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Executives

Russell James Frederick - Chief Finance 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

Billy Kim - Jefferies LLC, Research Division

Doug Taylor - TD Securities Equity Research

Robert Young - Canaccord Genuity, Research Division

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

William Morrison

Maher Yaghi - Desjardins Securities Inc., Research Division

Paul K. McWilliams - Next Inning Technology Research

DragonWave (DRWI) Q3 2014 Earnings Call January 14, 2014 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the DragonWave Third Quarter Fiscal Year 2014 Results Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Russell Frederick. Sir, you may begin.

Russell James Frederick

Thank you, Shannon, and good morning. I would like to welcome you to our Third 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've had an opportunity to read the press release we issued last night, which provided detailed financial information on DragonWave's third 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, including the statements regarding our growth opportunities and the potential benefits of and demand for our products, as well as our expectations regarding margin improvement. Actual results could differ materially from the conclusions, forecasts or projections in the forward-looking information. These statements are subject to certain assumptions, risks and uncertainties, including our view of the relative position of DragonWave products compared to competitive offerings in the industry and in relation to expected margin improvement, the timing of revenues and expenses. You are cautioned not to place undue reliance on such statements. DragonWave's actual results, performance, achievements and developments may differ materially from the results, performance, achievements or developments expressed or implied by such statements. Risk factors that may cause the actual results, performance, achievements or developments of DragonWave to differ materially from the results by such statements can be found in the public documents filed by DragonWave with U.S. and Canadian securities regulatory authorities. Forward-looking statements are provided to assist external stakeholders in understanding DragonWave expectations as of the date of this call and may not be appropriate for other purposes.

Material risks and uncertainties relating to our business are described under the heading Risks and Uncertainties in the MD&A dated January 13, 2014, and in the company's Annual Information Form dated May 17, 2013 and other public documents filed by DragonWave with the Canadian and United States securities regulatory authorities, which are available at www.sedar.com and www.sec.gov, respectively.

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

Slide 4. Before getting into the details, I would 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 third quarter of fiscal year 2014 was $22.2 million, compared to $25.5 million in the second quarter of fiscal year 2014 and $38.5 million in the third quarter of fiscal year 2013. In the third quarter, DragonWave had one customer who generated more than 10% of total revenue. Revenue from Nokia Solutions and Networks was $11.3 million or 51% of revenue in the quarter.

On Slide 5, please. Gross margin in the third quarter of fiscal year 2014 was 11%, compared to 11% in the second quarter and 19% in the third quarter of fiscal year 2013. While gross margin is consistent with last quarter, we now expect solid improvement in our gross margin starting in Q4. Total expenses in the third quarter of fiscal year 2014 were $12.6 million, compared to $12.4 million in the second quarter of fiscal year 2014 and $19.9 million in the third quarter of fiscal year 2013. The major reasons for the decrease in expenses versus the prior year was as a result of the work done to extract the integration benefits of the NSN transaction and the elimination of the Italian services agreement earlier this year.

In the third quarter, the loss before amortization of intangible assets and other items was $10.2 million. This compares to a loss of $9.6 million in the second quarter of fiscal year 2014 and $12.8 million in the third quarter of fiscal year 2013.

You will see 2 large gains on the P&L that deserve some explanation. You will see a gain on change of estimate of $2.9 million, which almost all relates to the elimination of a provision we had for a potential supply chain liability. You'll also see a fair value adjustment gain of $3.6 million related to the warrant liability we booked when we closed our financing transaction on September 23, 2013. This gain is driven by the reduction in the liability associated with the warrants because of stock price movement and the passage of time.

As of today, the company has 57.3 million shares outstanding. All the details are provided in the public documents we filed today.

The net loss applicable to shareholders was $5.5 million in the third quarter, compared to a net loss of $10.5 million in the second quarter of fiscal year 2014 and $13.9 million in the third quarter of fiscal year 2013.

Please move to Slide 6, which highlights some of the key balance sheet metrics. Days sales outstanding for the third quarter of fiscal year '14 was 57 days based on ending balance. This compares to 60 days in the second quarter of fiscal 2014 and 71 days for the third quarter of fiscal year 2013. Inventory at the end of the second quarter stood at $31.6 million compared to $32.9 million at the end of the second quarter of fiscal year 2014. Inventory turns in the third quarter were 1.8 turns compared to 2 turns in the second quarter of fiscal year 2014.

