Full disclosure - I sold out of EOS yesterday.

Reasons why I sold out:

1) CEO said EOS RWS had clear competitive advantages, and was winning most of the contracts it entered. I just learnt yesterday, the recent purchase of Abrams tanks includes the competitors product (Konsberg). WTF! If the EOS product is so good, why did the Australian Dept. of defence select a foreign competitor?

2) Unable to secure off take agreements for Spacelink in originally promised timeline.

3) They had to downgrade the Spacelink constellation, as they clearly could not fund the full monty.

4) The CFO resigned, without notice, with the announcement released at the close on a Friday.

5) Rumours abound that Rheinmetall has won the lucrative IFV contract, the announcement of which is delayed, possibly due to problems with the Boxer contract (in order for defence to gain leverage on Rheinmetall.

6) Strategic review underway - indicating big problems internally.

If you continue to hold, I wish you luck, but I would expect the CEO to go, and a capital raise in the near future.

At 3:52 pm on a Friday, EOS announces the resignation of their CFO.

The resignation had immediate effect, and no explanation was given for his exit.

Financial Review exclusive: Raytheon, Lockheed Martin at the pointy end of missile deal

Key takeaways:

1) The government is also expected to name the winning tender for its armoured personnel carrier contract (IFVs), a deal worth up to $27 billion, with sources saying defence officials had recommended the German Rheinmetall design.

2) Sovereign Missile Alliance -Looks like it is a dead duck.

Industry sources said the major stumbling block remained the transfer of US intellectual property to Australia. Although the White House and Congress are broadly supportive, it will only happen if the US is assured their companies can keep a tight rein on it.

That complicates what role two local consortiums, the Australian Missile Corporation and Sovereign Missile Alliance (EOS), could have in the project. Both consortiums were created for the sovereign missile enterprise.

Sources said Defence and the government swung between allowing the consortiums access, mindful of the need to support local industry, versus the desire to get the best technology.

Defence Minister Peter Dutton was said to be in favour of getting the most capable weapons as quickly as possible, even if that came at the expense of local involvement, in light of the deteriorating strategic circumstances.

It is expected both American companies will argue they need to be in charge of final assembly of their missiles. One suggestion has been a government-owned common facility to assemble both companies’ missiles, although that could meet resistance.

“If Defence gets its hands too dirty into dictating a supply chain, they might well be unwilling to transfer their IP,” one industry source said.

Another source said the US government was more likely to allow the transfer of intellectual property to the Australian subsidiaries of US defence companies.

It's not looking good, but depends on whether the government follows Defence recommendations or not...they may use a colour coded spreadsheet to make their final decision.

Long suffering shareholders - suffer no more - A strategic review is underway! LOL.

Most concerning line in the announcement:

"Given the SCALE of the Spacelink funding commitment, conflicting demands on capital and the linkages with EOS shareholder value..."

In another words, EOS needs more capital to fund its ambitions, and perhaps getting funding / capital injection on reasonable terms for Spacelink has been unsuccessful.

But, there are a a couple of potential positive catalysts in the near term as follows:

1. LAND 400 Phase 3 is sure to be announced in the federal election campaign. If the Hanwa team wins, this will be a significant boost for EOS.
2. Spacelink offtake agreements - I had a reminder in my calendar that we needed to see these flowing by the end of the month to firm up financing - This announcement does not bode well for any success in closing contracts. Perhaps the Aust. government will make announcement regarding this in the election campaign ??? But an offtake agreement with Australian defence will not be enough to get this off the ground.

I am giving them a little more rope until end of April.....

DISC - I HOLD (for now)

EOS have announced the development a new turret variant. Video here.

EOS has announced OHB are the preferred tenderer for satellite manufacturing project.  Key features of the announcement:

1) Expect contract to be finalised and signed next week, with  contract value in excess of $300 Million USD.  

2) Satellites to be delivered by March 31, 2024.  It is unclear to me if deliver means complete manufacture, or launch into orbit.  

3) The contract will require progress payments on achievement of milestones.  This is a different arrangement to what was originally flagged when the project was initiated. Originally, the CEO said he expected the manufacturing to be financed by governments hungry to secure space manufacturing work.   Now, Spacelink will need to secure funding. More on that below. 

4) Intial payment tranche will be funded by OHB, who will take a $25 million stake in Spacelink.   It is unclear how much ownership this $25 million convertible note stake will deliver to OHB.  

My thoughts are, that the risks are somewhat higher than what we were led to believe.  EOS will now need to raise capital to fund the manufacture of the satellites within the next 6 months.  This, in turn will need them to sign up offtake agreements within the next 4-5 months. 

