives

Russell James Frederick - Chief Financial Officer, Vice President of Finance, Secretary, Director and Member of Disclosure Committee

Peter Allen - Chief Executive Officer, President, Director and Member of Disclosure Committee

Analysts

Scott Penner - TD Securities Equity Research

Todd Coupland - CIBC World Markets Inc., Research Division

Robert Young - Canaccord Genuity, Research Division

Michael Murphy

Maher Yaghi - Desjardins Securities Inc., Research Division

William Morrison

Paul K. McWilliams - Next Inning Technology Research

Steven Li - Raymond James Ltd., Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the DragonWave Second Quarter Fiscal Year 2014 Results Conference Call. [Operator Instructions] I will now turn the call over to your host, Russell Frederick, Chief Financial Officer. Please go ahead.

Russell James Frederick

Thank you, Stephane. Good morning, everybody. I would like to welcome you to our Second Quarter Fiscal Year 2014 Financial Results Conference Call. With me today is DragonWave's Chief Executive Officer, Peter Allen. As a reminder, today's call is being webcast live on the DragonWave Investor Relations 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 have had an opportunity to read the press release we issued last night, which provided detailed financial information on DragonWave's second quarter fiscal year 2014 results.

On Slide 2, please. Before we begin, I would like to remind everyone that today's call contains forward-looking statements or information. 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 17, 2013, 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 and 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 then Peter will provide the 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 a.m. this morning.

On Slide 4. As I said, I will discuss the second quarter fiscal year 2014 financial results followed by some comments on the financing that closed and was announced in a press release on September 23, 2013. Before getting into the details, I will 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 second quarter of fiscal year 2014 was $25.5 million, compared to $24.5 million in the first quarter of fiscal year 2014 and $44.2 million in the second quarter of fiscal year 2013.

In the second quarter, DragonWave had 2 customers who generated more than 10% of total revenue. Revenue from the Nokia Solutions and Networks channel was $15.5 million, or 61% of revenue in the quarter, and the other customer was 10% of total revenue.

On Slide 5, please. Gross margins in the second quarter of fiscal year 2014 was 11%, compared to 11% in the first quarter of fiscal year 2014 and 15% in the second quarter of fiscal year 2013. While gross margin is consistent with last quarter, we are working hard to improve margins as we move forward.

Total expenses in the second quarter of fiscal year 2014 were $12.4 million compared to $13.4 million in the first quarter of fiscal year 2014 and $25 million in the second quarter of fiscal year 2013. The major reasons for the decrease in expenses versus the prior year was the result of the work done to extract the integration benefits of the NSN transaction and the elimination of the accounting services agreement earlier this year.

In the second quarter, the loss before amortization of intangible assets and other items was $9.6 million, this compared to a loss of $10.6 million in the first quarter of fiscal year 2014 and $18.3 million in the second quarter of fiscal year 2013.

Net loss applicable to shareholders was $10.5 million in the second quarter, compared to a net loss of $6.6 million in the first quarter of fiscal year 2014 and $1.1 million in the second quarter of fiscal year 2013.

The first quarter of fiscal year 2014 includes a onetime gain of $5.3 million, and the second quarter of fiscal year 2013 results include a onetime gain on the purchase of the NSN microwave business of $19.4 million. I described the components of these gains in past calls, so I will not be redundant here. But you will recall that the first quarter of 2014 gain we generated when we announced the renewed framework with NSN this past April and the second quarter 2013 gain was recognized on the acquisition of the NSN microwave business in June 2012.

If you move to Slide 6, which highlights some of the key balance sheet metrics. Days sales outstanding for the second quarter of fiscal year 2014 was 60 days based on ending balance. This compares to 61 days in the first quarter of fiscal 2014 and 46 days in the second quarter of fiscal year 2013.

Inventory at the end of the second quarter stood at $32.9 million, compared to $35.3 million at the end of the first quarter of fiscal year 2014. Inventory turns in the second quarter were 2, compared to 1.9 turns in the first quarter of fiscal year 2014.