The company ended the second quarter -- or the third quarter with $23.5 million of cash, cash equivalents and restricted cash compared to $9.8 million at the end of the second quarter of fiscal year 2014. Our cash position increased by $13.7 million in the third quarter. We completed a financing on September 23, 2013, where we raised a net amount of $22.4 million. We used $8.7 million of cash during the quarter and the components of this were cash adjusted loss of $9.5 million, a decrease in capital of $1.5 million [ph] , the purchase of capital assets and software of $0.6 million and $0.1 million from payments of capital leases and other items.

Subsequent to the quarter end, we announced we have increased and extended our credit facilities that are in place with Comerica Bank and Export Development Canada. The facilities now run through June 2016, and the maximum credit available under the facility has been increased from $20 million to $40 million. The credit is targeted at funding working capital and is geared primarily to our accounts receivable. This was important to put in place to support the pipeline opportunities we have in front of us.

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

Peter Allen

Thank you, Russell. Good morning, everybody, and thank you for joining us on our call. We've experienced a very frustrating quarter on one hand, and on the other hand, we are strongly encouraged by several operating dynamics which bode well for the future. On our last call, I said we continue to wrestle with timing variability with opportunities and deployments, which lead us not to be able to provide guidance. We experienced a number of dynamics where there were operator-initiated delays in the deployments in each of Africa, Asia and the Middle East. These delays, which prevented the modest growth that we were hoping for, were driven by the desire of these carriers to maximize the impact of their network deployments, and in each case, the forward CapEx outlook remains strong.

As I've said, my sense of frustration is heightened because these delays impacted our results at a time when we have many positive dynamics going on in our business. Across the world, we are seeing, as I'm sure you are also, major initiatives from first-mover carriers to invest strongly in their networks. As indicated in yesterday's press release, we just signed a new supply agreement with a major U.S.-based carrier. Activities associated with the first project [ph] with this carrier are underway. Deployments from the projects anticipated under this agreement are expected to commence during the first half of 2014. We are, of course, tremendously excited to be in a position to support this operator with these projects, which form a part of this operator's increased network investment in the United States.

In India, we are seeing a significant increase in activity. As we indicated last quarter, we booked a multimillion dollar order with one customer, and we expect a similar level from this customer this quarter. Like in other parts of the market, we see wide activity in which appears to be the leading edge of a CapEx cycle as leading Indian carriers upgrade their networks for 4G.

In Europe, we announced an agreement with defense and security company Saab to work collaboratively on the expansion and enhancement of a national security communications network in Sweden, Norway, Finland, Denmark and Iceland. As a first step, the 2 companies will deploy up to 1,500 DragonWave Harmony Radio links and a supportive number of Hub 800 adaptable, multiservice nodal switches to build an extensive mission-critical network covering all of Sweden.

Also in Europe and wider, Vodafone announced Project Spring, a GBP 6 billion, 3-year project which boosts our network investment spending by 30%, and includes, as part of this investment: 77,000 new 4G sites, 70,000 new small cell sites and 87,000 new high-capacity backhaul sites. As in the United States, commentators believe that major investments such as this will cause Vodafone's competitors to have to respond if the customer experience on their networks is to keep pace.

In the Middle East, we announced that DragonWave is the sole microwave backhaul supplier for MADA Communications Kuwait in its multimillion dollar network deployment. Enabling multi-gigabit speeds with minimal latency and ease of capacity upgrades, DragonWave's Horizon Compact and Quantum products allows MADA's network to expand effortlessly to the increased demand for bandwidth from their customer base.

In Asia-Pacific, the network deployment that was delayed from our Q3 is now moving forward, and orders for this deployment have started flowing in, in late December and continued into January. China has become active in increasing its pace of deployments. It is reported that China Mobile has said that they will spend $13.4 billion in 2014 to roll out what is touted to be the world's largest 4G network. Whilst fiber is expected to be the dominant backhaul technology in Chinese networks, the residual microwave demand is very interesting and DragonWave secured initial orders from a major Chinese operator during Q3, which is a small start on what we hope could become a more significant opportunity for us.

With all of these exciting opportunities going on, we were thrilled to get the support of our partners, Export Development Canada and Comerica Bank, to increase and extend our credit facilities such that we are in the position to handle the working capital needs of the projects coming forward towards us.