If they don't, shareholders will be left holding the bag. 

DISC - I HOLD. 

Korean Army to trial AS21 redback (fitted with EOS T2000 turret), taking one of the 3 prototypes from the Australian risk mitigation trial in 2022.....article here..

DISC - long suffering shareholder....!!

I have been a long suffering shareholder of EOS for some years now.   I have been struggling with thesis creep, as managment are very adept at kicking the can down the road, and selling the blue skies ahead for the business.  

Their H1 results were more of the same, with the following notable items:

1) Spacelink stratgy change.  Now they need to fund via debt, as they can't find business partners at startup.  The plna now is to initiate construciton via debt and finance, and then onboard investors as they sign contracts (which they reckon they have MOUs of $200 M USD to convert).  This is qutie a change, and increases risk.  They hav eindicated the contracts will begin to flow by end of Q1 2022.  

2) $1 BN in tenders slipping form H2 and into Q1 next year.   Conversion timeline slipping again,

3) $100 M cantrct asset conversion.  If you trust maangement, this is resolved, and will be able to repor ton cash conversion by end of October.  I'll trust them on this.  

So what to do......let the thesis and execution continue to slide?  Well, it is understandable contract timelines can slip when dealing with governments.   So I am going to give them slack until March 30, 2022.  If they don't deliver the following, I am out:

1. Been awarded $1 BN in contracts as promised in August? Incl. NATO ROCV Contract?
2. Have they signed commercial agreements for Spacelink yet – They guided for this.
3. UAE Contract asset should be history by now……
4. Land 400 Phase 3 contract – has it been awarded?

It's in my diary.!

DISC- I HOLD

EOS reported HY results for FY 2021.  Key takeaways:

1) Contract Asset Saga Continues.  EOS has negotiated amendments to contract, which have apparrently been agreed to and awaiting sign off with Defence Ministry.  EOS report they will invoice +$68 million once sign off is received, and they will update on when payment will be received in the Q3 4C report (due late October).   The CEO advises phase 2 will not have the same issues in realtion to long debtor cylces. 

2) CEO reports defnce segment contract tender cycles have lengthened, with procurement delays for NATO ROCV contract, and the counter-drone contracts.   EOS aiming to close most of $1 BN in contracts by close of Q4. 

3) Contract award for satellite construviton to be awarded over the next 30 days.  Debt to be used to fund 40% of Spacelink, with equity partners to be onboarded in stages.   The reasoning being, Spacelink's enterprise value will grow over time, as it is awarded contracts, and as the enterprise vlaue increases, so will the required dilution of EOS ownership.  CEO re-iterates, no futher capital required form EOS shareholders.  Risk weighted revenue pipeline now at $200 M USD per annum ($150 M was business plan goal).  

4) Communications business travelling well with record backlog.

5) Space sector experiencing delays in the contract tendering cycle, and htis will continue into FY2022. 

So, the short thesis is not quite busted..........the question is, are EOS management kicking the can down the road as it were in relation to contract issues / Spacelink risks, or are managements assurances legitimate?  Looks like we will need to keep waiting to find out.

DISC - I HOLD.   

Chairman, Fred Bart, has resigned from the board. 

Mr Bart is also Chairman of Audio Pixels Holdings Ltd, Director of Weebit Nano, and Noxopharm.  It is fair to say he has had a colourful history, most notably at APH.  

I see his departure as a positive, and may go some way towards restoring investor confidence over the longer term. 

DISC - I HOLD

Key takeaways:

1) Cashflow - Its positive! With $65.5 M hitting the coffers, up form $51 M in prior quarter.  Over $100 M illion in cash from the UAE contract to come in H2 2021.  Probably another $30 million in cash coming via DoD Hawkei RWS contract in H2 as well.  SUMMING UP, CASHFLOW CONCERNS LOOK TO BE DISCOUNTED BY THIS REPORT. 

2) >$1 Billion in contract awards potentially award in H2, 2021. 

3) Spacelink report confirmed negoitiations regarding financing ontrack for resoluton by end of Q3 2021.  Although news on the sales front was sketchy, but it would be impossible to be more transparent at this stage. 

4) Titanis trials / demonstrations over H2 2021.  

5) Partnership with Diehl Defence to build a production line in Germany for Defence products for sale into Europe. 

DISC - I hold. 

EOS reported $20 M of contact wins with ADF, which will be delivered over the next 24 months.  

The majority of revenue will be recognised on FY2022, and is a good lead in to projects beyond 2022.  

One contract is for 3 Cobra terminals for 3 of the 6 ships in the SEA 1180 program, and 12 ships in the SEA1445 program.  So, there is a long pipeline of contracts in the years ahead. 