The company ended the second quarter with $9.8 million of cash, cash equivalents and restricted cash, compared to $23.4 million at the end of the first quarter of fiscal year 2014. Our cash position decreased by $13.5 million in the second quarter. The uses of cash were a cash adjusted loss of $8.3 million, an increase in working capital of $4.6 million; the purchase of capital assets in software of $0.3 million; and $0.3 million from payments of capital leases.

Subsequent to the quarter end, we strengthened our cash position by approximately $23 million of net proceeds from the financing we closed on September 23, 2013. With the opportunity set in front of us, we felt very strongly that bolstering the balance sheet at this time was important to the large customers in our pipeline who have expansion plans and who need to have strong confidence in the resilience of their suppliers.

On Slide 7 -- this concludes my remarks, and I will now turn it over to Peter Allen. Peter?

Peter Allen

Thank you, Russell. Good morning, everyone. Thank you for joining us on our call. I want to begin by picking up where Russell left off by saying, the financing we completed in September was an important element to the foundation we required to put us in the best possible position to capitalize on the opportunities set in front of us.

While we continue to wrestle with timing variability with opportunities and deployments, which leads us not to be able to provide guidance, I am hopeful we are in position to be able to post modest growth in our third quarter as we continue to improve from our trough quarter in Q1 of this year. The pipeline remains strong, and we have not suffered any significant pipeline losses, as compared to when I spoke to you last quarter.

In India, we are seeing a significant increase in activity. We have booked multimillion-dollar orders with one customer this quarter. We have a trial commencing soon with another customer, ongoing discussions with a third and I'm very pleased that we have been shortlisted in a very large greenfield LTE opportunity.

To provide some context, India is moving from a voice-centric 2G environment towards 4G, and the base-stations spectrum is in place to support this. Operators have to build or extend their networks to be able to support the increased data-centric traffic, which we know from other markets is always significant when operators make this migration. Backhaul spectrum is relatively expensive in India, as it is priced on a service-revenue-sharing basis for 28 megahertz backhaul channel. It follows, because of this, Indian carriers -- because of this cost, Indian carriers are interested in getting the maximum spectrum efficiency or, to say another way, the most capacity through a single 28-megahertz channel. Utilizing 2048 QAM and our industry-leading bandwidth accelerator, DragonWave's Horizon Compact+ business product delivers the best spectrum efficiency for this market by a clear margin. This is generating significant interest in our products in the Indian market.

Outside India, we have received our first purchase order from a North American carrier for a new project within their overall expansion activities. As I indicated last quarter, there are plans to invest $16 billion in Sprint's network over the next 2 years. The industry, [indiscernible] says to me that this very strong investment in mobile broadband behind substantial spectrum assets will have all the market implications, and this vibrant environment will, I believe, trigger a strong CapEx cycle, some of which will be for microwave equipment, the requirements of which are aligned very strongly with DragonWave's product portfolio and development focus. I am hopeful that we will be able to share more news with you on this during the upcoming months.

In other markets, we expect Middle East and Africa to be strong for us this quarter. Last quarter, I spoke about our leadership focus in the important area of wireless backhaul for outdoor small cell networks. During this quarter, we have seen much activity in this area in the form of customer presentations, trials and now the launch of 4 more competitions. This high-growth area of the market reflects that the anticipated traffic growth would outpace the spectrum available and will inevitably result in that need to reduce our split cells to maintain and extend a strong mobile-broadband user-customer experience.

As we have seen before, there are many potential tools in the service provider toolkit. But as before, we expect the operators will want high-capacity, spectrum-assured, low-latency microwave as the workhorse for these networks as operators look to cost-effectively increase density in their networks. Our pilot deployment of small cell wireless backhaul with a major Asian service provider, whose small cell base station deployment is already underway, has commenced. Again, I hope to be able to share more news on this in the upcoming months.

In the small cell environment, we believe wireless backhaul will play an important role in enabling this market, as fiber will be far less likely to be present at the small cell sites necessary to increase density.

