DragonWave: Clearwire microwave orders tapering off

DragonWave (NASDAQ:DRWI) scored big when it landed Clearwire (NASDAQ:CLWR) as a microwave backhaul customer, becoming a key supplier supporting the operator’s nationwide WiMax deployment. In a year, DragonWave more than quadrupled its revenues, as Clearwire contracts accounted for more than 77% of its sales in 2009. But there are signs that the money spout might be running dry as Clearwire concludes in 2010 rollout plans.

By year end, Clearwire plans to have a 4G footprint of 120 million pops and launch some of its biggest markets to date, including New York City, Boston, Los Angeles and San Francisco. While most of its multi-billion-dollar investment is going toward radio access equipment from Motorola (NYSE:MOT), Samsung and Huawei, it is spending a sizable chunk of change on high-capacity microwave equipment in order to mitigate its reliance on local exchange operators and fiber providers to feed its cell sites. Clearwire estimates that 90% of its cell sites are backhauled by radio, and while it has multiple suppliers to handle the tower access and aggregation links in the network, DragonWave is its primary vendor for microwave. DragonWave estimated it has sold $175 million worth of microwave gear to Clearwire in the last five quarters.

DragonWave had a record first quarter this year, recording $48.7 million in revenues — more than $35 million of which came from Clearwire — up 275% from last year’s first quarter. But quarter over quarter, those sales have started tapering off, falling from $61 million in Q4 of 2009. Furthermore, DragonWave is projecting a huge fall off in revenues for the second quarter, as Clearwire winds down its microwave purchases for 2010. CEO Peter Allen estimated sales for the quarter to come in at $25 million, of which Clearwire would account for only 25%.

“Our Q2 guidance reflects the fact that we’ve now supplied most of the equipment to Clearwire’s network build to the end of 2010 in support of the markets it is launching this year to achieve the objective to cover a population area of 120 million people by the end of the year,” Allen said on DragonWave’s Q1 earning call this morning. “Clearwire has stated publically on a number of occasions that its objective is to continue to build out its network beyond 120 million pops to deliver nationwide coverage to the 275 million people its spectrum provides for. Clearwire has not yet provided specific timing of its network build plans beyond 2010 to achieve coverage for the 270 million pops. … We do not have sufficient visibility into the timing of Clearwire’s future equipment requirements from DragonWave for its network build beyond 120 million pops.”

Clearwire has not revealed its 2011 rollout plans, and a halt in backhaul orders certainly doesn’t mean it plans to stop expansion once it reaches the 120-million-pops goal. Allen described the scale back in orders as an “air pocket” between completing its 2010 schedule and formulating its 2011 rollout plans. Allen also dismissed the idea of Clearwire spending with alternate backhaul vendors. While also watchful of the competition, all indications point to DragonWave being a vendor in good standing with its biggest customer, Allen said.

“Their priorities are to consume that equipment in terms of the construction of the markets they intend to launch in 2010,” Allen said. “My perspective to the extent I have visibility is that what we’ve shipped is geared toward the 2010 markets and that whatever they need for 2011 will start to impact us in Q3 in beyond.”

Clearwire may already have concrete plans for its 2011 rollout, but it may still be looking for the funds to implement them. The operator this year is spending much of the initial $3.2 billion investment from Intel (NASDAQ:INTC), Google (NASDAQ:GOOG) and the cable operators, as well as $2.8 billion in financing it raised in 2009 through a combination of borrowing and investment, though Clearwire officials have said there will be enough funds left over to carry deployment into 2011. Last month Clearwire, closed another rights offering raising another $290 million. But to achieve its goal of near-nationwide coverage, Clearwire will have to seek additional investment, either through borrowing money or going back to its primary investors for more cash.

When contacted Clearwire said it could not comment on the earnings of one of its suppliers, but nothing has changed about its rollout plans. “We’re on track for 2010,” a Clearwire spokesman said. “We have not articulated plans beyond that, but we do aspire to build our network beyond 120 million pops.”