DISC - I HOLD.

Following the short interest, and concerns over cash conversion, I have had the opportunity to see EOS's response to the some o the bear case concerns:

1) Cash conversion.  The CEO reported cash as at May 28, was around $60 million, up nearly $20 million since March 31.  

2) CEO expressed complete confidence in payments, arguing they would never entered into the UAE contract if there was a credit risk. 

3) CEO said they are able to negotiate better payment terms (including cash upfront) with customers now, as they are a more established business, indicating the long payment cycle associaited with the UAE contract is a one off issue.  

4) Spacelink.  EOS currently arranging finance and minority partners for the separate entity (to be resolved by December).   Once this is settled, the value of the Spacelink business will be better understood.  Currently, the market is applying no value at all to this business. 

5) CEO reported anti-drone and ROCV technology developed by EOS has little competition at this time, with a tsunami in demand coming, including a +$1 Billion contract in the final stages of negotiation (3-6 months away from announcement). 

6) CEO advised they are very happy with the perfrmacne of their turret T2000 in the LAND 400 trials.  

DISC - I HOLD

Following a detailed review of the issues, I have decided to take management's word, given there is little downside in the share price at these levels, and IMO significant upside.   The high short interest also means there will be a strong pipeline of buying support should management execute, and shorters cover their positions.  

I've been doing a bit of digging, and it appears the defence contractor EOS is working with in the Middle East is NIMR Automotive, a subsidiary of Emitrates Defence Industries Companies.  

NIMR automotive develop and manufacture infantry fighting vehicles and infantry transport vehicles, with a focus on desert terrain / environment.  

They are expanding into SE Asia, and perhaps this is why EOS have a presence established in Singapore.  

My concern is the time it takes for EOS to get paid by this client.  EOS is yet to be paid for most of the product it made last year. That requires substantial capital to fund. 

Ok,  Key takeaways:

• Revenue expected to exceed $240 M of FY2021 - About 35% growth on PCP. 
• Underlying EBIT guidance of $20-25 M (excludes Spacelink establishment costs).   Spacelink costs $17 million. 
• Indications from EOS customers guide for revenue growth well above 30% far beyond 2023. Recovery to +50% growth not expected before 2023.
• No new capital required, unless revenue growth exceeds 70%. 
• Spacelink funding to be secured in Q3 2021.  
• +$1 billion of contracts in advanced stages of development with existing EOS customers.  
• Preferred tenderer on 2 counter drone contrcts worth more than $1 Billion USD.  
• "Demand tsunami on the horizon".  Is this statement just hyperbole?  

Backlog of $428 M and $535 million of cashflow.   

EOS state thaey have achieved minimum scale required to meet mandatory compliance requirements for next stage of growth......

With $41M in cash at the end of Q1, I think they need to give some more clarity around cashflows - We need to see +$80 M cash per quarter hitting the coffers for the remainder of the year to give us confidence they can fund projected growth.  

DISC - I HOLD.   

EOS is one of my largest holdings.  With escalating short interest in the business, I thought I would write down what I think this thesis is, and whether it holds water.  Here Goes:

EOS's Profitability is in Paper Form, and will Never Convert to Cash. 

FY2019 Revenue: $166 M

FY2019 cash receipts:  $109.2 M

FY2019 Contract assets*: $98.3 M

FY2020 Revenue: $180.2 M (up 8.6% on pcp)

FY2020 cash receipts:  $107.6 M (down 1.5% on pcp)

FY2020 Contract assets*: $191.8 M (up 95.1% on pcp)

* Includes contract assets and inventory

Clearly, the balance sheet has expanded boosting revenue, despite cashflow falling slightly.  

This change in contract assests over the 2020 would have flagged EOS as a shot candidtate to quant analysts.  

Management / Board 

In the full year results, on February 26, 2021, the management stated: “Contract asset conversion to cash to deliver >$120m cash flow in H1”

The above timeline failed to eventuate. On May 12, 2021, EOS announced under the headline: “EOS Cash Receipts Accelerate” -  “EOS anticipates further cash receipts of over $100 million from this business by Q4 2021”.  This is a 6 month delay from what was guided previously, with management seemingly spinning the announcement as an upgrade to cashflow guidance.  

This announcement revealed the second part of of the short thesis: Management can't be trusted, and are hiding a deeper malaise. 

One could dig deeper into the board, and there is a board member with what may be regarded as a colourful history, who has links with other businesses that promise much, and deliver little for shareholders.    