I've spoken before about the leadership focus in the important area of wireless backhaul for outdoor small cell networks. During the quarter, we announced commercial availability of our 60 gigahertz technology in the Horizon Compact+ and Avenue Link product lines. DragonWave's 60 gigahertz products have already been deployed in successful small cell mobile operator trials. These products are well suited for metro deployment in small cell architectures due to their small form factor and high-capacity, low-delay transport capabilities. Because the 60 gigahertz spectrum is widely available and generally offered at a lower cost than other bands, the newly incorporated technology offers network operators more product options to cost-effectively plan and deploy emerging small cell and LTE backhaul deployments around the world. First deployments and small cell trials have verified the operational feasibility of 512 QAM at 60 gigahertz, which reaches over 1 kilometer. The integrated 5-inch antenna makes the 60 gigahertz Avenue Link product a logical choice for urban developments. The initial deployments of 60 gigahertz have also shown latency performance consistent with being able to support LTE backhaul.

Diverse deployments in our areas will require a portfolio toolkit and as 60 gigahertz products join our already wide portfolio range ready to help operators cost-effectively increase density in their network. Our pilot deployment of small cell wireless backhaul with a leading Asian service provider, who is already deploying small cell base stations, has gone very well. As I've said before, we believe wireless backhaul will play an important role in the small cell environment in enabling this market as fiber will be far less likely to be present at the small cell sites necessary to increase density in most operator networks.

I believe our results continue to show our strong focus on cost control, and this will continue as will our focus on margin improvement. And I expect gains here in Q4. We remain committed to bringing the business to the cash flow breakeven point from operations as soon as we can. As I said at the outset, Q3 was a frustrating quarter, but we are sustained in our drive by the many positive dynamics, some of which I have discussed here.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Peter Misek of Jefferies.

Billy Kim - Jefferies LLC, Research Division

This is Billy Kim filling in for Peter Misek. Just a question on the project with the major U.S. carrier. In terms of timing, how back half-loaded will the new project be? I know it's commencing in the -- early in the year, but in terms of kind of lumpiness of revenue, what can we expect?

Peter Allen

It is -- I'm very mindful that we've just had a very frustrating quarter where the variability in deployments have impacted us. I can only answer you that at this stage, I think, we will start to see a revenue run rate probably in the second quarter, but then I would expect it to be fairly evenly dispersed from that point onwards.

Billy Kim - Jefferies LLC, Research Division

Got it. And then just one follow-up. In terms of the opportunity DragonWave has, I guess, are there any other competitors that are involved here or is it for the backhaul opportunities of mainly just DragonWave?

Peter Allen

I'm not quite sure I completely follow your question, but let me give you the situation as I see it. We've concluded an agreement and this agreement will be used for some certain projects. And in those projects, we think that those matters have been concluded, and we will be executing those projects. I am sure within that carrier's environment that there will be other projects. And for those other projects, I'm sure there will continue to be competition amongst microwave suppliers. Our posture in those position -- in those competitions, I think, is very good, because our focus on bringing the highest capacity microwave forward -- packet microwave forward, I think bodes very well at this time in the industry. When people are expanding their networks so strongly, they obviously want to consider the maximum capacity that they can for their backhaul, and our products deliver -- our leadership in the past has been grounded on that and we continue to lead in that area. So I'm comfortable with that as we move into those competitions, in other projects, our position is strong.

Operator

[Operator Instructions] Our next question is from Doug Taylor of TD Securities.

Doug Taylor - TD Securities Equity Research

Doug Taylor here for Scott Penner. I just wanted to clarify one point here. The $2 million to $4 million in contracts delayed, I believe in AsiaPac from last quarter, has that now been booked in Q3?

Peter Allen

The project was reshaped essentially. The carrier in question wanted to reexamine how he was going to use his CapEx, and he revectored some of his CapEx to markets that were doing very well with him. And he wanted to invest more strongly in those markets and defer extending coverage into other markets where, shall we say, economic activity is less strong. And so that caused a replanning exercise within the carrier. What has -- is coming through in orders right now is the stronger investment in the current markets. The piece of it that deals with extending coverage into some new markets with less economic activity will probably not come into this quarter, but the majority of the investment will come into Q4.

Doug Taylor - TD Securities Equity Research

Okay. You mentioned some other delays, operator-initiated delays in this quarter. Are you able to -- is there anything you're able to quantify there, as to what impact that had on the quarter?

Peter Allen

Yes. I mean, we would have posted modest growth that we were hoping for had that not happened.

