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VIDEOLink Between DragonWave's First Quarter and Ciena
By
Bob Faulkner Jul 09, 2010 9:20 am
Both are suppliers to Clearwire, a relationship that pushed DragonWave off more than 50% year to date. But what will it mean for Ciena?
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As you can see in the graph below, Clearwire (CLWR) has been DragonWave’s gravy train for more than a year. Now, as Clearwire adjusts its focus of capital spending, DragonWave investors pay the consequences. No one appeared to be worried about this last year as the stock went from $0.79 to more than $14.00. The ride was apparently supposed to continue indefinitely. However, I wonder just how many who enjoyed that ride are still around?
The company indicated on its conference call that it has supplied the equipment necessary for Clearwire to complete its planned build-out to cover 120 million pops by the end of 2010. Some have wondered how that can be if Clearwire still needs to penetrate New York, Los Angeles, and San Francisco to reach the goal.
One enterprising sell-side analyst suggested that Clearwire is actually reducing capital spending and, as a result, this will hurt Ciena (CIEN), which is also a supplier to Clearwire.
Maybe it will and maybe it won’t but I’m of the belief that there’s something else at play here. Take a look at the table below. It’s the areas where Clearwire has already introduced its 4G service (apologies if I missed any). What the overwhelming majority have in common (but not all) is that they don't have large, highly concentrated and very dense central cores with lots of very tall buildings. There are a couple of exceptions on the list, but for the most part, they don’t present the aforementioned conditions.
What this means from a network-design perspective is that most of the backhaul in these locations could be handled using microwave and that’s what DragonWave does. However, as we’ve seen with cellular providers AT&T (T) and Verizon Wireless (VZ), as they upgrade their backhaul, in urban areas the solution of choice if fiber.
The line of site issues created in a place like New York makes microwave uneconomical given the number of cell sites necessary to cover the city in the first place. Los Angeles may be less of an issue because it's spread over a much larger area but the central core will create problems. San Francisco likely presents the same issues in the business district as well.
So for those of you who are Ciena investors, relax, I don’t think Clearwire is an issue. Besides, Ciena gets about 20% of its revenue from AT&T and the carrier admitted that it will be building out its backhaul until 2015. Sit back and enjoy.
No positions in stocks mentioned.
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