My Thoughts

I believe the reasons for the expansion of the balance sheet have been well explained and are justifiable in the short term, given supply chain and contract disruptions due to the pandemic.   However, the delay in cash conversion is a concern, and I believe management need to work hard on explaining how cash receipts can be delayed by up to 6 months in such a short space of time, and give shareholders a clear picture on when this contract will be converted to cash, and importantly, whether delays in payment will neccessitate a capital raise to fund phase 2 of the contract.  

On management,  I trust the CEO, and he comes across as a genuine person, however, I do not feel the same what about the board, who I think may be letting him down.   The CEO needs to be more open and honest in his communication, but I think this may be adversley influenced by board members.  This is just my theory, and I have no inside information on board discussions.  It is just my impression from behaviours of certain board members in other companies.  

I have EOS on a tight leash, and I am keen to see management address their communication style (less spin, more substance).  

If anyone has a deeper knowledge of the short thesis, I would love to hear from you. 

DISC - I HOLD

Correction.

EOS reported cash receipts from $138 M inventory build up are now flowing.    EOS confirmed the $138 M inventory will be converted to cash by the end of December (IR clarified today).   This is 6 months behind what EOS managment guided for in February.  One would ask the question, if cash receipts are 6 months behind, what about the commencement of Phase 2 of the project? 

Given this clarification, Q2/Q3/Q4 cash receipts will exceed $60 M per quarter (given there is about $100 M in ADF contract to be delivered this year as well).   This is not as great as I first interpreted in the announcement.  

There has been growing short interest, based on the thesis that inventories and work in progress may be fictional and not convert to cash.   

Given cash burn was $100 M since Q1 2020, and management over promising/under delivering, I can understand the short thesis.    

DISC - I HOLD.  

Summary of key Points: 

1. Operating Cashflow - -$12.6 M.  EOS have burnt $104M in cash since Jan 2020.  There was $125M in contract assets on the balance sheet as of Jan 1 2021.  Management report most of this will be converted to cash by June 30, 2021 - Something to watch closely. 
2. Defence reported $120 Million inventory delivered to customer for testing and acceptance over quarter - refer item 1 above.
3. Defence reported R400 product achieved new industry benchmark for range and precision, extending their market leadership. 
4. EOS expect an initial order for RWS as part of Remote Operated Combat Vehicles (ROCV) from NATO member (Netherlands?) by June 30.  Follow on orders expected in 2022. 
5. Mopoke counter UAS system - Full Mopoke system deployed for field tests. 90 days of customer evaluations underway, with contract awards expected from H2 2021.  
6. Communications Systems - EM Solution xperiencing record demand with stong ongoing pipeline. 
7. Spacelink - On track for June 2024 deployment. Concept design finalised.  Contrat award for satellite construction by July.  
8. Spacelink sales "progressing well" - MOUs signed (Aus & US).  Revenue pipeline is forecast to exceed $100 M per year by 2025.  
9. Spacelink funding and financing expected to be completed by July.  

Some valuable takeaways: 

Defence Systems:

1) Risk weighted Pipeline: $3.5 BN, but major awards not awarded to late 2021 and 2022.  So, backlog will not start growing until 2022-23.  Backlog is currenlty $403M, which will be competed by 2023. BACKLOG LOOKS TO BE A LITTLE LIGHT ON, GIVEN THEY HAVE PRODUCTION CAPACITY OF $450 M pa. 

2) $120 M of inventory to convert to cash in Q2 2021.  

3) Large CUAS project to be determined in Q3, via a "shoot-out" with competitor.  EOS state they are very confident of winning the "shoot-out", as they assert their Mopoke product is the pre-eminent product on the market - the contract is expected to be awarded in Q4.  THIS IS SOMETHING TO WATCH CLOSELY, AS IF THEY DO NOT WIN THIS CONTRACT, THEIR COMPETITIVE ADVANTAGE MAY BE JUST MANAGEMENT SMOKE AND MIRRORS. Also, if they win this product, it will likely lead to further opportunities, as the Mopoke product will be tried and tested and come up on top of the competition. 

4) EOS have commenced production of their directed energy (laser beams) product, as they anticipate strong demand for the product.  

Spacelink:

1) Spacelink constellatIon funding expected to be announced in Q2 2021. 

2) SpaceLink maturity now allows a capital raising in the US without recourse to the ASX listed entity

Space Systems:

1) $49 M risk weighted pipeline, with $754 M in contracts to be awarded in 2021 and 2022. 

EM Solutions:

1) $173 M risk weaighted pipeline, with awards falling in 2021 and 2022. 

GUIDANCE

Management expects strong revenue growth and a return to normal levels of profitability in 2021. EOS expects to issue specific guidance at the AGM on 28 May 2021.

