DroneShield Limited (DRSHF) Earnings Call Transcript & Summary

Hello, everyone, and warm welcome to today's drone conference in cooperation with Dr. Reuter Investor Relations. It's a pleasure to have you all today for this very special roundtable. And this session is dedicated to DroneShield. And we are very delighted to have the chance to talk to the CEO directly, Oleg Vornik. And the stage is yours, Oleg.

Thanks for having me, Franzi? And good morning, and good evening, everybody. I'm Oleg Vornik, the Chief Executive Officer and Managing Director of DroneShield. Today, we'll talk about the basics of the business as well as the current thematics that the business is facing and hopefully, a little bit about the future of the business. For those less familiar with the company, DroneShield is an Australian-based global leader in counter-drone solutions. We make hardware and software that detects and takes down small drones, such as what you're seeing in the cover of our investor presentations of our DroneSentry-X. So you see that in the middle of that boat, that in gray-blue device on a mast called DroneSentry-X Mk2, deployed as part of the NATO exercise Bold Machina a couple of months ago in Netherlands. The device provides several kilometer bubble around the object, in this case, the boat, doing radio frequency-based detection as well as a smart jamming takedown when the user desires it to address one or multiple drones coming into its vicinity and safely coming down. Everything we make is completely safe for humans, and we do not do kinetic solutions at this stage. The company has operated for about 10 years. We started from essentially just a couple of person garage business when nobody was thinking about small drones doing any nefarious activities and expanded today into about 70 countries around the world, including several dozen countries in Europe. Our manufacturing today is in Australia as well as all of our engineering. However, we are expanding into Europe, now having a sales hub on the ground in Netherlands as well as setting up a production facility in Europe as well, which will be fully functional within the next several months. The order of this presentation is set up as our last quarterly. So it's a little bit out of order in terms of results first and then the products. So please bear with me if you're relatively new to the story. In terms of the investment thesis, DroneShield is, as I was saying, a global leader in what is a surging industry that is very new across both military and civilian sectors. I think everybody on this call would be in agreement that things are probably going to get worse before they get better. And with it, both defense and general security spend is continuing to increase. And with it are the electronic warfare. And as part of electronic warfare, specifically counter-drone budgets. Ukraine has shown how drones and counter-drone solutions can impact today's battlefield. Drones do not replace expensive kings of battlefield such as tanks, frigates, missiles. However, they are a disruptor and they are a force multiplier. For example, you can use a $200 drone to blow up a $5 million tank. So every tank and armored vehicle now needs a counter-drone solution. And also, you can have a $200 drone shutting down an airport or creating significant scare at a military base, which is what now we're seeing in a lot of facilities around Europe. So while it doesn't displace other things already used in security and warfare, you need counter-drone solutions. And often, we get asked, well, what happens if tomorrow, there's peace in Ukraine. Now firstly, I think just like everybody on this call, we are hoping that there will be peace in Ukraine very soon. I think it's going to take a little while. And even with that, counter drone will be center of any future conflict and so will be drones. But because it's such a new market, nobody has anywhere near enough counter-drone solution. So the difference between counter drone and, let's say, rifles or helmets, all these other devices existed for a while. I mean helmets has been existing since Roman times. Everybody got plenty of those. And yes, wars increased sales of helmets, but ultimately, if tomorrow wars subside, there's already plenty to go around. But counter drone specifically, because it's so new, nobody has been even thinking about it until maybe 3 or 4 years ago, there is, I'd say, less than 5% market saturation into what is essentially a $60 billion total addressable market, we believe. Half of that in terms of the military and intelligence and half of that into civilian market. So often people think of counter drone just as a military problem. But if you think about protection of airports, data centers, ports, energy infrastructure, prisons, there are a lot of contraband delivery to prison windows using drones and stadiums, corporates. So anywhere where drones can create danger through delivery of dangerous payload or cyber threats or espionage, counter-drone solutions have a role to play. We sometimes get asked, well, what happens if Lockheed Martin tomorrow decides to get into the counter-drone space. And we really do not believe that traditional defense primes are well positioned for this. The reasons are multiple. Firstly, counter-drone solutions need to be cost effective. You cannot be firing $50,000 missiles at $200 drones. You're going to be running out of money and missiles very quickly. And similarly, you cannot be using $10 million, $15 million lasers against $200 drones because how many of those lasers they're going to have. Secondly is the rapid evolution. When you're talking about new hardware for counter drone every 3 or 4 years, software every quarter, because the drone technology is evolving really quickly, you really need an agile company and traditional defense primes are not positioned like that. And so because of that, we see those large companies actually as our customers as opposed to competitors. And lastly, in terms of exposure to this sector, while there are lots of public listed drone companies in terms of the pure-play counter drone, we are the only company in the world. I just had a comment saying there's no voice. Can somebody confirm that you can hear me okay, please?