NSN have undergone some changes of their own. Nokia's acquisition of Siemens share of the joint venture has meant that NSN has migrated from Nokia Siemens Networks to Nokia Solutions and Networks. No changes relating to DragonWave have occurred as a result of this change, and we continue to focus on opportunities for revenue growth by maximizing the effectiveness of our channel partnership with NSN. Our direct relationships, particularly in the United States and India, are also being extended, both in terms of numbers of customers and verticals.

I continue to be pleased with our strong focus on integration restructuring and cost-control activities, and these activities have now resulted in a 50% reduction in operating expenses compared to Q2 of last year. Our journey to reach the cash flow breakeven point from operations through the combination of cost-base realignment and a strong focus on funnel development continues, as described previously. Our recent financing puts us in a position to execute on these plans.

That concludes my prepared remarks, and I would like to turn the call over to the operator to initiate the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Scott Penner with TD Securities.

Scott Penner - TD Securities Equity Research

First of all, Peter, I just wanted to get your comments on just the overall gross margin. You'd talked about last quarter changes to the supply chain having an impact in Q3, just curious as to what sort of order of magnitude that could be. And then, longer-term, guys, just sort of what sort of normal level of gross margin should we expect out of the business?

Peter Allen

Thank you, Scott, and good morning. I think we're on a journey. I think you'll see progress in Q3. And I'll think you'll see a much stronger performance in our fourth quarter as the changes that we are effecting work through the inventory pipeline that we have of parts, and we start to realize those costs moving to the P&L account. I think that the way you should think about our margin position going forward is, I think, on the direct business, you could expect, I think, us to see the normal industry margins that you would see from comparable companies in this space. When we work through our channel partner, or partners, we are getting the benefit of a much wider geographical base. We're getting the ability to be included in broader solutions being presented to the customer. So in that instance, you will see, I think, that we will be sharing that market margin with the channel partner. And I think for modeling purposes, I'd have you think about -- that we would share that margin on a 50-50 basis. What that does to our business model, of course, is it gives us different leverage because we will be able to participate in opportunities and breadth of opportunities globally that we would not be able to do with the same OpEx base that we have in place in the company. So you'll see lower margins, but much lower SG&A from us than you would with a comparable company that is only going to the market direct.

Scott Penner - TD Securities Equity Research

And you seem to be -- I mean, the way I was reading it, but seemed to be much more positive on the Indian market in the near term. Just -- I mean, is this -- would you think this is the -- if you were to zero in to the single largest opportunity, is the Indian market the one that you're really looking for over the next couple of quarters?

Peter Allen

I think the Indian market is exciting because of the transition. Anytime there's a market that has made considerable investments in base station spectrum, billions of dollars, and is making a migration from 2G networks they've been supporting -- 2G voice-centric traffic to higher proportion of data-centric traffic using the 4G spectrum that they've invested in, what we've seen around the world is that there is significant growth on the network. And that growth has to be provided for in the network infrastructure, and that triggers the CapEx cycle. India is going through that cycle. There are many countries -- developing countries that are modernizing their networks from a pretty low base. But we can't forget that one of the strongest CapEx cycles, I think, will be in the United States. I mean, the announcement that I talked about last quarter where SoftBank are investing $16 billion in the Sprint network over the next couple years and then on an ongoing basis, $6 billion is clearly a signal, in my mind, that they intend to strengthen the coverage and speed of their network to the highest possible level in this market. And I think that, that will be a challenge for the other key operators in this market, and that will trigger a CapEx cycle. So I think the -- North America is going to be very strong. I think that India is going to be very strong. And any other market making that type of investment and transition is going to have discontinuity in the network where they're going to start to look for the higher-capacity packet-based products that DragonWave specializes in.

Scott Penner - TD Securities Equity Research

Great. Russell, just 2 quick ones for you, if I may. The $8.7 million "due to NSN," the MD&A makes mention of that being a fiscal 2014 event still. Is that -- has any of that been paid out, and is it still expected to be this year?

