Coincidentally, after my straw yesterday, Etherstack announced a trading update this morning.

The market has reacted extrememy positively to the news (up 16% after opening). However, the announcement only confirmed what investors should have expected following the H121 report.

If anything I was working on the profit margin remaing at 19% for H221 and the FY21 NPAT being slightly higher (ie. US$1.6 million).

I’m happy to hold and keep my valuation at 50 cps for now before delving more into the competition, and competitive advantages the company might have.

FY21 TRADING UPDATE AND REVISED REVENUE GUIDANCE – REVENUES UP 77%

 • Increased revenue guidance of US$8.4m to US$8.6m for FY21, representing an increase of between 77% and 83% over FY20 full year revenue

• Significantly increased profitability with an expected EBITDA of approximately US$2.5m and NPAT of US$1.3m, assuming revenue is in the lower half of the expected range

• Positive operating cashflow for FY21, allowing for expanded R&D investment

• Strengthening of balance sheet, with remaining debt retired in second half FY21

• US infrastructure spending at the state & local government level is expected to drive significant growth in digital LMR networks

• The Company considers its unique product and service offering will enable it to secure a material new award within 6 months in the North American market

• Expectation to announce a second telco carrier win via Samsung within the first half of 2022

Financial update

Positive Revenue, EBITDA, Cashflow & NPAT Results

After the Company’s strong first half performance, Etherstack plc (ASX:ESK) ("Etherstack" or the "Company") is pleased to provide a trading update with full year revenue guidance for FY21 of between US$8.4m and $8.6m based on expected deliveries prior to our 31st December financial year end. This will represent an increase of between 77% and 83% over the FY20 full year revenue.

As a result of the increased revenues the company has significantly increased profitability, and provides further guidance, assuming revenue is in the lower half of the expected range, of an expected EBITDA of approximately US$2.5m, NPAT of approximately US$1.3m and significant positive operating cashflow for the year.

Debt Retirement and Strengthened Balance Sheet

The strong operating cashflow has allowed the Company to simultaneously expand R&D investment, build a new engineering facility in Chippendale and retire the last of the Company’s remaining debt in this current half year. The balance sheet has continued to strengthen.

Strong Growth and Tailwinds for FY22 Across All Business Areas

The inherent nature of the business means medium term revenues forecasts and market guidance is difficult to provide however the following management commentary outlines activities currently underway which will be finalised and announced in 2022.

Digital LMR Networks

Long term profitability driven by recurring revenues earned over the 10-15 year lifecycle of the network continues to grow. US infrastructure spending at the state & local government level is expected to drive significant growth. The Company expects to announce a material new award within the next few months in the North American market.

5G Cellular MCPTX

Our initial carrier win (US$8.5m) is progressing well, and on schedule for delivery in FY22. Our Global Teaming Agreement with Samsung continues to bear fruit and the management expects to announce a second telco carrier win via Samsung in the first half of 2022 in an OECD country. Further carrier pursuits are underway between Samsung and Etherstack.

Defence & Tactical

In November 2020, Etherstack announced an A$4.1m initial deal with the Australian Defence Force which the Company has been delivering over the course of FY21 and into FY22. The project is progressing well and positions the Company for subsequent opportunities. Management expects to announce further Australian projects within the next 6 months. The Company is actively engaged on other projects with the UK Ministry of Defence, and also has received a new order from the Canadian government for tactical communications equipment.

Resources sector

In October 2021, Etherstack received a further follow-on order of A$280k (not previously announced) with an Australian iron ore producer related to one of their mining projects in Western Australia. This third software and equipment order within the space of 18 months brings the total revenue from this single account to A$1.1m. The Company is aware of other opportunities for the same iron ore producer including a large project planned for H2 FY22.

Outlook

The outlook for government led stimulus spending programmes on infrastructure projects in the Company’s home markets of the US, Canada, Australia and UK provides management with a positive medium-term outlook over the next 3-5 years.

Additionally, the focus on sovereign defence capabilities and associated government spend in Australia and UK provides management with a longer-term positive view for our burgeoning defence business within these markets over 5-10 years.