Yes, we can hear you perfectly.

Right. Thank you. So let's move to the next slide. On the September quarterly update, we have recorded about $93 million in revenue. This is more than our entire 2024 revenue the year before. So $93 million in the third quarter represents about 11x what we have secured in the comparable quarter of last year. Similarly, about 7.5x increase in cash receipts, 4x increase in SaaS revenues, and I'll talk about SaaS revenues a little bit later and twice increase in our operating cash flow. Slide 4 gives you a bit of a graphic summary. So we started in 2015. We listed in 2016 as a means of raising money for developing our technology and the sales footprint around the world. The counter-drone industry as such really started in 2022, where Ukraine has demonstrated the potential of drones, their battlefield. And with that, we're now seeing the surge, which I believe is just the beginning of the growth for both the counter-drone sector and for DroneShield specifically. In addition to the significant financial performance that we just talked about, so $165 million in revenue for the first 3 quarters. So now we're going through towards the end of our fourth quarter. We're running calendar year, $5 million profit before tax for the June '25 and about $193 million. These are all numbers as of October that we publicly announced, the financial update. In terms of looking forward, we are looking at about a $2.5 billion pipeline. Now what is the pipeline? The pipeline is when a customer that is usually a well-credentialed government customer comes to one of our salespeople and says, "Okay, I now want to place maybe another order." Most of our customers today are repeat customers. Over 90% of the business comes from repeat customers. And I'm not exactly sure when or what products or if I can secure the budget and maybe there's going to be competition, but it's a lead. And as each of these parameters get individually confirmed, so the customer confirms is definitely DroneShield. And by the way, a majority of our projects, we do not compete in the sense that it's sole-source award to DroneShield. And obviously, the customers evaluate which company they want to go for before. The specific opportunity matures from a credible lead all the way up to a purchase order when it gets a 100% weighting. So we've got about 300 projects in the pipeline across virtually all continents around the world. We've got some pretty meaty projects as part of that. So the largest opportunity we have, which is in Europe with the same customer who placed a $62 million order. By the way, when I say dollars, I mean Australian dollars. And the largest opportunity here is about $800 million. And how are we different? So there's a separate slide I'll talk to. But at a high level, we're saying we've got, we believe, more engineers than just about anybody else out there, about 330 and growing world-class hardware and software engineers. We continue to significantly invest in R&D. We're a very high margin -- high gross margin business. So historically, we had about 65% gross margin on our sales, which is pretty remarkable for a majority hardware business, and it shows the high degree of differentiation and also a very healthy cash balance of just under $0.25 billion. Speaking of sales pipeline, so Europe is by far the biggest driver for this company right now. It's both in terms of the revenue contributed year-to-date as well as the outlook where almost roughly half of our pipeline is across different places in Europe, and that includes -- we now have hundreds of systems deployed in Ukraine, but also Western Europe significantly as well. U.S. has historically been about 70% of our revenues, and we are significantly investing in U.S. as well as in Europe to rapidly develop that market. I think there are a number of exciting growth drivers there, like Department of Homeland Security really looking to ramp up their counter-drone spend, Department of War looking to increase the counter-drone budgets, legislation potentially changing to enable police departments to jam where public safety generally is limited to detection today in terms of the local and state-based level and other drivers. So Europe, firstly, and then also U.S., I think, will be quite significant for us, but also everything else. Like, for example, in Latin America, we have significant business in both Mexico and Colombia who are fighting Narco Cartels, basically sending drones against our customers being government agencies in what is a fairly underreported, but pretty deadly war going on between government agencies and Narco Cartels. In Australia, we expect the rollout of LAND 156, which is a $1.3 billion counter-drone deployment across various military bases. In Asia, we're seeing significantly increasing tensions between China and all of its neighbors, and we had substantial sales in Japan in recent times, and I expect those to continue in 2026. U.K. has been fairly slow up to now, but we expect for there to be meaningful purchases even into 2026 as it's finally getting the point that it really needs to start investing in counter drone as a sector. And we are the only, to my knowledge, widely deployed counter-drone product today with the U.K. Army through our partnership with British Telecom. We believe the total addressable market for counter drone in the military space is about $35 billion. But very importantly, it's a super nascent market. So today, probably 5% of that market has counter-drone systems, meaning for every customer that has one system, they really need more like 20. A lot of customers have nothing to speak of. And that's across quite a variety of spaces there. As you can see, counter drone has a really diverse problem. So you need it on the soldiers, on the vehicles, on the bases, on flying objects, on the vessels, on border security, the list is quite significant. And that's even before you go into the civilian market. Now civilian market has been somewhat slow. And the way I see it developing is 1 of 2 ways. One, if we see -- and this resonates with our American audiences really well, like a drone 9/11 type event where there is a potentially large-scale loss of life and incident involving a drone, I think then we're going to see a really rapid response in the sense of every critical infrastructure-type asset having to mandatorily have a counter-drone system, much like airport security has changed almost overnight after the original 9/11 event. But even without that, and I think we're all hoping something like that would not happen, although statistically, I think it's just increasing in chances. I think there's continuously increasing