Doug Taylor - TD Securities Equity Research

Okay. Moving on to gross margin. What is it exactly that gives you confidence that the gross margins are going to increase quarter-over-quarter? Is it just projected better fixed-cost coverage or something different in the pricing?

Peter Allen

There's a whole range of activities that we've been working on from piece-par [ph] pricing, the way our inventories are -- have been consumed from earlier inventories to later cheaper inventories and the improvements we've made in our supply chain logistics. We see a lot of those -- that hard work that's been going on now for some time starting to crystallize with benefits in Q4 and beyond.

Doug Taylor - TD Securities Equity Research

Okay. So I think last quarter you talked about longer-term 20% to 25% being sort of a gross margin target. Is there any change to that expectation?

Peter Allen

No.

Doug Taylor - TD Securities Equity Research

Okay. Operating expenses, they didn't decline sequentially as they had for the previous 3 or 4 quarters. Is there the opportunity to reduce OpEx further here? How do you think about managing the expense base moving forward?

Peter Allen

I think the expense base looks level now where the big gains, the reductions that we've made in the past are going to be difficult from this base. We continue to be very vigilant about all opportunities, and there will be some. I mean, we are seeing some real estate-based opportunities that we're working on right now that will have some impact. The last quarter was a pretty heavy quarter for certain expenses. Travel, a lot of international trade shows occurred last quarter, so it was a quarter where some of our run rates were disturbed because of activity. But I think, in general, we are close to an expense base that we expect to be in place for the future.

Doug Taylor - TD Securities Equity Research

That's helpful. Just a couple of quick housekeeping questions. Given the balance sheet at quarter end, how much are you actually allowed to borrow against that asset-backed credit facility at this point?

Russell James Frederick

Well, right now we're at $15 million, Doug, and that's kind of the capacity right now. When the receivables grow, then we'll be able to borrow more. Yes.

Doug Taylor - TD Securities Equity Research

Okay. And then just -- could you provide an update on the projected timing of the remaining payments you're going to be making to NSN? And I'll pass the line after that.

Russell James Frederick

Yes, the -- you're talking about the termination fees. I think all I could say there is we would expect to pay them over the course of our fiscal 2015.

Operator

Our next question is from Robert Young of Canaccord Genuity.

Robert Young - Canaccord Genuity, Research Division

In the past few quarters you've given us kind of some milestones for cash burn. I was wondering if you could talk about what you think it might be for Q4.

Russell James Frederick

Yes. So the burn has been coming down. I think that, that will happen again in Q4, Rob.

Robert Young - Canaccord Genuity, Research Division

From Q3?

Russell James Frederick

What we planned is it'll happen again in Q4, yes. And so, I think, using kind of a 5 to 7 burn kind of planning number would be reasonable.

Robert Young - Canaccord Genuity, Research Division

Okay. Great. And then, so the cash flow breakeven milestone, I think last quarter you said Q1, potentially, is that still what you're tracking towards?

Peter Allen

Yes, Rob. Again, I'm very mindful of the fact that we've had a frustrating quarter. We've foreseen the fact that we can be buffeted by changes in operator deployment approaches. It certainly won't be Q4. It could be Q1. Our pipeline is strong and is supportive. I can't say for certainty that it would be Q1, but you would -- I would certainly expect us to make significant progress in Q1.

Robert Young - Canaccord Genuity, Research Division

Okay. So I guess you have to show some pretty considerable progress in Q4 to hit cash flow breakeven in Q1 then. Is that kind of the way to think of it?

Peter Allen

We will have -- we expect to make considerable progress during -- continually during 2014.

Robert Young - Canaccord Genuity, Research Division

Okay. The gross margin is flat quarter-over-quarter despite -- well, the top line came down. I was wondering if you could talk about what -- the mix of factors in there. I know that you'd talked about some structural improvement from the supply chain, but there's also a lower contribution from the NSN channel. I was wondering if you could talk about the mix of those 2 factors, or if there are any other factors in the gross margin.

Peter Allen

I -- my -- most of my response in fact to the previous question was related to my belief that we will see gains in margin in Q4 and beyond. And the factors that went into that, I was not particularly responding to the historical results. In terms of the historical results, I would say, we haven't had the benefit of all of those things yet. And we have a mixed profile. India was reasonably strong, as I indicated in my prepared remarks in Q4, so that was a factor on margins overall. Russell, I don't think I have anything else to add.