Management are guiding for a big 2022, flagging significant contract awards to come in 2022.  TIME WILL TELL. 

DISC - I HOLD

Barnaby Joyce has brought shares in EOS, after questioning EOS executives in a Federal Parliamnetary inquiry into the Space industry.   

He said he brought the shares after seeing they have gone up a bit lately.    

EOS have denied providing insider information to Barnaby, and have denied meeting or communicating with Barnaby outside the inquiry.   

Perhaps Barnaby knows the government is looking to throw money at a sovereign space industry.....

Notworthy management hurdles are as follows:

June 2018 Share loan issue-

Tranche B -  a Share Price Hurdle of $7.50 by 31 December 2021 (this hurdle must be reached on at least 30 trading days, not necessarily consecutive, by 31 December 2021)

Issue of shares during the year ended 31 December 2020-

Tranche A - A share Price Hurdle of $9.50 by 31 December 2021 (this hurdle must be reached on at least 30 trading days, not necessarily consecutive, by 31 December 2021)

Tranche B - A Share Price Hurdle of $11.50 by 31 December 2022 (this hurdle must be reached on at least 30 trading days, not necessarily consecutive, by 31 December 2022).

Shares issued under the share loan scheme are forfeited if the above conditions are not met.

In more insider buying, new EOS director, David Black, acquired $50 k in shares.   

I woul dlike to see more buying from EOS directors - would prefer they held more shares....

DISC - I HOLD

Results for 2020 were heavily impacted, with COVID-19 disruptions resulting in a $25 M loss for the year.    However, looking forward, there are strong positives:

1) $100-130 m in cash to hit the balance sheet over the next 5 months, as contract assets convert to cash.  

2) Technology improvements in their RWS, and optical communications extends its competitive advantages.  

3) Spacelink breakthrough.  EOS will jump to the hybrid RF-optical technology, as the development has exceeded expectations to a point it is production ready for the stage 1 satellites.  This means he satellite will have 2-3x the bandwidth of the original proposal.   

4) Over $500 M pipeline for Spacelink.   EOS is finalising financing and confirmed no additional capital will be required from shareholders to establish the business, and EOS advise they will retain controlling onership o fthe business.   NPV of business case is $1 Bn USD.   

5) Trials underway for European ROCV contract.  With contract likely to be negotiated by October this year.   

6) Risk adjuested pipeline of $3.6 Bn.  

7) Defence systems business will have propduction cpaaity to deliver $900 m in product per annum in the medium term (current capacity: $450 M pa).   

8) Directed energy (lasers) product to enter production by mid-year. 

9) Defence systems market opportunity is claimed ot be over $40 Bn USD over the next 10 years.   

Market update / forevast to be given at AGM.  

DIC: - I hold.

EOS wins a $34.4 M project with Dept. of Defence as head contractor to deliver contract under "C4 EDGE" program.   

Contract to be completed in FY2021, so it is probably a 10% boost to FY2021 revenue, and could lead to further opportunities in the future......

More details revealed on the development of this business.  Key takeaways:

1) Project to be funded via a comination fo 70% debt and 30% equity via SPV.   By this, it appears third parties will take a 30% interest in the business, with no capital input required by EOS.   EOS will retain majority ownership.  

2) Project is conservatively estimated to be 20%, based on a capital cost discount rate of 8%.   With discounted cashflow valuation of $1 billion US per constellation.  Note: There will be three constallations developed over the next 10 years, with improving capacity and ROI. 

3) EOS Spacelink has limited competition, through Airbus and SES, but they lack the bandwidth and technology EOS possesses. 

4) EOS Spacelink has perpetual access to 64% of RF bandwidth, initally with 100 GPs capacity.   Quite a moat here.  

5) 2nd generation constellation will be a partical hybrid of RF and optical communications, with 4x the bandidth of 1st generation.  Expected to be commissioned in 2027.   

6) 3rd generation constellation will be full hybrid optical of RF and optical communications, with +10x the bandwidth.  Expected to be commissioned in 2030. 

By 2028, EOS Spacelink, 1st generation, will be generating $262M USD in revenue. By my numbers, generating $80 M USD in profit to EOS.   With 2nd generation coming online at that time.  

EOS has signed the contract with the Austrlaian Govt for 251 RWS previosuly announced.  The contract value is around $94 M, with $28.5 M being paid in cash in Q4 2020, with the remainder for the contract being executed in 2021.   

Reassuring boost to cashflow, which will raise hopes of no further capital raises,in the near term (noting the satellites are going to cost $1 Billion).   