number of flights over critical infrastructure facilities. For example, even with data centers, we're now seeing a lot of unidentified drones flying around data centers while they're being built, essentially snooping on the design of the data centers. And then once they're built, attempting to land on the roofs of data centers and using proximity to do cyber attacks and hacking into the data and so on. So a very significant kind of threat from drones to data centers. And that's one example. Slide 9 talks about our solutions. So this slide is on the hardware, and then I'll talk about the software. So hardware today corresponds to about 95% of our revenues. And software, the other 5. Our aim is to get to as close to 30% to 40% of total revenues being a software over the next 5 years. So first, I'll start on the hardware, and then I'll talk about the software strategy. The hardware goes into families, the handheld products. So today, it is RfPatrol, body-worn drone solution, and we are launching the next generation of that product in 2026 as well as DroneGun. So that's a body-worn jammer, which is probably what we're most well known as a company, which is a little ironic because it's actually some of the more basic technology compared to other products that we offer, still fairly sophisticated in itself. The DroneSentry product is actually a family of solutions. So next to the F/A-18 plane, you're seeing DroneSentry-X, which I talked to on that Dutch mode on the cover slide. But then in addition to the radio frequency-based approach, we also offer other modes of detection and defeat. So here in the picture, you're seeing third-party radars and cameras. We also offer acoustics. And then for the defeat, we offer other solutions such as protocol manipulation. We'll be integrating things like intercepted drones into our command and control. So it's a fully flexible modular on them and will be in fixed-site solution. And then Sentry-C2, what you're seeing on the very right of that slide is our latest launched product. It's a cost-effective subscription-based solution, fully cash flow positive from day 1 for us in terms of how the pricing model works, where you would attach the box to a site of a prison, a stadium or other cost-conscious customers and that provides you with capabilities such as tracking a drone location on the map and a number of other functionalities such as analytics. On the software, we have fundamentally 3 levels of software, device, site and enterprise. On the device level software, we have radio frequency AI, which is AI-enabled detection that today sits inside of RfPatrols and DroneSentry-X. So about 5 years ago, we realized that we cannot just do a library-based approach because there are unlimited number of drone protocols coming out. So we moved to AI, but the problem -- just like with any AI, the problem is you have to have enormous amount of drone data signals. So that's where our presence in 70 countries around the world really helped. So we started collecting and retaining with customers' consent data that our devices have been recording all around the world in different regions, and drone signals sound entirely different depending where in the world you are, the background environment and so on. And even today, so we've got a bit over 4,000 devices deployed around the world. A number of them are able to transmit data back to us as well as data from our trials. Our database grows virtually weekly, and we have data engineering teams, which clean, tag and improve the data so that artificial intelligence engines can continue to improve. And that's one of our core competitive differentiators. When it comes to RFAI-ATK, that's the same thing, but focused on the defeat of drones across different spectrum. And that's our device-based software. On the site, there is DroneSentry-C2. So it's a bit like Google Maps, there are dots floating around, the drones are flags where pilots are. And then you have rich suite of analytics. And then we have DroneSentry-C2, which I need to update the slide for, which is essentially lots of DroneSentry-C2 instances. We had our first sale of that system to an Eastern European country on the Eastern flank of NATO, which gives you country-wide awareness of nefarious drone behavior. I'm mindful of time, so I'll start skipping. I'll take Slides 11 and 12 as read. I'm happy to answer any specific questions, but we often get things like, what about fiber optic drones, what about AI drones and so on. So I'll take that as read. The presentation is available on our website. I'll talk a little bit about competitive differentiators. So technical and commercial. On the technical front, we have more engineers working on the counter-drone problem longer than just about anybody else and continue to do so. And some problems, you just have to spend time thinking about and developing in-house skill. And so as a result, our products today can detect further, defeat further, be more accurate, less false alarms, lighter and so on. We talked about the AI database as well. On the commercial differentiators, apart from our reputation and the branding and the commercial presence around the world, trusted relationships with end customers really matter because unlike selling in the consumer space, when you're dealing with the militaries, it's really hard to get in. But once you're in, it's a really close collaborative relationship with end customers who then feed you what they're seeing around the world. We often get asked, "Well, what do you guys in Australia at the end of the world know about the problems we're having here in Europe?" And the answer is, "Well, we get information from Ukraine and all the other European customers who tell us, here are the drones we're seeing, here are various technologies that we're observing inside of those drones, here is how you might be looking to solve it." And then we incorporate all of that in our technology road map. I'm mindful of time again. So on the competitive positioning, at a high level, I'd say in every niche we play, there's usually a handful -- a small handful of competitors, which are different across the niche like handheld detection, defeat, again, handheld defeat on the move and so on. And we have a number of differentiators compared to these firms. Manufacturing capacity expansion. So we're currently in the process of moving to $2.4 billion capacity expansion by end of '26. So this will be through a combination of our new European facility, new U.S. facility as well as expansion of our Australian facility. And with that, I can see there are questions that start to come in. Maybe I'll stop presenting and see what questions come.