Russell James Frederick

No, I think that's -- it was pretty consistent with last quarter, so I wouldn't read too much into that. I think the story on margin is, going forward, we now think we're at the point where a lot of the things that we've worked on in terms of making the supply chain more efficient and getting the right cost profile with our contract manufacturers is going to start to pull through.

Robert Young - Canaccord Genuity, Research Division

Okay. And then last question for me is just on the increased credit facility. I was wondering if you could remind us about what the covenants are and if there are any changes on the covenants on that refinance?

Russell James Frederick

No. The covenants were adjusted to reflect our current position, Rob. But the main one that stayed consistent was to keep a $10 million cash balance. That was the one that I would just reconfirm.

Operator

Our next question is from Kris Thompson of National Bank.

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

Great. Russell, just on the NSN termination fee, is that still $8.7 million? Did I read that it was reduced by $3 million?

Russell James Frederick

No. It's always been in the $9 million range, Kris. I think you might -- it can change a little bit quarter-to-quarter because of foreign exchange.

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

Okay. Got you. And just, Peter, on the U.S. agreement that you've signed. Can you give us an idea of the number of links that are going to be deployed and kind of how we should model that over time?

Peter Allen

I think it's -- I won't go into those level of detail, that's -- some of that's a little sensitive and it's dependent upon the planning and engineering work that is underway. But I also make the point that there are a couple of projects already underway here. And there are other projects that will need to be executed within this carrier's investment activities. And so the answer could well -- that you're seeking could well change over time as projects themselves change and more projects hopefully are added to our activity.

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

Okay. Would you expect this to be a 25% to 50% customer each quarter as a percentage of your revenue?

Peter Allen

I expect it to be certainly a 10% customer, for sure. I'd have to think about how it plays against the other opportunities. But we are excited about the growth that this could represent for our business. But we are excited about growth opportunities elsewhere. And how all of that creates a percentage for each, I'm not quite sure yet.

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

Okay, that's fair. And just on the NSN revenue, it's down to a record low. Can you help us understand what's happening there? And is that going to rebound or is that kind of tapering off?

Peter Allen

I believe that the NSN opportunity is very strong going into 2014. I mean, I think the projects that we -- the deployments that we saw, the variability in Q3, the largest ones there, the 2 largest ones there were NSN projects. And so, that was -- caused the result that you indicated. And as I've said -- the Asia-Pacific one has started to rebound already in Q4. So I am -- have still very strong expectations for the activity level through the NSN channel in 2014, and I think we're seeing that certainly is consistent with the activity in our pipeline.

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

But if we kind of think a year ahead from now, should we expect your direct sales to be larger than your NSN revenue? Have you thought about it that way?

Peter Allen

I don't think about it this way. I just think about how I can make all of the segments of my revenue bigger. But I do think that we have some big direct opportunities, and it is possible that our direct business could be as larger there, and it's in business in 1 year's time. But it's equally the case, there are some big opportunities in the NSN pipeline and they could outperform my direct business.

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

Okay. Maybe just structurally, Peter, when I look at your publicly trading competitors, they're all seeing year-over-year revenue declines for 4 or 5 quarters in a row, not too dissimilar from DragonWave. Can you help us understand, maybe structurally? I mean, is there something that we're missing here? Is it more fiber? Is it the Huaweis and the Asian vendors coming in with price pressures? Is the sector going to come back or are we just in a little bit of a lull here?

Peter Allen

I think we're seeing major announcements around significant CapEx cycles in many parts of the world. I mean, if I just think about the Softbank investment in Sprint, $16 billion over 2 years. I think about the announcement of the GBP 6 billion investment by Vodafone in their Project Spring into their networks. China's gone from a strategy of being a laggard 3G to trying to be a leader in 4G and a significant amount of investment just in one, albeit the largest operator in China. Each of those, I think, will have impacts on the CapEx cycle of their competitors, and I could go on about first small cell deployments here that we're seeing in Asia, in terms of CapEx cycles in the Middle East. I think we're -- I think there has been a bit of a lull and that lull is coming to an end, in my view.

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

Okay. And just last for me, Russell. Help me understand this warrant exercise. It looks like 3 million or so shares were exercised at $2.70. I'm just scratching my head to figure out why anybody would do that?

Russell James Frederick

Yes. So the -- as we've described in the prospectus, Kris, there was a cashless exercise feature in the warrant. And if the stock price went down, there was the ability to exercise for shares. So that's what -- some of that has happened and we've described all that in the public filings.