Russell James Frederick

So -- No, thank you, Scott. No, none has been paid out. And I think there will be some this year, but I would expect it will probably -- some of it will slip into next year, Scott. Very slow.

Scott Penner - TD Securities Equity Research

And the -- you've been good at sort of providing us some sort of benchmark for the expected cash burn of the upcoming quarter. Do you have that number for Q3?

Russell James Frederick

Yes. For Q3, I would think of a range somewhere between 10 and 12.

Operator

Our next question comes from Todd Coupland with CIBC.

Todd Coupland - CIBC World Markets Inc., Research Division

I just wanted to -- a couple of housekeeping items. What is the basic and fully diluted share count post the financing?

Russell James Frederick

Okay. So we currently have 50 million shares outstanding, Todd. And you will have seen there was approximately 9 million warrants that went along with the financing. And then think about there being another 2 million options outstanding for employees.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. So 61 million fully diluted? Okay.

Russell James Frederick

Roughly.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. So I just wanted to understand the business model a little bit better. I mean, I heard the answer on the gross margin, but I didn't really hear an answer, so if we could just go back to that. I understand you don't want to give a specific number near term, and I get the directional point, but where -- what is the blended goal with NSN and direct gross margin potential for DragonWave?

Peter Allen

I would tell you that in giving that response Todd we're making assumptions around the proportion of the business that flows through channel where we share the margins, we get the leverage and the proportion of business that goes direct, I think that all ends in the -- somewhere in the low to mid to -- mid-20s.

Todd Coupland - CIBC World Markets Inc., Research Division

Low to mid. Okay. So 20% to 25%, something like that?

Peter Allen

Yes.

Todd Coupland - CIBC World Markets Inc., Research Division

And that's kind of what I thought the answer would be. So just to get to breakeven, you need $50 million a quarter in revenue. I mean, is -- and we're 25 now, what's the timeline to actually generate a reasonable return? And I don't know what a target EBIT margin might be, but let's say, you would think 5% or 10% would need to be a goal, so we're a long ways away from that. So I'm just wondering how you think about that path, and what kind of a milestone should we watch for?

Peter Allen

Yes. As I've said before on previous calls, I think our first waypoint on that journey is to get to cash flow breakeven from operations. And I've indicated last quarter that I thought that, that was possible after 2 more quarters. And I do believe that, that is in the vicinity of a possibility, and we have the power to do that.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. And when you look at your sales funnel, when would you think you'd have to book those orders in order to be able to continue to say 2 quarters cash flow breakeven?

Peter Allen

Well, the book-ship timing in this business is quite short. So it would be during the quarter in question.

Todd Coupland - CIBC World Markets Inc., Research Division

I see. Okay. So you're still confident there's enough in India and there's enough with this new carrier in North America to get you to spike up, I guess, by the first half of next year?

Peter Allen

Yes. And I think -- so I've emphasized those 2 growth high-growth areas, but they're just 2 areas of the pipeline in many regions around the world. If you look at where we do business now, just using last quarter as an example, we do 15% of our business in Asia. Another 10% of our business last quarter was in India. So 25% in that part of the world, 25% in North America, 23% in Europe, and we had about -- the balance was in Africa and the Middle East. And so, we are very geographically diverse now. And I would tell you that the pipeline is strength -- is strong in all of the regions that we do business in.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. And will we be able to track those major projects? Or are we just going to see it show up in your quarterly results?

Peter Allen

Well, as the projects come through to fruition, I'm hoping we'll be able to talk about them more clearly than just as a historical commentary in the results. But that's getting a little ahead of ourselves, and we'll have to wait and see.

Todd Coupland - CIBC World Markets Inc., Research Division

One last question, if I could. So in your pipeline in these targeted projects, the ones that will get you to this breakeven in a couple of quarters, have the decisions already been made to include microwave as a backhaul link? Or do you still have to cross over the debate of fiber versus wireless?