Etherstack CEO, Mr David Deacon said: “With global infrastructure and domestic defence spending predicted to be particularly strong over the next 5 plus years, Etherstack is poised for significant growth in our core business areas. The high margins associated with software delivery and strong growth in our recurring revenues derived from long term support contracts point to sustainable and increasing profitability for the foreseeable future.

“In support of our sustainable growth objectives, the Company continues to consider complementary acquisitions within its core markets that are cashflow positive, accretive, and provide both strategic and market expansion benefits to its core products and businesses”.

ends.

What does Etherstack do?

Etherstack plc is a wireless technology company that engages in licensing mission critical radio technologies to equipment manufacturers and network operators worldwide. Etherstack’s software enables interoperability between traditional and new 4G & 5G networks for public safety communications and is at the forefront of 5G Public Safety Communications Rollouts. Etherstack has over 20 years of intellectual property development across LMR and carrier communications. Etherstack has a Market cap of $61 million.

Core Markets

Etherstack has 3 core markets (below):

Impressive Customer Base (now also including a contract with AT&T).

Contract wins 

June 2019 – Order from the US State Department & supply contract with an Australian state police force

October 2019 – Order from Australian energy utility for equipment and software at 18 new sites

November 2019 – Etherstack wins Federal Police Digital Radio Network in Canada

May 2020 – Etherstack enters contract with CSE Crosscom

June 2020 – Etherstack signs Global Teaming Agreement with Samsung for 4G/5G Public Safety

October 2020 – Etherstack signs licence agreement with TPL Systèmes

November 2020 – Etherstack signs $4.1m first stage Australian Defence Contract

July 2021 – Etherstack signs initial Carrier deal with Samsung USD $8.5 m

Sep 2021- nitial order with AT&T for software licences, equipment and professional services US$420k

Revenue growth

H121 revenue was US$4.3 million up 79% on the prior corresponding period (“pcp”) with growth across all revenue streams. Revenue has increased by 170% over 4 years (from US$1.6 million in 2017). Etherstack core revenues are transitioning to an enterprise SaaS model.

Recurring Revenue

H121 RR was up 30% pcp

CAGR to 31 Dec 2020 was 31.2%

Growth Drivers

Global rollout of 5G networks is expected to drive demand for Etherstack MCPTX over LTE technology in coming years. 5G network coverage is expected to grow from ~15% of global population in 2020 to ~60% in 2026. National carriers are expected to provide guaranteed public safety communication capacity to public safety agencies in each country. As a result, demand for Etherstack’s MCPTX over LTE technology, is expected to rise significantly over next 36 – 48 months.

Royalty revenues of licencee products which incorporate Etherstack technology have increased 129% over 1 year.

EBITA up 88% in 1 year

H121 EBITDA was US$1.5m up from US$0.8 for H120.

Guidance

Etherstack has already achieved contracted revenue for H221 of US$4.2m plus any additional contract wins. We could expect FY21 revenue to be upwards of US$8.6 million or 6.6 cps (129.6 million shares).

H121 NPAT was US$0.8 million. FY earning should be approx US$1.6 million, or 1.2 cps assuming a similar 19% profit margin in H221.

Strong Cash Flow reduces Debt

Continued strong operating cashflow has allowed Etherstack to invest in facilities, intellectual property and debt reduction simultaneously. The current debt to equity ratio is 7.3%.

Forecast fundamental metrics

PE ratio = 0.465/1.2 cps = 39 (based on FY21 guidance)

Forecast annual earnings growth 57% (one analyst SWS)

Future ROE 25%

Zero debt

Valuation

With the 5G network expected to grow by 280% over the next 6 years, and with Etherstack technology at the forefront of the 5G Public Safety Communications Rollout (including initial contracts with Samsung and AT&T) annual earnings growth of 50% seems to be achievable.

Priced at 46.5 cps Etherstack is currently trading on a multiple of 39 x FY21 earnings (guidance). Even though it’s trading close to 12 month lows, it’s still not particularly cheap. Nor is it expensive if current earnings growth continues over the next few years. Seems like a reasonable entry point to me.

Disc: Recently bought a small parcel IRL.