Operator

Our next question is from William Morrison of Oppenheimer & Co.

William Morrison

Just a couple of questions around small cells. What percentage of the small cell future deployments do you see as being microwave-compliant versus something like 5 gigahertz WiFi? Do you see any major competition from WiFi for backhaul? Or is it mainly up into the microwave frequency?

Peter Allen

Okay. So let me just start -- ground my answer by let's kind of think about the problem that the operator is trying to solve here. The problem is that as mobile broadband usage continues to grow extremely rapidly, they can get into the situation in the markets where they have very high teledensity where it absorbs all of their spectrum from a macro cell site. And so, in order to maintain the customer experience, they need to increase the densification of that use of that spectrum in those highly teledense areas. And that densification can be done in a number of ways. And I think WiFi is one of the tools in the toolkit that carriers will use to do that. But I think the challenge with that will be, it will only provide a certain level of capacity. It will only provide a certain level of carrier-grade capability that will support the customer experience. I mean, we've all been in areas where the -- I was at a trade show in Africa recently where WiFi was available, but essentially by 8:45 in the morning, it proved useless, because it couldn't support the number of users in the building. So there are -- it's useful, but there are limitations. And I think those limitations will mean that it will not preclude the use of other technologies, whether it's products in the -- point-to-point products in the 5. gig -- in the sub-6 gigahertz range, traditional microwave packaged into small form factors, which is what we've done with our custom maintainers and our Horizon Avenue Link and Horizon Compact+ products. Example I talked about in my discussion earlier was that we did it with just a pilot deployment with a major Asian operator. That used a traditional microwave frequency at --packaged into this smaller, lighter form factor. But I also think that 60 gigahertz will play because of the balance between inexpensive spectrum and capacity. And also, 80 gigabits -- 80 gigahertz will have a position in part of the market. 80 brings a lot of capacity. It is -- the spectrum is not always available in every country, so some countries have yet to permit 80 gigahertz. But it also brings some challenges about the stability of the structures that you can mount on to maintain a carrier-grade connection. And so, I think there are -- there's going to be the need for a wide portfolio toolkit. And the challenge for the -- for us and for the operators is knowing which product to bring out of that toolkit to deal with the customer's specific situation in trying to increase the density in their network in a certain market location, country, depending upon the requirements of the municipality, the regulator in that country and so on. We think our portfolio of products, ranging from our sub 6 gigahertz products with our Horizon Lite through our traditional microwave in these very small light form factors and our 60 gigahertz products announced in the quarter, and our emerging e-band product represents the best portfolio toolkit available from any microwave supplier in January of 2014.

William Morrison

So, I mean, what's the feedback from your customers and OEMs as far as like the percentage of the market in small cell that would have microwave or higher frequencies as backhaul?

Peter Allen

I honestly don't think the customers know the answer to that question yet themselves. I think their situation -- they're obviously looking at their opportunities, of where they can place their small cells, whether it's lamp posts, sides of buildings, advertising billboards, top of bus stops. And each of those have different engineering constraints, so I don't think the customers yet know the single answer that you're looking for, because I don't think that there's a single answer. I think there's going to have to be engineering flexibility to meet this challenge. But this challenge is an imperative. They have to densify their networks to maintain a customer experience for this vast increase in mobile broadband subscribers and the activity that those subscribers bring to the network.

William Morrison

Okay. So let me just try to get a bigger picture then. I mean, a small percentage of it would be microwave, or more than half would be microwave?

Peter Allen

Well, I don't know about you, but I don't know how much fiber there is to atop, the top of any bus stop in any country, to behind advertising billboards. So I think this, as I've said in my prepared remarks, I think wireless microwave, getting the wireless backhaul right, is a key enabler to make this market be able to move forward, and I think a lot of operators recognize that. So I -- you can take it from that, that my -- Peter Allen's view of this is that microwave backhaul has to play a very significant part in small cell site backhaul. What that percentage is exactly nobody knows, but it's going to have to be high.

Operator

Our next question is from Maher Yaghi of Desjardins.

Maher Yaghi - Desjardins Securities Inc., Research Division

I wanted to just review a little bit the SoftBank situation. You've been highlighting this opportunity recently, and can you maybe share with us any advancements in negotiations or kind of a granular discussion about what to expect on that front, if there has been orders received and how much have they've been so far?