Peter Allen

I think in all networks, customers will -- in pretty much most networks, customers will use a combination of fiber and microwave, and that kind of percentage can flex a little during the implementation cycle. But in line with the spirit of your question, no, I believe that the proportion of microwave included in the networks that I'm talking about is confirmed.

Todd Coupland - CIBC World Markets Inc., Research Division

Has been decided then?

Peter Allen

Yes.

Operator

Our next question comes from Robert Young with Canaccord Genuity.

Robert Young - Canaccord Genuity, Research Division

Last quarter, you were discussing 3 new deployments with some existing customers that you'd expected to come through in this quarter, and I was wondering if you could talk about those deployments. Have they started on plan? Were they delayed? Do we see them in the results this quarter?

Peter Allen

Two of them occurred, Robert, as expected. One has experienced some implementation delays, but it's still in our view and pathway [ph].

Robert Young - Canaccord Genuity, Research Division

Okay. So is this the case for some revenue that you'd expected in Q2 is shifting into Q3, but not lost?

Peter Allen

Right.

Robert Young - Canaccord Genuity, Research Division

Okay. So the overall opportunity from those 3 deployments is still basically the same.

Peter Allen

And as I indicated in my prepared remarks, I think the pipeline -- we didn't suffer any significant pipeline losses.

Robert Young - Canaccord Genuity, Research Division

Right. You did say that. Okay. I might have missed a part of a comment earlier on gross margin. I was wondering, I think you'd said that you expected steady growth through the year, but a bit of a decline this quarter. What's happened to those gross margins relative to where you thought they would be last quarter? Is that the NSN channel contribution? Or is there some other factor in play?

Peter Allen

Yes. I would describe it more in the lines of market mix than channel ratio, if that's your question.

Robert Young - Canaccord Genuity, Research Division

Okay. So market mix being regional as opposed to the NSN -- sharing the margins with NSN?

Peter Allen

Regional, yes.

Robert Young - Canaccord Genuity, Research Division

Okay. Is that India? Lower margins in India?

Peter Allen

Partly, but not exclusively India.

Robert Young - Canaccord Genuity, Research Division

Okay. And if I could ask just about India. I mean, there's been a lot of focus on the macro issues recently in India and the rupee weakness. You're talking about that demand side, but do you think there's any risk that there's delays based on the environment in India? And I know you have a partnership there, how does that position you relative to your competitors?

Peter Allen

Certainly, the customers are -- in India are keen to have as much of the value propositions that we bring to them, sourced in India and priced in rupees. They are watching the rupee-dollar exchange rate very closely. They don't have that option, I think, on the microwave, on the radio side, but certainly there are antennas, cables, other accessories that are -- and services that are able to be sourced locally in India. And having an organization in India, as we do, gives us the opportunity to meet that need for the customers. I think we are well-placed with that organization in that region, but I would not be complacent for one moment that other competitors and their presence in India remain a very strong competitive element and threat to our position that we're hoping to achieve in that country.

Robert Young - Canaccord Genuity, Research Division

Okay. And last question for me is on the inventory decline quarter-over-quarter. Despite -- I think you're expecting growth on the top line, how can we reconcile those 2 things?

Peter Allen

The inventory didn't go down as much we -- I wanted it to go down.

Robert Young - Canaccord Genuity, Research Division

So that's not a worry, you've got enough inventory to support the revenue growth?

Peter Allen

Yes, we do.

Operator

Our next question comes from Michael Murphy with New World Investor.

Michael Murphy

When you do make the termination fee payments, will we see them in gross margin or in G&A, or as a separate line item?

Russell James Frederick

Yes. We've already accrued the amount, Mike. So it will be a balance sheet item, it won't be going through the P&L...

Peter Allen

It already flowed through the P&L.

Russell James Frederick

Again, yes.

Operator

Our next question comes from Maher Yaghi with Desjardins.

