The Good

• Significant positive cash flow of $21.8m for the quarter. This leaves a solid cash balance of $57.9m. Given the lumpy nature of contracts, this can’t be extrapolated out for every quarter, but it gives an indication of what the business can look like as it continues to deliver.

• Full year revenue of $55.1m with earnings (EBITDA?) of $4m.

• There was only a minor increase in staff costs in Q4. Given staffing sits at 105 with a medium term target of 150, this will likely continue to increase, but now makes up a much smaller portion of the operating costs. Advertising has now jumped to the largest cost behind product costs due to sales commissions.

• Pipeline remains at $400m. Of this there are 7 “high probability” near term contracts to the value of $200m

• Order backlog reduced from $51m to $30m. This is likely able to be delivered in Q1 if the relocation to the new facility doesn’t impact production.

The Not So Good

• Previous updates had the move to the new facility being completed by December 23. This is now revised to the end of January 24. Only a minor slip, especially over the holiday period and when they have been obviously delivering on orders as a priority.
• SaaS revenue which has a medium term target of 50% of the revenue base only increased from 2% to 2.5% of revenue share from FY22 to FY23. This is expected to be slow as hardware is distributed to the market, however current growth is marginal.

Watch Status: 

Valuation Status: 

What To Watch

• $4m of EBIT reported for FY23. Review the full year report for how this is reported in accounts.
• Completion of move to new facility and how this impacts the speed of order fulfillment.(Carried Over)
• Planned US Federal roll-out of body worn devices (No Update - Carried Over)
• Air Service Australia C-UAS rollout (Carried Over) - Looks to have closed at the end of October 23.

https://www.unmannedairspace.info/uncategorized/airservices-australia-publishes-tender-for-drone-surveillance-network-covering-29-airports/

• European framework agreement for 24/25 rollout ($30m+)
• Start of JCO US DoD rollout (Carried Over). Potential updates to this program around March 24?

https://www.c4isrnet.com/unmanned/2023/11/15/pentagon-counter-drone-office-makes-headway-as-services-adopt-new-tech/

• Lockheed Martin - Australian DoD Agile Shield Integration
• As the company starts to generate more cash, how this is deployed will be an important indicator for the medium term future of the company. Recent options have a $200m revenue target. Management may start eyeing off potential acquisitions or adjacent technologies. My preference would be to stay focussed on their primary business and continue to grow with the rapidly evolving and expanding market.

Announcement

The Good

• Although cash receipts from sales were down compared to the previous quarter, this has been offset by the receipt of a $2.5m government grant and cash receipts of $17.3m in October which is setting up Q4 to be significant for the company. 

• Staff growth sounds like it is largely complete for now, given the move to the larger facility before the end of the year, other ongoing expenses are likely to rise.
• Reported pipeline has now increased to $400m which are double the previously reported figure of $200m. This indicates that the market tailwinds are continuing to improve

• Order backlog reduced to $51m.
• New products launched over the quarter. Hard to identify specific impacts, but new products are a sign that Droneshield are trying to stay up to date in a rapidly evolving segment. 

The Not So Good

• Blending of YTD and Q3 numbers in the quarterly update. The developments in October are worth mentioning but lack consistency.

• Operating cashflow continues to fall, however this is mostly due to costs from increasing inventory and order fulfilment. Other operating expenses are starting to level out.

Watch Status: 

What To Watch

• With a increase to the cash position of $12.8m since the end of Q3 and a current operating cash burn for the year of $11.4m and significant payments scheduled in November, Droneshield could be on track to be operating cash flow positive for the full year.
• Completion of move to new facility by end of the year and how this impacts the speed of order fulfilment.
• Planned US Federal roll-out of body worn devices
• Air Service Australia C-UAS rollout - 29 Airport contract to be awarded
• European framework agreement for 24/25 rollout ($30m+)
• Start of JCO US DoD rollout. Still no indication of when this will start. (Carried over from previous quarter)
• Revenue at the end of Q3 was $39.3m. Oleg has previously indicated that this could be in the range of $70m for the full year.

The Good

• New record cash receipts of $8.2m for Q3 resulting in $15.3m for H1 which is up 288% on the pcp.

• $33m US government contract highlights that there is demand for Droneshield’s products.

The Not So Good

• Staff and product costs continue to increase. These are requirements of growing the business to meet the customer needs. The product costs are also for the build up of stock levels.