EOS Announced on September 8, 2020 a new product range, called "Mopoke", which is the world's first comprehensive counter-UAS (drone) system.   Key highlights:

1) First comprehensive solution on the market. 

2) Only solution that includes directed energy (lasers) weapons (Development of technology courtesy of EOS Space Systems). 

3) The EOS system's 10 elements (features) have surpassed all other competitors in terms of performance in recent trials. 

4) Estimated TAM to be $21 Billion over next 10 years.  

5) EOS selected as the preferred provider for ajor international CUAS requirement.  First phase of contract negotiaitons to be concluded in the next 6 months.   

6) Further 4 customers have initiated "discussions" with EOS. 

Great news, and demonstrates EOS's optionality, but damn these defence sales cyces are long.  

https://www.defenceconnect.com.au/key-enablers/6473-podcast-maintaining-agility-through-covid-19-grant-sanderson-electro-optic-systems

Great insight in this interview.   One key takaway is that EOS has around $150 M of Work in Progress stuck in their factory due to supply chain disruption, but this is expected to be cleared by the end of September.  

Also mentions the opportunities in the recent defence strategic review, but higlights the bigger opportunities are offshore.

EOS Contract with DEpt. of Defence worth $100 million.........https://www.australiandefence.com.au/news/eos-to-supply-rws-under-approx-100-million-stimulus-deal

Given they remain in a trading halt, there is a possibiility there are other contract announcements pending.  

Ok, dept. of defence will be spending $13.5 Billion on Space and Satellite Communications.   Here is where:

1) Satellite Communications: $6.9 Billion over 10 years.  It looks like defence will establish low earth obit satellites, which need MEO satellites to communicate - EOS's MEO satellite communications will surely be a beneificary, providing high margin communicaitons services. 

2) Space Situational Awareness: $2 billion over 15 years.   This is right in EOS's sweet spot.  They will surely win a significant chunk of work through this. EOS are developing two new failities in Qld and SA to support data sales. 

3) Terrestrial Operations in Contested Space: $1.4 -2 B form 2027.  This is reliant on tracking data , and further R & D to develop and improve such data - This will surely require EOS's expertise. 

4) Satellite Communications Assurance: $1.7 - $2.6 B from 2028.  This expeniture is about defending and securing the space domain (i.e. EOS laser technology anyone?).   This is presumably an opporutnity to deplo EOS's laser technology to move space objects around perhaps.   

So this looks to be a great opportunity, and it is perhaps an opportunity greater than the Defence Weapons business if Australia's allies need similar technology.   

ScoMo announced $270 Billion in defence spending over the next 10 years.   What is interesting is this (from ABC report today):

The Government will spend $15 billion on cyber and information warfare capabilities over the next 10 years, $1.3 billion of which will be used to boost the cyber security activities of the Australian Signals Directorate and the Australian Cyber Security Centre.

Including a network of satellites for an independent communications network, $7 billion will also go towards improving Defence's capabilities in space....

This is a huge opportunity for EOS, and perhaps is why EOS spiked +15% this morning.......

Disc.: I hold EOS

the EOS Communications business, is only months old, but has made tremendous progress, and has the technlogy to transform satellite communications over the next 10-15 years.    

Here is a video from one of EOS's competitors, SES Satellites, which gives you an idea of the use cases for the a Mid Earth Orbit (MEO) satellite constellation:  https://o3bmpower.ses/use-cases/cruise.

Extensions to SES Satellites MEO constellation is scheduled to be launched into space in 2021 by SpaceX.  SES Satellites Netork revenue was 745 M Euro last year, for their GEO and MEO networks (unable to separate out their revenue), with an EBITDA margin of 62%, and profit margin of around 20%.   

A very profitable business.   SES Satellites has a marhet capitalisation of $3.5 BN Euros ($5.7 BN AUD), or 7x EOS's market capitalisation.   

Intersting the annoncement was not price sensitive.   Two key points:

1) CEO of communications Appointed.  Mr Glen Tindall.   He looks to be a high calibre individual (look here: https://www.linkedin.com/in/glentindall/) , with deep knowledge and connections in the space communciations sector. 

2) Acquisition of Collinear, as US based communications business, with a unique hybrid communicaitons technology that appears to fit in well with the EOS strategy.  They have a team of about 40 employees, so I am guessing they generate around $8 Million in revenue, which is a bit under 5% of EOS revenue.   

Will be interesting to watch the satellite constellation develop ove rhte next 3-4 years.   

PS -  EOS are building 4 satellites, and I believe one of them is a spare one in case the launch of one satellite fails.  Remember this if one satellite launch goes wrong......