Maher Yaghi - Desjardins Securities Inc., Research Division

I just wanted to ask you for the $10 million to $12 million cash burn in the third quarter that you're expecting, are there any onetime cash payments that are occurring that should not be recurring in future quarters?

Russell James Frederick

No.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay. So -- and that's basically operating cash flow you are talking about?

Russell James Frederick

That's right. That's right.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay. Now I'm trying to figure out the path to cash flow breakeven and to be -- to hit a breakeven point with, let's say, 15% gross margin, your sales have to grow by $66 million in 2, 3 quarters. I mean, do you have that visibility right now into the sales funnel that these orders have been placed and the deliveries are going to take place and -- over the next 2, 3 quarters for $66 million?

Peter Allen

Okay. So let me try and help you here. So earlier, I agreed with a questioner who was suggesting to me that the breakeven point was around $45 million. Part of the reasons that we land on that number is the improved -- improvement in gross margin that we talked about last quarter and we still see will contribute strongly, somewhat, in Q3, but strongly in Q4. And I also described that the book-ship period in this business is relatively short. And so, now, not all the orders are in place to support the journey to the breakeven point which we think is around $45 million, but that we have a very strong pipeline that gives us confidence that we have a path to that journey.

Maher Yaghi - Desjardins Securities Inc., Research Division

And your Indian customers, you mentioned that there was some delay in orders from Q2 that could probably fall into Q3, can you mention the amount maybe, if you can?

Peter Allen

So firstly, just to clarify the point, I did not refer -- I did refer to a deployment that was delayed. I did not indicate that, that was in India.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay. So -- because...

Peter Allen

But nevertheless, the deployment delay would probably have an impact somewhere in the range of between $2 million and $4 million.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay. And I'm just looking at the revenue from India in the quarter, it was $2.4 million up from -- up about $1 million and change on the first quarter. I'm trying to figure out when the actual increase in the revenue will take place from -- you discussed about Indian orders...

Peter Allen

Yes, we've already booked orders for Q3 delivery that's above that number.

Maher Yaghi - Desjardins Securities Inc., Research Division

So it's going to ramp up right in Q3 in India?

Peter Allen

We're going to see -- as I said in my opening remarks, I think we're in position to post some modest growth in Q3, and that would also be true in India.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay, okay. And just one final order -- final question on your NSN microwave transport business. Have we reached a trough here in terms of the revenue run rate from that part of the business, or there's still some ongoing restructuring taking place in the business?

Peter Allen

From a channel standpoint, yes, I think that as part of the point that I made that I thought our Q1 quarter was our trough, I think that's equally true of the revenue through the NSN channel.

Operator

Our next question comes from William Morrison with Oppenheimer.

William Morrison

On the North American carrier that started giving you orders, what percentage of the microwave business do you think you have? And has that changed in the interim with all the activity around M&A?

Peter Allen

I think there are going to be several projects -- many, many projects, I think, that make up the whole picture within any one carrier, and this is but one project. So this is obviously just a microwave project and relates to the opportunity to get some improved coverage through better use of microwave. So I don't think from this project that you can discern a proportion of the network that will be microwave and the proportion that will be fiber. But what I think is important that it is a new project as part of this carrier's expansion activities and we're delighted to be involved with that.

William Morrison

But is there any visibility...

Peter Allen

In the North American environment, there is a desire, where possible, to take advantage of fiber. But the needs of getting coverage and a uniform customer experience across the entire service area means inevitably that there is going to be a proportion that's required of microwave. And today, I will probably say, in North America, that's around 25% of the network. As we move to small cell, the small cell locations will be less convenient. It is expected for fiber and a very strong microwave component will be needed to -- or wireless backhaul component will be needed to cope with that increase in coverage density. And so, we think that there will be an additional overlay market for wireless backhaul with small cell deployments, probably with a higher overall percentage than you see at the macro cell level from microwave. But that's got to play out yet, but a healthy growth environment is what I would suggest.

William Morrison

And -- that's good. And driving further CapEx cycle in North America, do you see any activity on the RFP front there? Is it just...

