Some strong numbers from Droneshield today -- but not strong enough for the market, which has already priced a lot of growth in.

Contrasting Q1 and Q2, we saw $16.4 million vs $7.4 million, respectively, in terms of revenue. This could be due to timing of large orders or contracts.

Cash receipts were a lot stronger ($7.1m vs $14.2), reflecting the lift in Q1 sales.

From a SaaS perspective, we saw Q1 $561k vs Q2 $721k, showing continued growth in recurring revenue.

Cash Balance up massively, due to the >$100m cap raise in the quarter.

Inventory was up 75% as the company prepares future sales.

Likewise, we saw significant team expansion: In March we had 120 team members (95+ engineers), now 151 team members (114 engineers)

As well as more manufacturing capacity: going from $400m pa to $500m pa.

Sales Pipeline growth was massive -- pretty much doubled to $1.1 billion. The contracted backlog was about the same though suggesting steady order intake and delivery rates.

The operating cash outflow (going from -$10.7 million to -$18.9 million) seems to reflect the inventory build-up and team expansion.

You can see the full preso here.

My take remains the same -- the company seems to be enjoying incredible growth and the future looks bright -- but that (and more) is already captured in the price.

Shares in Droneshield catching a bit of a bid this morning after they announced the release of their latest product -- DroneSentry-X Mk2

No indication of what this means financially -- they'll just have to wait and see what the take up is like. But good to see some output from all the R&D and the timing of the release ahead of the AUSA 2023 expo can't hurt.

Not sure the news warrants a 10% jump in the share price? But I've long given up trying to find reason in daily share price movements.

ASX announcement here

As expected, the first half results are pretty strong for Droneshield. This slide highlight the key numbers well:

Small point: It's interesting that for a business that is now firmly commercialised and growing, well funded and at the breakeven inflection point, the results preso puts a lot of emphasis on the technology use case and Total Addressable Market. More what you tend to see when there aren't any good financial numbers to do the talking for you! Hard to miss the emphasis on AI too -- they're not blind to what the market is excited about at present.

Anyway, as Oleg said to us recently (see here) the second half is positioned to deliver further growth and the 5 year target of $300-500m in revenue. During our meeting he seemed to suggest around $70m in revenue for the full year (they report on a calendar basis). So that puts shares on a 2.6x sales multiple.

Maybe not that high if they can sustain their growth and hit aspirational targets. I'll try a rough-cut valuation in a moment.

ASX presentation here.

We'll have the recording with Oleg up soon, but just wanted to add a few small notes while they are fresh.

• He strongly hinted that revenue would be around the circa $70m this year (just based off things that have already been announced) -- compared to about $17m last year. Also, that the business would be "easily" profitable.
• Manufacturing capacity at present could support $100m in sales, and up to $300m in sales within the next 6 months
• They've already announced a $200m sales pipeline, but said that they are working on several large opportunities. I'd guess these would be akin to the $33m deal with the US announced in July.
• Gross margins for hardware are not disclosed, but well north of 40%
• They genuinely seem to be one of the key market leaders in this fast growing space, and well ingratiated with key customers.
• Expect staff numbers to ramp up considerable in the coming years to support top line growth, of which they are targeting $300-500m in 5 years (already announced). Half of that will be SaaS and R&D revenue.

Droneshield has been added to a MSCI index.

Doesn't really change the business, but probably provides a bit of support short term (even if the weighting is likely quite small within the index).

Just a few quick notes following our meeting with Oleg while they are still fresh in my mind. I would encourage you to watch the recording if you missed it (see meetings page).

I'll be honest, I last looked at this company a few years ago and pigeon holed it as a serial capital raiser, always bleeding cash and always on the cusp of something big. Yes, the technology seemed cool, but what could a tiny ASX company really bring to the table when you (i assumed) have some huge military-industrial giants likely in the same space?

So the first thing to note, taken Oleg at his word, is that Droneshield is the global leader in this very fast growing space. It sounded like they were well ahead of competitors, with a decent first mover advantage and a far more holistic product set.

Contract negotiations -- especially with defence agencies -- can be very protracted, but then tend to be very sticky. Given their existing partners in this space, they seem to be very well placed to win a lot more work here. Indeed, Oleg certainly suggested that they expected a lot more orders in the coming years.

Another noteworthy fact is that they have essentially doubled revenues each and every year in recent times, and Oleg suggested that they would again get close to doing that in FY23 (ends Dec31) -- although there can be a month or so delay between contracts signed and revenue recognised. He said that things could triple in the following year.

What really stood out was that they achieved cash flow positive status in the 3rd quarter and expect this to be the case each and every quarter going forward. With $7.5m in the bank, assuming this is true, they should avoid any capital raise. And while it's true that the global economic picture isn't pretty, this is a business that is seeing some strong tailwinds -- such is the state of the world :(

Oleg mentioned that the cost base was pretty well established and could handle 10x revenue here -- at least from an engineering perspective. There could be some additions in terms of sales. The use of contract manufacturers to help provide some elasticity to their own capacity seems smart given the lumpy nature of orders. It was also prudent, it seems, to bulk up on inventory given chip and component issues in the global supply chain.

At present 70% or so of revenue is hardware based, but Oleg expects that SaaS subscription revenue will grow to about 50% in the coming years.

Assuming (conservatively) that they do $15m in sales this year, the company is on about 3x sales. Doesn't seem that onerous for a CF +'ve company with expectations for continued strong sales momentum.

I don't own at present.