Some interesting takeways from Dr Greenes presentation:

1) Defence - RWS total Addressible market is $16B.  With ROCV (remotely operated combat vehicles) being the fastest growing segment.  EOS has a powerful competitive advantage, due to its accuracy and reliability.  The CEO reported the EOS system consumes 1/3 of the ammunition of its nearest competitor to complete a mission, giving it a significant competitive advantage.  Further upgrades have increased the capability of the RWS's systems, which can now incorporate anti-tank weapon systems.   Given the relentless innovation being demonstrated, it is quite possible EOS will dominate this market for years to come.   

2) Satellite communications.   EOS reported that all mid orbit satellite communication network competitors are profitable, due to the difficulty in establishing mid orbit constellations.  The EOS has secured communications bandwidth that is in the order of 3-4 times larger than the next 3-4 competitors combined. 

3) EOS forecast having $200 m in cash by the end of FY2021.     They are also in discussion with suppliers and customers around ways to finance / fund the satellite constellation capital costs.  EOS will not need to fund the satellites until 2024, and will report on funding negotiations in 6-12 months.  

4) Powerful synergies - the synergies between the three businesses are becoming increasingly powerful, with the communications business finding opportunities in the ROCV sector (where reliable communications are critical), and the space business securing the Communications business satellite network - which is highly valued feature for defence customers, among other synergies

EOS has received regulatory approval to acquire Audacy, which means EOS is going into space.   

More detail was provided in the announcmment, namely:

1) The constellaiton will consist of four satellites, not three, which was the original Audacy plan.

2) Constellation will cost $1.2 Billion (yes I know).  

3) Interest free finance is available on satellites, meaning the $0.9 Billion satellite cosot will not require payment until 2024.  

4) The initial constellation will not include EOS's optical technology, and will rely on RF technology. 

5) EOS has launched research collaborations to commercialise its optical satellite technology, initially in a hybrid of optical and RF communications.    

6) The constellation will provide constant communication link capability to low earth orbit satellites, which Audacy reported to have a TAM of $10 billion USD (EOS have over $100 M pa USD in commitments).   I understand EOS will have the first satellite constellation to provide this service and as a result, has first mover advantage. this will be enhanced by their optical communications technology that will roll out in around 5-10 years time.   

I certainly hope the RWS business is pumping out cash by 2024. 

Electro Optic Systems (EOS) have announced their 2019 full year results, with the key highlights:

·         $166 M Revenue, up 91% on 2018

·         $166 M EBIT, up 194% on 2018

·         $3.1 billion pipeline.

EOS have invested $800 million in R & D over the past 20 years developing core technologies, with much of this investment yet to be monetised.  

The EOS business consists of three pillars:  Space, Defence, and Communications, with the Space business creating the core technologies driving EOS innovations in weapons, communications, and space domain technology. 

Defence Business

EOS report that market estimates of $1 billion of annual demand for remote weapons technology are being confirmed by $3 billion of upcoming contracts over the next 3 years.   The Australian operations are now close to its full, $300 million per annum, production capacity, with the US operations commencing in mid 2020, and two other facilities to commence production in 2021 and 2022 respectively.  

EOS report the total addressable market for the Weapons business is $24 billion over the next decade.  With EOS winning approximately 30% market share to date, EOS is only in the early phase of meeting remote weapon system market demand.

Communications Business

Investments approaching $1 trillion have been made in space microwave technology, however bandwidth is close to saturation in space.  Optical communications can address the limitations of microwave, however, the technology is incompatible with microwave technology.  EOS has the technology to address this problem, and this represents a $100 billion revenue opportunity.  

Through recent acquisitions, Audacy and EM Solutions, EOS can now provide comprehensive space communications capability, allowing EOS to introduce optical communications via the newly established communications business.  

EOS have reported preliminary commitments of $100 million per annum for the proposed MEO satellite constellation, named EOSLinkTM.   Ben Greene advised during today’s earnings call preliminary satellite design has commenced, and he expects tenders to be let for the construction and launch of satellites next year (subject to Audacy acquisition approvals).   Ben Greene advised countries have offered incentives, such as 4-5 year interest free loans for the EOS satellite project, with Ben Greene indicating this may negate the need for a future capital raise.  

Space Business

A change in government policy in early 2019 has required EOS to change their business model to enable direct sales to international customers.  This will increase the diversity of customers, however, has delayed monetisation of intellectual property by 18-24 months.   

EOS believes the establishment of the US Space Force, and their counterparties, along with the ever increasing threat from space debris will drive demand for their Space business offerings. 

EOS have enormous optionaltity, which is difficult to value.   In the near future, I think the current valuation will look like an amazing opportunity. 