Peter Allen

Yes.

William Morrison

Yes? All right. And then the deal that was delayed in the next quarter or so, is that strictly because of just operational issues? Or is there some concern about your balance sheet that's causing them to taken another...

Peter Allen

It's operational, and it's related to a -- being a deployment than just microwave.

Operator

Our next question comes from Paul McWilliams with Next Inning Tech Research.

Paul K. McWilliams - Next Inning Technology Research

On your cash usage in fiscal Q3, how much of that is an increase in working capital?

Russell James Frederick

I would think about it, kind of, in the same proportion as in Q2, Paul. I want to be careful not to give of full breakdown because that ends up being earnings guidance.

Paul K. McWilliams - Next Inning Technology Research

Okay. Now the cash flow from operations breakeven goal of Q4 fiscal 2014, you did reiterate that -- I want to make just clear that, that's a reiterated forecast?

Russell James Frederick

I'm sorry, paul, could you say that again?

Paul K. McWilliams - Next Inning Technology Research

When you spoke about your goal of hitting cash flow breakeven in fiscal Q4 2014, are you still stating that as your forecast?

Peter Allen

No. I think I said in the vicinity of 2 more quarters, so I think it's more likely Q1 of fiscal '15. You will see considerable progress in Q4.

Paul K. McWilliams - Next Inning Technology Research

Very good. And then that number you discussed, the $45 million, what is the split between channel partner and direct business that you imagine to realize the goal of the split or at that revenue level?

Peter Allen

I would -- the way I would think about it at this stage is it's going to be around 50% for each channel direct and 50% for channel partners, probably with a 5% variability either way.

Paul K. McWilliams - Next Inning Technology Research

Okay. That's pretty close then. And so you're kind of implying that you're envisioning your cash operating costs at around $10 million, maybe $10.5 million?

Russell James Frederick

Yes, I think that's about right, Paul.

Paul K. McWilliams - Next Inning Technology Research

Okay, very good. Now as far as capitalization, do you feel as though you've got adequate capital resources now without selling any more shares to take you through to self-sustaining operations?

Peter Allen

I think that rather depends on some of the opportunities. We have really good support from our commercial lenders and good facilities, and with some of the opportunities that are intimately involved with the working capital challenges. So I think so, but it will depend a little bit on the magnitude of some of the opportunities in front of us.

Paul K. McWilliams - Next Inning Technology Research

I see. So you would more likely go to debt for more cash, which you're kind of saying would be to increase working capital, not lengthen your runway to breakeven?

Peter Allen

Yes.

Paul K. McWilliams - Next Inning Technology Research

Okay. Let me just check my notes real quick here. When you were naming off, real quickly, the geographic business, is Africa and Middle East around 25%?

Peter Allen

In combination, yes.

Operator

Our next question comes from Steven Li with Raymond James.

Steven Li - Raymond James Ltd., Research Division

Hey, Russell, I just wanted to ask, what would you expect to burn next quarter? Should we think maybe half what you did in August?

Russell James Frederick

Well, I said earlier, think about it in the $10 million to $12 million range for our Q3.

Steven Li - Raymond James Ltd., Research Division

For September -- for November?

Russell James Frederick

That's right.

Steven Li - Raymond James Ltd., Research Division

Okay. And then, Peter, can you maybe talk about any new initiatives you have put in place to reengage the NSN channel?

Peter Allen

Well, I've never disengaged the NSN channel, so initiatives that we work together with NSN I don't think can be characterized as reengagement. We do work closely with NSN in all of their regions. They're organized into -- I think 3 clusters is the best way to describe it. North America is one cluster. EMEA, which is, if you think about it as Africa, Middle East, India, China, Asia-Pacific and Japan, is another cluster and is a particularly strong engagement area for us. And then Europe and Latin America is the last. We've been working with the sales leaders across all of those areas. And I would say, we're seeing increased activity in many places, not all, but many, and I'll give you some color. Certainly, we're involved in some large opportunities in Latin America, which is a microwave-rich region. Most recently, we've been involved in responding to some small cell RFPs in North America. Generally, there is good traction around small cell opportunities in Western Europe. And I think that follows, because small cells are going to be needed first to increase density in the markets that are the most mature. In Asia, we have business in Japan, in Indonesia, Malaysia, India, all with the NSN channel. And we've been in particular dialogues, recently, in India about opportunities to help customers with the next stage of modernizations in their network. So lots of activity going on globally with NSN, both in terms of market penetration, product alignment as we get ready for the next solutions that are needed in the market.

