DragonWave's (DRWI) CEO Peter Allen on Q3 2016 Results - Earnings Call Transcript

| About: DragonWave Inc. (DRWI)

DragonWave Inc. (NASDAQ:DRWI)

Q3 2016 Earnings Conference Call

January 14, 2015 08:30 AM ET

Executives

Patrick Houston - Chief Financial Officer

Peter Allen - President and Chief Executive Officer

Analysts

Todd Coupland - CIBC

Operator

Good day ladies and gentlemen and welcome to the DragonWave Incorporated Third Quarter Fiscal Year 2016 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I will now like to introduce your host for today’s conference call Mr. Patrick Houston, you may begin.

Patrick Houston

Thank you, Kevin, good morning. I’d like to welcome you to our third quarter fiscal year 2016 financial results conference call. Following our prepared remarks we will open the call for questions and we plan to finish the call by 9:30 AM. 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've had the opportunity to read the press release we issued yesterday after the close of the markets, which provide detailed financial information on DragonWave's third quarter fiscal year 2016 results.

Slide two, please. Today's call includes forward-looking information as defined by applicable securities laws. These statements are subject to risks and uncertainties. Annual revenue guidance is also subject to assumptions including those related to the timing of orders and deliveries and our supply chain capacity. Please read the full disclaimer that is contained in the presentation slides.

I’d 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. Slide three please, total revenue for the third quarter of fiscal year 2016 was $21 million compared to $26.9 million in the second quarter of fiscal year 2016 and $47.3 million in the third quarter of fiscal year 2015.

We had a broad geographic distribution of revenue in the third quarter with Europe, Middle East and Africa representing the largest single region with 41% of our revenue. The North American region was the second largest region, representing 31% of our total revenue in the third quarter. DragonWave had two customers who generated more than 10% of total revenue in the quarter. Revenue through Nokia was $8.4 million or 40% of total revenue in the quarter. In addition, 15% was from a Tier 1 operator in North America.

Gross margin in the third quarter was 23.5% compared to 14.8% in the second quarter of fiscal year 2016 and 16.3% in the third quarter of fiscal year 2015.Margins in the third quarter were positively impacted by changes in customer and product mix. Please move to slide four, which highlights comparative revenue, gross profit and operating expenses. Operating expenses were $8.7 million in the third quarter of FY 2016 compared to $10.5 million in the second quarter of fiscal year 2016 and $12.2 million in the third quarter of fiscal year 2015. This reduction was the result of restructuring efforts undertaken midway through our quarter, in which we reduced our global workforce.

We expect to see further reductions in expenses during our fourth quarter as a result of the actions already taken, as well as additional cost curtailment. Net and comprehensive loss attributable to shareholders in the third quarter was [$6.2 million], which included restructuring charges of $1.4 million. This compares to $21 million in the second quarter of fiscal year 2016 and $3.8 million in the third quarter of fiscal year 2015.

Please move to slide 5, which highlights on the key balance sheet metrics. The company ended the quarter with $7.8 million of cash compared to $13.1 million at the end of the second quarter. Cash usage in the quarter included debt repayment of $6.2 million. We were able to utilize our assets on hand and working capital effectively this quarter to manage our cash balance, whilst reducing our debt balance. Inventory at the end of the quarter stood at $25.4 million compared to $27.2 million at the end of the second quarter of 2016. DSO was 110 days in the third quarter based on ending balance. This compares to 116 days in the second quarter of FY16 and 79 days in the third quarter of the prior fiscal year. We expect improvements in this metric in the next quarter as we collect significant amounts with extended payment terms as they come due.

Slide 6 please. On slide 6 we show the trend in adjusted cash flow from operations or adjusted EBITDA, in order to better explain our cash dynamics we used the non-GAAP financial measure called adjusted cash flow from operations, which excludes non-cash operating expenses such as inventory provisions, stock compensation expense, and depreciation expense. The adjusted cash used from operations decreased to $2.8 million from the adjusted cash usage in the second quarter of $5.1 million. This was achieved primarily through improvements in gross margin and reduction in our operating expenses.