Peter Allen

Obviously, the SoftBank investment is into -- that was announced indicates that Sprint will make major investments in their network in an ongoing way, with $16 billion being invested in the next couple of years. As you know, Sprint is an existing customer of DragonWave, both in terms of historical Sprint network and the very high share that we had in the build of the Clearwire network, which has now been acquired by Sprint. In terms of negotiations, I hope you'll understand that I'm -- not only am I covered by NDA that would preclude me discussing that, but I would view those matters to be extremely commercially sensitive and would not be prepared to discuss those yet.

Maher Yaghi - Desjardins Securities Inc., Research Division

No, but have you started receiving orders? Have you started shipping products? Have you -- I mean, because in terms of revenue, it's -- I'm looking at the North American revenue line and it's down year-on-year. So I'm kind of wondering if opportunities...

Peter Allen

Sprint is an existing customer and we expect them to be a strong customer going forward.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay. When do you expect that inflection point to happen? At the current time, the Indian market, which had been a potential turning point, is still not showing signs of a turnaround. Where should we be looking forward in terms of the geographic area where you could -- if that's going to be allowing you to turn to cash flow positive in 2 quarters from now?

Peter Allen

Okay. So just incidentally, India was about just under a 20% market for us in the last quarter, and we expect India to be strong for us in Q4. But in terms of inflection in our business, as we discussed in our press release, we have concluded a new agreement with a North American carrier that we believe the deployments of which will start in the first half of 2014, that will bring a part of an inflection. We are still very positive about India. And we believe the CapEx investment that's going on includes, in many operators, includes India. The Vodafone Spring project will have an impact on that operator in India, and the deployment or the plans of Reliance Industries is well known. And we believe that India will play a significant role in our inflection during the first half of 2014. China, it's a very small green shoot at this point, but we have been able to secure our first orders for a major Chinese operator. And given their massive build-out of 4G in 2014, we believe even with a small microwave percentage typically in that country, there will still -- and with strong competition, we still believe that the growth that we can achieve there will have a contribution to play to our inflection as well.

Maher Yaghi - Desjardins Securities Inc., Research Division

Both of these opportunities are still within the NSN relationship, right?

Peter Allen

Some are, but not all. The last one that I was just going to point to was the conclusion of a very successful pilot deployment with the Asian carrier who's looking at small cell backhaul. We believe that will have a part to play during 2014 as well. Some of these are -- that I'm talking about here are direct relationships, some of them are through the NSN channel. The formation that we're in basically tries to respect and acknowledge that some customers have a buying preference to work through, to bundle their equipment and work through a larger systems integrator. And some purchasers like to purchase directly from the end manufacturer. With our relationship with NSN, we're able to respect that and serve the customer in the way they wish to be served. And we think that gives us a stronger overall applicability to the market.

Maher Yaghi - Desjardins Securities Inc., Research Division

Okay. And just one last question. In terms of the North American markets and Western Europe, in terms of wireless deployment, it has been -- they've all been pushing hard on improving the networks and upgrading to LTE, et cetera. The opportunity here is -- it's still like a latent order pattern or what we have seen in terms of revenue from these operators is kind of in line with their spending on their own network. Basically, my question is, is the order for your product delayed in terms of when their CapEx is being implemented or it's at the same time? Because -- when should we expect that kind of revenue growth to come due to LTE deployment in your North American and European operations?

Peter Allen

Right. So it depends upon how they're doing it. So if they're upgrading their -- an existing site and they're changing out a base station, they may have the view that they have a backhaul connection today that will be sufficient in the short term and they can defer the upgrade of the backhaul capacity as they grow traffic on the base station. Some carriers do that at some sites. Sometimes, they want to put the backhaul capacity in first and make sure that it is ready for future capacity enhancements, so they can make the base station... Sometimes, it's about extending coverage and building a completely new site. And so, there is no one formula. I think the problem you're wrestling is similar to the question of -- that was asked previously about, is there really an inflection point here in the CapEx spendings of major carriers? And I think we certainly, and I certainly believe that we've seen enough now strong indications that there is.

Operator

Our next question is from Paul McWilliams of Next Inning Technology Research.

Paul K. McWilliams - Next Inning Technology Research

You mentioned earlier that you expected to be at run rate with a major U.S. carrier, I believe, in your fiscal Q2. Is that correct?

Peter Allen

I think it starts in fiscal Q2. At this stage, I would expect it to just run a certain run rate. But I prefaced my answer then, as I will now, that I am conscious that during the last quarter, we experienced the buffeting associated with a carrier changing their own plans for their own reasons. And I can only tell you that, that's how I -- the answer on this question is how I see it today, but it could well change and we'll try to keep you updated as things change if that in case is -- if that is indeed the case.

