May 7, 2010 / 6:46 PM / 8 years ago

UPDATE 1-DragonWave stock falls on worry over key customer

* Issues forecast for one quarter, not customary full year

* Sees $50 mln in Q1 sales vs expectations of $56-$57 mln

* Concern that demand from Clearwire slowing

* Stock falls to C$6.30 on TSX, 20-month low

By Susan Taylor

OTTAWA, May 7 (Reuters) - Shares of Canadian telecoms equipment maker DragonWave Inc DWI.TO DRWI.N tumbled more than 20 percent on Friday after it forecast revenue figures that sparked worries about waning demand from its marquee customer.

The one-time market darling, whose stock was worth more than C$14 just four months ago, was the second-biggest loser on a percentage basis on both the Toronto Stock Exchange and Nasdaq on Friday.

DragonWave lost about C$65 million ($62.5 million) in market capitalization as its stock sank to C$6.37 in Toronto and $6.13 on Nasdaq on concern that orders from U.S. carrier Clearwire Corp CLWR.O, its biggest customer, were coming to an end and won’t be replaced by orders from new customers.

“That’s the raging debate in the stock: Can they do it quick enough? What does their trajectory look like?” said Avian Securities analyst Matt Thornton.

“That’s really the name of the game, to try and quickly ramp up the other side of the business. It’s just very difficult when you’ve got one customer that’s so large, relative to anything else you have in your pipeline.”

DragonWave, whose microwave radio systems move voice and data between cell phone towers and phone companies’ networks, reported its fourth-quarter results after the market close on Thursday.

They showed a record 87 percent of the company’s revenue in the quarter came from Clearwire, which is expanding its U.S. communications network to reach a target population of 120 million people by the end of 2010.

The results were in line with analysts’ estimates, but in the report DragonWave forecast sales for just one quarter ahead rather than the typical full year.

It estimated first-quarter sales at $50 million, which trails the $56 million to $57 million analysts expected. DragonWave is switching to reporting in U.S. dollars starting in its first quarter.

“What’s giving people concern is Clearwire may be getting ready to roll off or slow down. And so the question will be just how does the company navigate if there is a change in pace of activity at Clearwire?” said Pacific Crest analyst James Faucette.

Clearwire’s contribution to DragonWave’s fourth-quarter sales was C$55.3 million, a 21 percent increase over the third quarter. Sales from other customers fell 15 percent to C$8.6 million.

“These customer concentration situations seldom work out well,” said Dundee Securities analyst Tom Astle in a note. The fourth quarter could represent a sales peak for some time, he said.

DragonWave has won some new customers -- including new entrants to the Canadian wireless market Globalive and Quebecor’s (QBRa.TO) Videotron -- but analysts worry about the pace of growth.

There has been speculation that DragonWave could supply equipment for network expansions planned by big U.S. carriers AT&T and Verizon, though several analysts said it looks unlikely.

“Most of the activity that Verizon and AT&T are doing right now to improve their network backhaul capacity is being done in metro areas and that’s using a lot of fiber,” Faucette said.

“The question is how much and how soon might they start to upgrade their more suburban and rural segments of their network? And in those cases that’s where microwave could be introduced.”

Several analysts cut their share-price targets for Ottawa-based DragonWave on Friday. Dundee Securities chopped its 12-month target to C$8.50 from C$14.50 and downgraded the stock to “neutral high risk” from a “buy” rating.

National Bank Financial cut its target to C$10 from C$14 and Canaccord Adams cut its target to $11 from C$17.

$1=$1.04 Canadian Reporting by Susan Taylor; editing by Peter Galloway

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