Watch Status: Encouraging

What To Watch

• Subscription revenue made up 2% of revenue for FY22. As further contracts are awarded and software upgrades are released, it would be good to see if this number increases. (Carried over from previous quarter)
• Start of JCO US DoD rollout. Still no indication of when this will start. (Carried over from previous quarter)
• Continued rate of increase in staff costs
• Directors sale of significant number of shares post Q2. Additional selling would be a red flag
• Epirus integrating competitor technology along with Droneshield? - Anduril Lattice systems

• $62m in backlog of orders and progress of fulfilment over the coming quarters.
• Oleg noted in the meeting that he expects there to be some more larger contracts coming out of the $200m pipeline.

• Cash receipts in Q3 should continue to grow to match the contracted revenue as it is delivered. (up to ~ $70m for FY23)
• $2.4m government R&D grant expected.

Strawman Meeting Notes

• Repeat R&D contracts with the same customer continue to increase in value. The latest iteration of this contract will require Droneshield to have a SCIF (Sensitive Compartmented Information Facility) which will allow the company to work on more highly classified projects. There are not many of these facilities in Australia.

• Based on Olegs comments on the contracts that will convert this year, revenue could be in the range of $70m, which is substantially higher than the $16.9m for FY22 and expect it to be profitable.

(Note: To date cash receipts for H1FY23 are $15.3m)

• Nato stock codes simplify the procurement process as it removes the legal need for departments to trial and verify the products before placing orders.
• Having deployed hardware in the field helps provide a moat in the future for ongoing software sales as there are significant capital requirements from clients to replace these items.
• Current capacity is able to fulfil around $100m per year. Moving to a new facility by the end of the year which has ~2.5x the space to allow for higher manufacturing capacity. Suppliers are also expanding. After the relocation is complete capacity will be closer to $300m-$400m per annum.
• IP from the R&D contract ultimately is owned by the customer, however they have given the go ahead to market to approved partners. In particular, five eyes customers. The focus at the moment is to scale these types of contracts into the U.S.
• Hardware update cycle is around 3 to 4 years. The current cycle has only just begun so there isn’t a risk of obsolescence at this point in time. There are also shared components across the product range. Only typically keep a few $m in completed products in stock. Typical customer delivery requirements are around a few months.
• Compliance requirements means there is a specific list of countries that the company can sell to. Droneshield choose to only sell to whitelist customers, not grey list. Commercially, typically don’t offer exclusivity to distributors, however they have in the past.
• Oleg and Peter’s share sales were for tax obligations for shares granted by the company and to take some financial rewards for the time provided to the company. Still holds significant equity and is aligned with the company.
• Preliminary a R&D company. 75% of the engineering staff are continuously working on ongoing R&D. 
• Oleg outlined that the business would always be open to a take-over offer if the price was right, however the primes who would be the likely company normally wait for the clear winners to emerge and that is where Droneshield is starting to get to now with their latest contracts.

Another fluff announcement from Droneshield recently.

Significant Production and Operations Ramp Up

I actually take this announcement that they have been missing out on contracts due to their inability to be able to meet customers required timelines, and this has likely been happening for sometime and was one of the drivers for the surprise capital raise and then keeping the oversubscription funds.

The start of this ramp up could be seen in the increase in operating expenses last quarter. Unfortunately @Rocket6 I would be dusting off those orange flags as from this announcement I expect the cash burn to increase over the next several quarters.

With a gross profit margin ~70%, and $67m sale value, Droneshield are potentially looking at taking a $20m chunk out of the $38m cash reserves over the next 6 months in product costs. (Estimated figures)

The Good

• Cash receipts up to $7m for the quarter

• Release of new products and software updates throughout the quarter demonstrate that droneshield is continuing to work on their product offering.
• Sales pipeline continues to remain high

The Not So Good

• Jumps in operating expenses across the board mean that even though cash receipts are the second highest to date, operating cash flow was still -$1.9m for the quarter. So even though there is $22m in order backlog, the increasing operating expenses mean that Droneshield is going to need to convert sales at higher levels to reach profitability.

What To Watch

• Cost control and capital allocation. Management have kept the additional funds from the SPP and capital raise which gives them a large cash position going forward. To prevent any further raises and shareholder dilution going forward, management needs to display some prudent capital management.
• Additional contract awards in the UTM market
• Subscription revenue made up 2% of revenue for FY22. As further contracts are awarded and software upgrades are released, it would be good to see if this number increases.
• Start of JCO US DoD rollout. Still no indication of when this will start. (Carried over from previous quarter)

A good podcast about one of Droneshields competitors and how they are currently engaging with Defence Departments and government for new technologies such as drone detection and defeat, ai and ongoing software development.

https://www.joincolossus.com/episodes/95062882/schimpf-building-the-future-of-defense?tab=transcript

The Good

• Increasing cash receipts and close to operational cash flow break even. (Last quarter was distorted by government grant receipt). 

• Expenses remained level, however staff and admin costs are likely to go up in the future as noted in the capital raise use of funds breakdown with $2m allocated to staffing.