We’ve continued to receive support from the company’s credit facility partners Comerica Bank and Export Development Canada, as we work through the difficulties experienced in the first half of this year and the restructuring we’ve recently undertaken. The company continues to work with its lenders as we try to maximize the value of our assets and restructure the debt facility to meet our forward business plans.

Slide 7 please. This concludes my remarks and I’ll now turn it over to Peter Allen. Peter.

Peter Allen

Thank you, Patrick. Good morning everybody. Last quarter I indicated that this is a very difficult time for DragonWave as we try to vision our business. This transition continues and I would like to update you on what has been achieved so far. As Patrick has indicated we improved our margin performance in Q3. Some of this was a lower percentage of business in India during the quarter. Our main customer in India, Reliance Jio has been focused on hardening their network in the readiness for the launch of that network.

Reliance Jio launched 4G services for the Reliance Group Employees on December 27. We congratulate them on this significant achievement and look forward to participating as they return to network expansion during 2016. Another area of improvement was the reduction in their operating expenses which in quarter were brought down by 17% over Q2 levels to $8.7 million. Our efforts in this area have continued and we believe that our Q4 operating expense level has been reduced by a similar quarter-on-quarter reduction.

Three months ago, I indicated that we could only speculate what impact would occur on our forward opportunities from Nokia having added Alcatel-Lucent to their microwave backhaul partner ecosystem ahead of the completion of the acquisition of that company. I would hope that the product differentiation would permit an ongoing relationship in new opportunities. However, during the quarter it came as judgment that it was no longer possible to operate inside an ecosystem of choice with a company doing the choosing was also a competitor.

In mid-December, we announced that our future channel strategy whereby our approach now is to primarily position our latest new products directly to customers. Our future relationship with Nokia will primarily focus on supply of legacy products and support of the related installed base. This transition has been a lot of business in some areas as Nokia has positioned Alcatel-Lucent products with some customers where DragonWave products have been previously. Our focus is to restore the choice of DragonWave products to those operators. The choice that we believe differentiated widely because of our unsurpassed capacity and spectral efficiency.

Another important area is we are continuing to attempt to resolve the disputes that have occurred related to the product that we shift to new customer in India. In order to do this, we’re pursuing our related contractual legal remedies. Our transition has been expanded to explore opportunities to license non-core intellectual and legacy product technology. Our approach is to underpin support for customers legacy footprints while simultaneously strengthening DragonWave. We are already engaging on this initiative with Nokia, other system integrators and end customers and we plan to expand these discussions as we go forward with our transition. Overall, our transition has a goal of reaching [indiscernible] key opportunities. We are continued to be excited by significant network expansions in key customers in both North America and in India.

That concludes our prepared remarks and I would like to turn the call back to Kevin to start the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Todd Coupland of CIBC.

Todd Coupland

Hi, good morning guys.

Patrick Houston

Good morning.

Peter Allen

Good morning, Todd.

Todd Coupland

Good morning. Can we talk about liquidity for a moment? So it sounds like OpEx would be just over $7 million in Q4, so with that reduction and the revenue profile that you see, do you expect to be cash flow breakeven?

Patrick Houston

Yes, certainly I think on expenses, you’re correct. We are shooting for around the $7 million mark. Certainly we expect probably a similar quarter from a cash perspective this quarter and using our working capital and asset to cut offset any of the cash usage from the P&L and the quarter on a similar basis as Q3.

Todd Coupland

So you’ve got revenue of $20 million or so, OpEx of $7 million, gross margins in this same range and then whatever the burden left, it will come from pulling cash out of inventory. Is that the point?

Patrick Houston

Yes, inventory and some of our other assets including receivables.

Todd Coupland

And what’s the revised debt structure going to look like in terms of line of credit and draw and all of that?

Patrick Houston

I think there is more work to be done and we’re working with our credit facility partners now and we’ll continue to do so during the next month as we reshape the business. As Peter mentioned towards new targets and adjust our targets, we will work with the bank to get their support in funding that.