Paul K. McWilliams - Next Inning Technology Research

I appreciate your caution there. At run rate, should we model this as low double-digit millions per quarter?

Peter Allen

I wouldn't provide that guidance at this stage. It could be -- there are -- as I said to the previous questioner, there are some projects moving forward that are significant. There are others that could well be added over time. So this answer will definitely change, but I'm not prepared to provide any guidance on the magnitude of that run rate at this time.

Paul K. McWilliams - Next Inning Technology Research

I understand. The aggregate node volume that you've booked in this North American deal, is that in the hundreds or thousands?

Peter Allen

The node.

Paul K. McWilliams - Next Inning Technology Research

Or link volume, I'm sorry.

Peter Allen

Yes, again, that's covered by my NDA with the customer and commercially sensitive, Paul.

Paul K. McWilliams - Next Inning Technology Research

Okay. Let me ask one more question on that, that you might be able to answer. In the Clearwire deal, you supplied, I believe, nearly, if not literally, 100% of the mesh connections. On this particular deal with the North American carrier, are you dominating the mesh connections?

Peter Allen

In the historical Clearwire network, we had an extremely large percentage of their overall build of microwave backhaul, which was their strategy for backhaul. And yes, in their approach, they used a tiered ring architecture, and we provided equipment that supported the high-capacity -- the rings, the tiered rings, as well as the subtended rings and the spurs. This carrier's architecture is a little bit different, but still, as time has passed, the amount of capacity required has increased significantly, even over the 5 or 6 years that we're talking about here. And so the architecture is a little bit different, with more fiber in the ring, but the capacity required on the subtended rings and the spurs has increased dramatically in these high-capacity microwaves. So it's not exactly comparable, but we are essentially bringing a high-capacity value proposition to bear here. And in these projects, they're projects that are ones that are allocated direct to DragonWave.

Paul K. McWilliams - Next Inning Technology Research

Okay. On India, could you provide a little bit more color there about your status and potential?

Peter Allen

Yes. I mean, we had good orders last quarter with one of the important operators in India and we expect -- well, not we expect, we've received ongoing orders from that operator this quarter. We are, as I've indicated in the past, shortlisted in a major greenfield build situation and I have high hopes of converting that into a relationship for that build. We have a trial underway, or just beginning, I should add, with another important operator in India. And lastly, we have significant investment being made by Vodafone overall, and India Vodafone Essar would obviously be a part of that Project Spring that Vodafone are making. And I think that, that will give an opportunity because in India, as people move to 4G, they will wrestle with the need for capacity, and I think we have a very strong position in capacity as evidenced by our penetration in North America. But India is a country where backhaul spectrum is extremely expensive, it's done on a revenue-sharing basis. And so, it follows -- at least for me, you would want to maximize the most amount of capacity that you can get through a expensive 28 megahertz channel, and we bring, by a clear margin, the best spectral efficiency to do that. So I think that those characteristics, at a time when this CapEx cycle is strong in India specifically, will -- gives us confidence that we can convert some of these activities into revenue growth.

Paul K. McWilliams - Next Inning Technology Research

Okay. I've got 2 more and I think they're short. In India, as far as number of links go that you've booked there, is that in the hundreds or thousands, or can you say?

Peter Allen

Again, this is considered customer confidential information that I would be restricted under NDA.

Paul K. McWilliams - Next Inning Technology Research

Okay. Well, let me kind of cut to the chase behind a couple of these questions. Yesterday, one of your competitors announced booking thousands of links and identified a major U.S. carrier as having hundreds of links and India, assumably, by the title the article or the lead paragraph, being thousands. Did that take any business from you that you really anticipated getting?

Peter Allen

My read of that was, firstly, if I may correct you, they didn't actually say a U.S. carrier, they said a North American carrier, and there's a hint there, and they said they had received orders. I think these are existing relationships, which they just received the next orders in India as we have done this quarter. No, I think this is them continuing to maintain their share in some existing customers.

Operator

I'm currently showing no further questions at this time. I'd like to turn the conference back over to Peter Allen for closing remarks.

Peter Allen

Yes, thank you, everybody, for joining us today and a belated Happy New Year from me. Thanks very much.

Russell James Frederick

Thanks, everybody. Bye.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.

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