DragonWave hopes acquisition brings more carriers

A struggling Canadian maker of wireless backhaul solutions for carriers is buying a manufacturer of circuit and service emulation solutions in hopes of broadening the number of its customers.

Ottawa’s DragonWave Inc. said Thursday that it has bought privately-held Axerra Networks, which makes pseudowire products that can push legacy TDM traffic of wired and wireless carriers over packet-based microwave networks like DragonWave’s.

DragonWave already has some pseudowire capabilities, but CEO Peter Allen told financial analysts that Axerra’s is “more fully featured.”

“With the Axerra addition to the DragonWave family, we now have a broader and deeper product set in this area to address the convergence needs of carriers around the globe,” he said.

Ten-year-old Axerra already has some 50 customers around the world, he added, including an unnamed Tier 1 carrier in the U.S. Allen said he’s “keenly interested” in letting them know about his microwave line.

About 80 per cent of its business comes from North American operators.

Pseudowire is a standards-based technology that coverts T1 and E1 interfaces into a packet-based interface so carriers can have a converged network.

Alan Solheim, DragonWave’s vice-president of corporate development, said in an interview that one problem his company faced is its pseudowire products aren’t as scalable as Axerra’s. That was OK for carriers with few legacy services, he said, but Tier 1 carriers with thousands of TDM circuits need a more robust solution.

He also noted the Axerra line are standalone products can be sold separately to fibre-based carriers, an additional market for DragonWave. Later, they can be offered microwave.

Based in Woodbury, Conn., and with research and development and manufacturing facilities in Tel Aviv, Axerra’s AXN family of gateways and access devices allows IP and legacy voice and data traffic over Ethernet, IP, and MPLS wireless and fibre optic networks. The company has 61 staffers.

At least initially, Axerra products will be sold alongside DragonWave’s.

DragonWave will initially pay US$9.5 million in cash for Axerra. It may add an additional US$15.5 million in cash or shares if the Axerra business generates US$25 million in revenue over the next 16 months.

Allen figures Axerra will add another US$2 million in revenue to the roughly $30 million in revenue DragonWave will pull in during its current quarter, which ends Nov. 30.

The recession has been tough on DragonWave, which said last week that its revenue for the second quarter of fiscal year 2011 was $27.2 million, down from US$32.4 million in the second quarter of fiscal year 2010. Net income in the second quarter of fiscal year 2011 was US$1.2 million, compared with US$5.7 million the second quarter of fiscal year 2010.

DragonWave has a number of networking partners who sell integrated solutions to carriers, some of whom have their own pseudowire and wireless products that partly compete with Axerra. But Allen dismissed a suggestion the acquisition will raise conflicts with these partners. “The way I think about it is it’s a bit like an a la carte menu … They don’t have to buy all of our products to take advantage of some of our products. It will give some of our channel partners more options”

One analyst suggested to Allen that a complimentary acquisition would be a company that makes native TDM microwave backhaul wireless systems, but the CEO dodged that by saying that he’s open to any acquisition that diversifies the company.

“The swing towards packet-based networks utilizing these emulation techniques has gained momentum,” he said, “and the reason is the economics of those solutions are superior” to other transport technologies.

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