• Strong cash balance of $14.1m heading into likely cash flow positive territory in the upcoming quarters.. This will be further strengthened by the injection of the $10.9m from the recent capital raise.
• The repeat customer metric is a good indication that currently the products that Droneshield provide are performing as expected by the customer base, which backs up the companies claims to being an industry leader.

• Continuation of a strong future sales pipeline.

The Not So Good

• Recently there have been several instances of management not being completely transparent with shareholders. I.e On both $11m contract award announcements it was indicated that further working capital would not be required. Then within weeks of the announcement a capital raise is announced with the prime reason being working capital. It even says the same thing within the capital raise slide deck.

Given Drone shields operating margins, these orders would likely cost around the $7m range to fulfil which would have been only around half of the cash balances at the time.

The team is likely confident around the timing of further upcoming orders and are being proactive in addressing stock levels and are unable to announce a specific deal to go with the raise, however the mixed messaging is an orange flag for me.

What To Watch

• Cash receipts likely $11m + for Q1 FY23 with partial receipts of both $11m orders in Q1.
• Start of JCO US DoD rollout. In a recent interview Oleg mentioned that the Droneshield hardware forms the backbone of the detect and jamming.
• Management communications vs delivery. 
• Size of SaaS revenue in the annual report. It will provide an indication if clients are taking up the ongoing upgrade cycle.

Drone use on the battlefield getting more airtime by abc news

https://www.abc.net.au/news/2023-02-04/diy-weapons-innovation-drones-in-ukraine-war-russia/101910506

Interview

Further to @Summer12sstraw about the ShareCafe interview with Oleg I wanted to add a few notes. (I haven’t watched the Market Herald interview that @slymeats posted yet, but judging from the slide notes the content looks similar) Sometimes Droneshield can be a bit over promotional so I am trying to keep track of some of the statements made to compare to the actual outcomes over FY23.

• The company is now reaching its breakout phase of the growth profile. Size of contracts have been progressively getting larger as Droneshield establishes itself with the government departments globally. This is indicated by the two recent 8 figure contracts. Ongoing contracts are expected to be more of this nature going forward.

• SaaS was 5% of Revenue in FY2021. Oleg re-iterated that the goal is for this to make up 50% of Revenue within 5 Years. How this is tracking / growing will be able to be determined in the upcoming FY2022 results.

• Expecting follow up to multiple R&D contracts. These are great contracts for Droneshield as they develop relationships with the client and are improving their product / SaaS offering to directly meet clients needs. They also further Droneshield’s capacity in the adjacent AI / Machine Learning sectors. There may be some key personnel risk here if the company starts taking on too much work, but the other side of that coin is that they can use these types of contracts to further develop their teams.
• Australian DoD AI electronic warfare contract. The next contract is also expected to be larger than the previous ($3.8m over 2 years. Expected to end in the 2QFY23)
• Australian DoD AI computer vision contract. ($800k over 1 year). Phase 2 expected commence early 2023
• ISREW Panel
• Expecting similar work with US DoD eg. the SBIR Phase 1 JV with Quantam Research - due for completion in Q1FY2023



• Recommendation from the US DoD for Droneshield products to be deployed at military bases across the U.S. The rollout is expected to commence this year. This was a 12 month selection process, where 3 companies were selected to form a panel. I have listed the companies selected below which helps provide some insight into Droneshield’s competitors in the market. A point of interest is that D-Fend Solutions isn’t listed in Droneshield’s slides. It will be worth monitoring which companies are getting contracts and the associated values, in particular LITEYE.

• Droneshield - Detection & Defeat - Announcement
• D-Fend Solutions - Forced Land - Announcement
• LITEYE - Detection & Defeat - Announcement

• Bill amended last year in Australia for critical infrastructure owners to assess and mitigate threats against facilities. This will need to include threats from drones. (This could be a bit of an opportunity for AVA as well)

Summary of Reforms

This one has taken me a while to work through, and the rest of the sections are still in the works but here is my first pass on the business summary for Droneshield.

• What does the company do and is it easily understandable?

Droneshield is a provider of UAV countermeasures including drone detection, tracking and disruption. They provide products and services to both the public and private sectors.

• What is the problem the company is solving and how are they solving it? - Where? Why does it need solving? 

As drone technology becomes more sophisticated, drones are increasingly being used as tools in nefarious activities such as smuggling of drugs and weapons, disruption to airports and other infrastructure, spying, remote controlled explosive devices etc, which are costly to the asset owner in terms of capital, reputation and human cost.

Due to their size drones are unable to be detected using conventional technologies. Droneshield provides a range of fixed and portable equipment which can detect, track and disrupt a drone’s flightpath. These devices can be used to protect critical infrastructure and locations from the threats listed above.

