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A statue of a dragon on a temple is seen as steam billows from a plastic factory at an industrial park near Suao, northeast of Taiwan, December 8, 2009.NICKY LOH

DragonWave Inc. has increased its financial guidance three times in less than a year, giving rise to an important question for investors: Is the wireless equipment maker embarking on a long period of supercharged growth, or is management just dealing with an unexpected burst of sales?

The stock price of the Ottawa firm has risen 12-fold over the past year, largely based on business from a single major U.S. phone company.

This month, DragonWave reported quarterly results that saw sales surge to more than four times year-earlier figures, and operations swing from a small loss to a $12.6-million profit.

Clearwire Corp. accounted for 82 per cent of DragonWave's $55.8-million of revenue in the last quarter. The Kirkland, Wash.-based carrier has tapped DragonWave as one of its suppliers as it builds next-generation wireless services in major U.S. cities. Clearwire counts among its financial partners, Intel Corp., Google Inc., Sprint Nextel Corp. and Time Warner Inc., which have all invested in Clearwire's latest wireless network.

Buying shares of DragonWave now amounts to a bet on whether the 10-year-old company can add other big telecom companies to its client list before revenue from Clearwire begins to dwindle.

Investors' eyes are on two major contracts up for grabs over the next six months from AT&T Inc. and Verizon Wireless, the two largest operators in the United States.

Ted Whitehead, manager of the Manulife Growth Opportunities Fund, said he is confident after meeting with DragonWave's leadership last week that the company's business with Clearwire is not about to "fall off a cliff," and that a contract with AT&T or Verizon would put the company at a new level.

"It's now an established player in [the market]and we're confident that the deals will continue for them."

If DragonWave can secure contracts with even one of AT&T or Verizon within the next six months, that should power the stock price to $20, he added.

The Manulife Growth Opportunities Fund is a small- and mid-capitalization fund with about $650-million of assets. It owned 1.3 per cent of DragonWave's outstanding shares at the end of the year, according to its most recent filings.

"Management has been guiding upwards and earnings have been better than expected, and I suspect that will continue," Mr. Whitehead said.

DragonWave's microwave radio technology moves voice and data wirelessly between cell towers and the phone companies' core networks on the ground. The high-speed ethernet microwave technology can be deployed more easily than running fibre-optic cables from towers to the core, which is an important attribute for carriers that are managing rapid traffic growth.

The company plays in a growing marketplace. With mobile phone companies now drawing more than one-quarter of their revenue from data, representing about 16 per cent more than a year earlier, they are being forced to upgrade their networks to handle more traffic, according to Sanford C. Bernstein & Co. LLC.

Globally, wireless carriers will build about 600,000 base stations for high-speed, third-generation (3G) networks this year, up from about 445,000 in 2009, write Bernstein analysts Pierre Ferragu and Robin Bienenstock.

They estimate that AT&T will increase capital spending on wireless by 33 per cent to $8.4-billion (U.S.) this year from 2009, and Verizon by 15 per cent to $8.5-billion.

"There is a lot of public awareness on mobile broadband and pressure on operators to increase their 3G spending to keep up with the explosion of mobile data," they said in a recent report.

For DragonWave, the trend points to an enormous opportunity if it can secure deals with the major carriers.

Business from Clearwire should last longer than first expected, giving DragonWave more time to find other big customers, says Kris Thompson, an analyst with National Bank Financial Inc.

He raised his price target on the stock last week to $17 (Canadian) from $15, maintaining his "outperform" rating, in part on expectation of new supply deals with AT&T and Verizon.

"Investors want to own this stock before the AT&T Mobility announcement," Mr. Thompson wrote in a research note. "The stock may exhibit more volatility over the next several months as speculation on AT&T and Verizon plays out. This stock is better suited for investors with a higher appetite for volatility."

DragonWave recently won contracts to supply two new entrants to Canada's wireless market, Globalive Wireless Management Corp. and Vidéotron Télécom Ltée. Those contracts should produce $12-million, but deals with smaller carriers will not be the main driver of DragonWave's growth, Mr. Thompson says. "DragonWave's growth momentum will be derived from a small number of large customer deployments."

He thinks the market opportunity for DragonWave's technology is worth about $1.4-billion a year as carriers move to improve their network capacity and speed.

DragonWave (DWI-T)

Close: $14.17, down 32¢

***

By the numbers

$512-million

The company's current market capitalization

$107.3-million

Revenue for the nine months ended Nov. 30, 2009

$32-million

Revenue for the nine months ended Nov. 30, 2008

$16-million

Profit for the nine months ended Nov. 30, 2009

$3.8-million

Loss for the nine months ended Nov. 30, 2008

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