Thank you so much, Oleg, for the presentation. We'll now move forward to the Q&A session. And today, we kindly like to ask you to only pose the question in the chat. And I'd like to ask today because it's a drone conference. And if you could elaborate a little bit more on the plans for Europe 2026. I know you opened just recently in Amsterdam. Could you tell me a little bit more about that?

So several strengths to it. First, on the sales front, outside of Australia, which is our home market, we generally tend to embed distributors in the countries where we operate, and then we tend to refine them, change them if it's not working, train them, go in front of customers with them. And now that we are seeing very significant momentum in Europe, we have decided to invest to have on-the-ground representation with a very capable local sales team working hand in glove with our various European distributors, having our own warehouse with goods available on short notice when you need -- when you have urgent requirements by our customers. And I think eventually, we'll end up, which is European Center of Excellence, and this will be very likely in 2026, partnering with one of key European governments to essentially create this, call it, like a counter-drone Center of Excellence Research Institute as we're seeing very significant demand for sovereign. And by sovereign, I don't mean just a particular country, but also potentially regional counter-drone points of excellence. So this is pretty exciting for us. And of course, manufacturing that we expect to start, which will be majority European componentry from first quarter of '26.

Thank you so much. And we have another question from [ Albert Iype ]. An hour ago, during this event with EOS, they told us that drone tech is not part of the latest consortium solution, which won the LAND 156. Therefore, EOS is up to now not compatible with DroneShield's products and software. What do you expect from LAND 156 in perspective of future revenue? Is there a foot in the door? Or are there iron in the fires regarding it? Is there a partnership with Leidos? Or is it only DroneGun RfPatrol effect, so [indiscernible] retailed with broad integration? Sorry about the last part of the question, but it is in the chat.