• What is the company business model? What is the pathway from product/service/offering to payment? 

Droneshield sells their devices to both private and public entities through a mixture of direct sales and partnerships. Typically a proof-of-performance trial or extended tender period are a precursor to being awarded a contract.

• Is the product offering diverse and therefore income generation diverse?

The company offers a limited range of fixed and portable devices, which can be mixed and matched to provide a tailored solution to their clients needs. The limited range of equipment is a risk in the rapidly evolving technology area, however droneshield are regularly releasing upgrades and new products to compliment the existing product range. 

The limited offering could be seen as a potential risk.

Diversity in income is primarily from the range of clients / applications for the technology.

• Is the company a price maker or price taker?

The counter drone equipment space is rapidly becoming more competitive, (8 competitors are listed in the company investor slides) and although Droneshield claim their technology is superior, they are a price taker.

• Does the business generate recurring revenues? How reliable is this recurring revenue? 

Recurring revenues are generated through ongoing software upgrades to the equipment. The recurring revenue would be expected to last for the install life of the equipment where it has been taken up by the customer. (Estimate ~5 years?) 

Currently recurring revenues only make up around 4% of total revenues as of H1FY22, but as the install base of hardware expands, the recurring revenues from software sales are expected to grow.

The CEO has stated that he expects this component of the business to grow to ~ 50% of revenues in the future.

• Who are the core customers of the business?

Core customers are government entities, such as military & law enforcement, but private sector customers are growing such as airports and infrastructure owners.

Currently defence makes up 75% of revenue and the intelligence community 15%.

• Is the customer base diverse? / • Does the company operate in multiple markets/countries?

Droneshield sells to a global customer base. (Limited by Government approvals etc). Revenue splits for H1FY22 can be seen below.

• Is it easy to convince customers to buy the products/service?

Initial sales are usually led by a proof of performance period or trials of the product, there are also significant onboarding and vetting processes to be able to sell products to many of the government institutions that Droneshield has as customers.

Once these barriers are crossed and droneshield has been awarded a contract, sales become much easier.

As drones increasingly become an problem in need of a solution the global sales pipeline available to Droneshield continues to increase. (Note. As reported by DRO)

• Does the company operate in stable markets?

Both the markets and customer base of Droneshield are stable and low risk of having significant disruptions all at once

• Is there a history of launching new lines of business successfully?

The company has launched several products over the years which complement each other. Each has had progressive trials with several entities leading to contracts.

• Is the company disruptive and innovative in its field?  

Droneshield uses similar technologies to many of its competitors using RF Jamming for its defeat options, and RF, EO/IR, Radar for it’s detection technology.

• Are the profit margins attractive (better than industry)?

Currently gross profit margins currently are around 70% (H1FY22) 

• What are the CAPEX requirements and are they ongoing?

To be able to deal with additional or large orders, droneshield has manufacturing partners to be able to subcontract to without the need to scale up its own facilities and maintain the ongoing operating expenditures. This does incur additional manufacturing costs but currently contracts are lumpy which make scaling up their own facilities a risk.

• To what degree is the business cyclical?

A large part of droneshield’s current revenue is based on government military spend, which although budgets are usually relatively stable the allocation of the budgets can vary. As Droneshield expands across wider industries and geographies the cyclicality may smooth out.

• What extent does the business experience operating leverage?

Droneshield sells manufactured devices which means there is a fixed cost that is required for each unit sold. There may be elements of efficiencies of scale, but that can’t be relied upon. There are two things working in the favour of Droneshield. 

First, most of the business’s main overheads and operating expenses have not been increasing with sales. Once staff costs do the same there will be an element of operating leverage that will appear as sales increase as operating expenses become a smaller portion of the overall expenses.

Second management have indicated that they are targeting for software upgrade sales to increase towards 50% of revenues and SaaS style sales tend to lend themselves much more favourably for demonstrating operating leverage at scale.

• How does interest rate increase and inflation affect the business?

The manufacturing costs and operating costs will be impacted and likely increase at a rate near that of inflation. As each contract is usually tendered at a single point in time supply, cost increases can be passed on to customers.

Droneshield has minimal liabilities so interest rates don’t have any significant impacts.

• Does the company spend a reasonable amount on R&D? Look at how R&D evolves over time in % of sales.

 R&D spend has stayed relatively steady at around $200k - $300k per quarter over the last 3 years which has now decreased from over 100% of sales to less than 10%.

• Is the company unknown or misunderstood by the market?

Being at the smaller end of the market and with an average volume of $120k of shares traded per day Droneshield is still a hidden company. Given the sector in which they operate it is easy to dismiss the technology if the partners and client base is not known.