Operator

[Operator Instructions] Our next question comes from Kris Thompson with National Bank.

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

Russell, just on the NSN revenue, there is some contradictory information in MD&A. Can you just give us the revenue number this quarter for NSN?

Russell James Frederick

$15.5 million.

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

Okay. And Peter, just on your balance sheet. I mean, a few years ago, I recall, Clearwire would like to see $50 million cash to be comfortable to -- going through the significant deployment with any vendor. And right now, you're at about $28 million. You owe NSN $8 million or $9 million. You're going to burn $10 million to $12 million next quarter, and you've got Comerica $15 million facility coming due in May. I'm just kind of scratching my head here on your competitiveness given your weak balance sheet. Can you just maybe talk about how you get Sprint and larger carriers around that risk, please?

Peter Allen

Yes. I'm not quite sure the threshold, Kris, is $50 million. It was one of the reasons that we moved to strengthen the balance sheet. At this stage, we think we have an adequate position to serve the customers that you referred to and have had -- have no reason to doubt that.

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

Okay. And my last question, just on the small cell deployments. How should we monitor your progress there? If we -- is the primary NSN deployments that you're going to be working with, or are you going to be working with the other large vendors as well?

Peter Allen

Well, firstly, Kris, I'd say I think this is an important period for small cells. Although, I think, most market reports would indicate that the majority of small cells really starts to kick in, in -- starting in about a year's time, I think this is an important period for operators to get a clear understanding of what the different technologies bring and the different providers bring so they can make the best selections for their networks. So this is a really good period. I think from the discussions I've seen so far and from some of the former competitions that I've seen so far, we've certainly seen that a good proportion of operators want to think about their backhaul solutions for small cells alongside the small cell selection. So the RFPs have been bundled solution RFPs for the most part, not exclusively, but certainly, a high proportion of what I've seen so far takes that approach. And as you know, we are working with a number of parties in meeting that customer requirement, and NSN is one of them. However, we do -- have seen operators who have indicated to us that they will run their thoughts in competitions around small cells on a discrete basis, addressing only backhaul. And sometimes, I think that might flow through NSN, but sometimes, it will come to us directly. There is not yet, I would say, a clear pattern, but the strongest pattern -- the strongest element is, I think, that more people have bundled them than not.

Operator

We have a follow-up question or comment from Paul McWilliams with Next Inning Tech Research.

Paul K. McWilliams - Next Inning Technology Research

You'd mentioned earlier North America at the macro cell level is about 25% microwave. Is that all carriers? Or we are just talking Sprint in that case?

Peter Allen

I was using a bit of an aggregate between multiple carriers, but I think it's not a bad number. Probably a shade higher for that particular carrier. Well, Paul, just let me just say this. I mean -- and if you consider new Sprint, i.e., the combination of Sprint and Clearwire, it's clearly in that area.

Paul K. McWilliams - Next Inning Technology Research

Oh, yes. Yes. I'm thinking Sprint as we know Sprint today, but that comment of 25% was a general statement for the major U.S. carriers in total aggregate.

Peter Allen

That would be my view, yes.

Operator

And I'm showing no further questions at this time. I will turn the call back over to Peter Allen for closing remarks.

Peter Allen

Well, thank you, everybody, for joining us on our call this morning and for your questions. And we look forward to talking to you during the quarter. Thank you very much.

Russell James Frederick

Thanks, everybody. Thanks, Stephanie. Bye-bye.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.

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