Great question. So LAND 156 consists of several parts. We have already received one of the largest orders awarded to any one company for the portables, which is still small experimental purchases for Phase 1. Leidos Australia was appointed as part of the next phase to be government's adviser to provide basically advice on what the government should deploy to protect its bases domestically and overseas. Leidos has initially bid with a handful of companies, including EOS. That group of companies, in my opinion, is completely irrelevant going forward because the only company that matters here is Leidos because they have a multiyear contract with the Australian government. Everything else, so in terms of role of EOS, role of everybody else in the consortium is fully up for discussion. And I would not read anything into who was in the Leidos consortium at the time of selection of Leidos. There's going to be a panel of suppliers that will be appointed shortly. Exactly how shortly, I don't know. I think the original plan was supposed to be several months ago, but I think it's going to be very soon. And then the plan would be for the government to draw on the suppliers from that panel, and that would include all of our solutions potentially, assuming we're in the panel to start deploying over the next decade or so as part of the $1.3 billion solution. Now in terms of EOS compatible or noncompatible with our products and software, the most important thing is what will the customer meaning Australian government decide to use. If they decide to deploy our C2, our command and control system and EOS' remote weapon stations, then sure, we can integrate it. There's no problem. Please remember that one of key differences, there are many differences between us and EOS. But please remember that one key difference between us and them is that they're a business of making individual effectors, so remote weapon stations, lasers and now interceptor missiles. While we are a business of making individual products like DroneGuns or DroneSentry-X, but we are also importantly an integrator. So we provide complete systems with third-party kit like radars, cameras, et cetera, integrated in. So that's one big difference.

Thank you so much. And then we have another question from the chat. How many drones can be taken down in 1 minute with one of your products? Where is the planned production facility in Europe?

We can take unlimited amount of drones down. Remember that smart jamming is a volumetric solution. So it impacts in, say, in the case of DroneSentry-X, a complete dome around the -- around what you're trying to protect. So whether it's 1 drone or 100 drones, it doesn't matter. This is one key advantage of what we do versus kinetic solutions. There are many advantages of what we do versus kinetic solutions. No one solution is perfect. But for example, anything that enters into an area gets equally affected at the same time. You don't need to go drone #1, then drone #2, then drone #3. And of course, the other advantage is that when you're protecting, say, an airport in a densely populated area, if you're protecting a military base, surrounded by settlements, you're not going to be firing bullets or lasers. It's simply unsafe. In an open war, you will, but not in a domestic setting. So it's because of that nonkinetic solutions and especially something that's not bullets or lasers like what we do, jammer's protocol manipulation solutions have a lot wider appeal. And I will repeat, there's no one fits all. It's all ultimately about layering. But in terms of universality, the nonkinetic solutions provide the best approach, I believe. In terms of the country, I can't comment, sorry, due to confidentiality.

And then we have the last question. And I kindly also ask you to pose the questions and message us afterwards. So don't worry, your questions will be answered. And the last question is what kind of sales force size are you deploying for U.S. growth efforts?

For the U.S. growth efforts, so remember, we do both distributor and own sales force. So today, we have approximately 10 salesperson in the U.S. And what I find with salespeople is it's not about quantity because this is not a shop floor. So one well-positioned person selling to the U.S. Army can outdo 100 ordinary people. That's basically the magic of somebody who is great at selling and also concentrated customers like the U.S. Army, like where you're going to get big bucks is basically selling a programmatic level. And for that, you don't need a lot of people. You just need really good people with a really good plan. But that said, as we're going now starting to go after the public safety and the civilian space, those are more fragmented markets. So we'll aim to beef up a little bit. But all of these people then are supported by also distributors. So there's quite a complex structure. So you think in terms of people who work on tenders, people who help shape government acquisitions programs for us and so on. So we have also providing support from Australia. So you don't need a huge amount of sales force to go into that. And also, the other thing that we've done is hiring people who are specifically going after defense primes in terms of embedding our products onto the defense prime platforms.

Thank you so much, Oleg, for the answers and also for you for your attention. If you have any questions in the future, please do not hesitate to contact Oleg directly or the Investor Relations team. And of course, the recording and the presentation will be also on the Airtime platform. So for the investors, this is an excellent opportunity to also look at the slides and get more information on DroneShield. And with this, I hand over to Oleg. Thank you so much for being here.

Thank you, Franzi. So if anybody got questions, [email protected] is how you can reach me and my team, and thanks for tuning in.