Audacy and went into administration in 2019, after failing to attract funding and development partners for its medium earth orbit satallites.   The proposed constellation consisted of three satellites.   

Things went pear shaped for Audacy when they lost contact with a protoptype satellite late in 2018.  

Audacy had $100 million USD per annum committed in MOUs from potential customers, and planned to have the satellites operational by end of 2020.  I don't know how much a communication satellite costs to launch - can anyone help here????

The Audacy acquisition fits in very nicely with EOS's transformative satellite communications business.  

Audacy have US satellite microwave spectrum licences, which EOS will need to launch MEO satellites by June 20204 to provide microwave communications with LEo satellites and other space vehicles.     The acquisition aenables EOS to:

1) Develop own ground terminals, using the acquired EM solutions capability. 

2) Implement its optical communications technology, which will enable EOS to expand bandwidth / capacity beyond what the microwave licensing allows.  This will maximise returns on capital, and will demonstrate the benefits of the technology.   

3) over 50 potential customers haveexecuted MOUs realting to the proposed service.   

4) The prelimianry constellation design will be finalised in the short term.  

5) Remote Weopon Systme update: production is ahead of schedule for 2020.

this is a long term development, and I think this is a huge step towards EOS's development of a significant communications business. 

EOS annonced a capital raise, raising $68 million, at $6.66.  This represents about 10% of listed capital.   

The reason is because EOS can't meet demand for its technology, and has had to accelerate the capacity expansion to meet the demand.  EOS has a manufacturing backlog of $630 million, and they expect to win another $2 billion in contracts by 2022 (this is their weapons division only).   EOS has not lost a contract to a competitor in the last 3 years, which shows it market leadership.   

EOS report strong demand for their counter drone technology, with $700 million in contracts tendered, and due to be awarded on FY2020. 

The additional capital will be used to increase production capacity, through building their supply chain (increased inventory?), and expanding production capability.   

With the acceleration in production output, they have foecast EBITDA growth will accelerate to 70% pa for the next few years.   

Yoy can see the build up in inventory resulting in negative cashflow, as work in progress increases ahead of revenue.   

Some more colour in their recent presentation:  Manufacturing facility can produce 40 units per month in one shift, at $625k revenue per unit.   Potentially, additional shifts could be added, to increase output from each factory, with little further capital expenditure.   Margins should improve over time, assuming competition doesn't apply pressure to prices.  

EOS have announced they have acquired EM Solutions (EMS), a Microwave Satellite Ocmmunicaitons Company. 

EMS will form the core of EOS's new Communications Systems business segment.  Encouragingly, the acquisition was mostly via script, which aligns the EMS vendors interests with EOS shareholders.   the deal values EMS at around $26 million.  

The deal is reported as earnings accreditive, and given the business is profitable, and has over 50 staff, would indicate its sales are possibly $20-30 million per annum.  

Ben Greene said:

"This acquisition immediately establishes EOS as a credible provider for a portion of the $120 billion of space communication infrastructure and equipment to be replaced over the next 20 years. EOS intends to expand this portion to embrace most of the identified market by 2023. EOS will leverage its agile business processes and its advanced technology, now including EMS innovation, to provide strong market differentiation and competitive advantages in this $120 billion market".  

So, by 2023, EOS want to have the capability to service a $6 billion per annum market ($120 billion / 20 years).   Very ambiitous, but it if achieves just 10% market penetration, the communication business itself is worth about $1.5 Billion. 

I think EOS 's technology is highly valuable, and are strategic assets.   IMO, EOS would be a very attractive takeover target.

Series of breakthroughs paves the way to a $120 billion market opportunity, so says Group CEO.  

EOS's IP seems to be a pretty significant moat and competitive advantage.   If EOS can capture even 10% of this market, it would be transformative for the business. 

Good news for EOS yesterday, with the tender reduced to two. See link here:  https://www.edrmagazine.eu/australia-land-400-phase-3-lynx-versus-redback

EOS is providing the turret fo rthe "Redback" tendered IFV, with EOS providing its RWS technology for all of 450 if the vehicles. EOS have reported the EOS portion of the Redback tender value is $1 Billion over 8 years.   Note: 90% of EOS revenue is from exports. 

The German made Lynx is using its own turret on the IFVs, but will use EOS RWS on the non-turret versions (about 115 units).   

So, EOS is guaranteed to win, the size of the win will depnd on which tenderer is successful.  tender won't be awarded unitl the end of 2021 (geeze, its a long process). 

Management have given an update on contract wins, confirming a backlog of $600 million in work by the end of the calendar year, and has forecast revenue growth to more than double 1019 revenue by 2021, with strong growth to continue into the medium term.