Todd Coupland

Could you just remind me of the terms on that line of credit as it [indiscernible]?

Patrick Houston

It’s an asset based facility. So in general our ability to borrow fluctuates based on the assets we have on it.

Todd Coupland

Okay. So what would that be now versus what’s drawn on it?

Patrick Houston

I think in the advanced statements we disclosed, we made additional repayments of $4.5 million after the quarter and now it’s down in the low 20s. We expect it to stay in that range for the fourth quarter.

Todd Coupland

So low 20s and if I remember correctly I thought it the availability was in the $40 million range, is that in the zone?

Patrick Houston

Yes. No, the four bearings that we modified the availability from $40 million to $35 million but the maximum under the facility is $35 million.

Todd Coupland

Okay. And like I say with the flow that you spoke about that should actually not go up at all in the fourth quarter.

Patrick Houston

We wouldn’t expect it to go up significantly.

Todd Coupland

Okay. And if we just think about like the next couple of quarters with the business that you’re seeing in North America and India, do you expect – what would you expect for your revenue profile?

Patrick Houston

I’m not going to get into guidance Todd, but the key opportunities that I talk to now in North American and in India would certainly added to our base line revenue that we are experiencing today. Significantly we think starting in the [indiscernible] so we are trying to find ways to minimize that cash consumption, increase our cash reserves particularly in this period to the second quarter where these opportunities are expected to have a significant impact on our business.

Todd Coupland

I see. Sorry, Peter, you broke up. Did you say you think your base lining now and that – the opportunities you’re working on are expected to start to hit in the August quarter.

Peter Allen

I said in the second quarter, so I was thinking more of calendar quarter quite where they would fit in the P&L. I’m not sure of it yet in terms of whether or not they hit – anything hits our fiscal Q1, more likely our fiscal Q2 but that level of detail and accuracy would be spriest at this stage. But essentially we are trying to bridge to that opportunity and with those things this is a fairly difficult environment to forecast. We are working on the basis that we have base lined the revenues without those opportunities at the current levels.

Todd Coupland

Okay. Two other quick questions if I could. So just one more outlook follow up, so are you seeing enough detailed planning which gives you some level of confidence for the Q2 uptick in revenue from these core customers?

Peter Allen

Yes, the sort of thing that you see in terms of activity that leads up to those revenues is telling me that that is likely.

Todd Coupland

Okay. And then just last question, you alluded to – I wasn’t sure I understood this but you alluded to licensing I think your technology, how do you envision that working out.

Peter Allen

Yes, there is a considerable footprint in the market and we are keen to ensure that footprint is supported well and the customers benefit from the support that they need. And as we transition our business, it may be more interesting for that to be done in a different way than it’s been done today and we are open to the discussions that we are in about licensing in order to secure the situation where customers can get their network supported fully and we can put strengthen DragonWave in this transition to that future opportunities ahead and future channel strategy that we already announced in the back end of last year. And we are in dialog with interested parties around how to do that.

Todd Coupland

Okay. But is that licensing the products that give you cutting edge in the market ability to offer at a much lower perennial cost…

Peter Allen

No, this is more focused around what I would consider as non-core and legacy parts of our business.

Todd Coupland

The business in Nokia Siemens install base, if you just want to provide support for and see if you can get a revenue tail on that?

Peter Allen

That’s a piece of it but it’s not – that’s not the only piece of it. And yes, there is a considerable – there is over a million network elements have been installed on those products around various third parties or NOLs [ph] and we want to find a way whereby those can get supported in a manner that is good for the customers but also gives us the opportunity to strengthen our business.

Todd Coupland

Okay, that’s helpful Peter. Thanks very much.

Operator

[Operator Instructions] And I’m not showing any further question at this time. I would like to turn the call back over to our host.

Peter Allen

I would like to thank everybody for joining us on the call this morning and look forward to updating you in the near future. Thank you.

Operator

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

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