Electro Optic Systems Holdings Limited (EOS) Earnings Call Transcript & Summary

Good morning, and welcome to EOS's 2021 results presentation. The relevant disclaimers have been launched with the ASX and should be read in conjunction with this presentation. I'm John Hobson and I'll be hosting this morning's call. At the end of today's presentation, there will be a Q&A session. If you'd like to ask a question, please use the Q&A side bar and address your question to all panelists. I'd now like to hand over to Dr. Ben Greene, Group CEO.

Thank you, John, and welcome everyone to the 2021 full year results presentation. My name is Ben Greene, I'm the group CEO. If we go to the first slide. Next -- thanks. So this is a summary of where we stand today as at 31 December 2021. The company continues to expand quite aggressively throughout the world. Last year, 2021, we had record revenues, record production coming out of our plants. A record number of staff recruited as we build towards the growth that's coming down towards us, driven by, as we all know, no major geopolitical events. And the future of the company looks quite strong provided we manage the headwinds that are facing us at the moment as well. Next, the operational highlights of FY 2021. Obviously, behind the scenes is COVID and this will come up from time to time through the presentation. But there were some limitations and some great successes in COVID obviously. U.S. as an international business with 90% of our revenue coming from overseas is highly dependent on the free movement of goods services and particularly people to negotiate, manage and close out contract negotiations around the world. So this obviously slowed where we've had successes in restoring our supply chains, and in managing the productivity in the output from our plants, which is quite clear from the record number of units and the record revenue in the defense business from those plants. Revenue growth continues, up 7.5% on prior period, missing by 1% from the prior guidance. But we'll talk about that in the financial presentation more than made up for by improved margins in the revenue that we did capture. The highlight that we'll also talk about is obviously net cash from operating activities improved by $110 million over the previous year. And the underlying EBIT loss before ForEx $14.3 million, includes an investment of $27 million on product development and future business. The accelerating technology development is obviously key to us, and we've been very open for the last several years that we've been investing in counter-drone technologies. Now many of you will be aware that drone systems are being widely used in current conflicts around the world, including the one that's just started in Ukraine in the last few days. I'll talk more about some of these things when we look to the future. And of course, the sector leaders will talk about the application of these technologies in their growth markets. A key for us, obviously, is SpaceLink. It's basically we'll get some good coverage through this presentation. But the main thing is that it remains a very attractive proposition. I'll move to the next slide to discuss that in more detail. So SpaceLink has been a very successful engagement between EOS through SpaceLink and the customer set. I think the customer set has increased in terms of its scale and in terms of its forward-looking engagement with us on contracts. Bottom line for SpaceLink has been faster, better, cheaper is always good. And the derisking of this project through changing the capital requirements and more aggressively, attacking the launch dates has led to a repositioning of this in terms of risk reward and profitability for the company. And again, although there's a considerable discussion available on this slide, I will prefer to talk more about that as we talk about where the company is going, and Glen will also address that in his discussion of space. The key points here are that it's a continuous smooth process. We've engaged with a major vendor in OHB. They're still with us working on a long-term optimization plan for the major satellites. And the project financing is being managed. And I'll deal with that very directly and in detail a little later. The next slide. One of the key things to bear in mind in SpaceLink is that, we're underpinned by the value of this market going forward and our ability to meet that. And what makes our ability unique to meet what is a USD 2 billion annual market for SpaceLink services in the long term is the spectrum allocation that we had from the FCC, which to be secured in terms of our ability to rely on that spectrum to give us a competitive advantage in the marketplace. That spectrum has to be in use by June 2024. So the company quite rightly places some emphasis on roads to space that achieve operations by June 2024. The -- the RF spectrum that we're using with FCC license is fundamental to the transition to the current -- for the current customer base to the future customer base, which will be optically based on using optical technologies. And I believe -- in fact, we know that spacing is the only entity in the world that has a priority on that spectrum, which can therefore, take legacy customers and transition through the spacing transition to future communications capability. Before I finish, I'll just hand over to our next speaker. I'll talk about the overseas contract returning to normal. So the COVID-19 disruptions continue, obviously, at a lower level. But in particular, the contract of concern that it has concerned some shareholders has substantially returned to normal as we showed from the $95 million cash received from this contract during the year and the contract status, which is moving through formal process of amendment adjustment to rescale it upwards for some changed and improved requirements. What's coming out of this program, by the way, is a very strong -- a very tough specification. As we qualify for each stage of this customer program, we are qualifying for major programs around the world that are well above state-of-the-art from our competitors. Again, more of this from the sector leaders. I would like to hand over now to Michael Lock, the Chief Finance Officer of EOS, to talk through the financial highlights of 2021.

Thank you, Ben, and good morning, everybody. We'll just start with the first slide, the headlines for the year. As Ben said, this was a record year for us. We recorded $213 million worth of revenue, which is up $22 million on last year and continues, frankly, the very strong growth track we've had since 2018. Adjusting for the extraordinary issues moving just back to operating revenue, what we saw was about $32 million increase in ordinary revenue. So a good year all around, even noting that approximately $20 million of our original forecast for '21 were deferred into '22 with the deferrals of deliveries on a major client. Gross margin, very strong growth there. All segments were at or above last year. Group profit, in fact, was very well done. It was 49% versus 42% for last year. So the group saw a gross margin of $103 million, which was an increase of $28 million. Now international, international business is very important to us. It's a significant portion of our portfolio. So foreign exchange has a large part to play in our results in a year. We, therefore, focus on what we call underlying EBIT, which removes the foreign exchange result. There was a modest decline in underlying EBIT this year down to a loss of $14.3 million. But in saying that, we need to be remembered -- we need to remember that last year's underlying EBIT result was supported by nearly $10 million worth of jobseeker. FY '21 also includes $21 million spent on SpaceLink, which Ben talked about a moment ago and which Glen Tindall, CEO of Space Systems will talk to shortly after me. So underlying EBIT before SpaceLink, once we cut that out was $6.3 million, which was in the middle of the range of the guidance that we issued in October. Foreign exchange, as I said, it's a significant part of our business. We benefited from foreign exchange this year of $9.8 million compared to the $15.7 million loss last year. One thing that's probably not that visible from the accounts is that foreign exchange movement is largely driven by the contract asset. It's less driven by cash exposures and more by balance sheet movements. So that makes it very difficult to hedge. And therefore, it's part of our lives, and that's why we focus on underlying EBIT. Next slide, please. Segment performance. So defense was a very good result, right? Revenue was up $28 million and underlying EBIT up $24 million. Again, the FY '20 result for defense was supported by about $6 million of jobkeepers. So the FY '21 performance was really quite a substantial improvement. Communications, we have a subsidiary EM Solutions that has performed very well, contributed $23 million of revenue and contributed $6 million of EBIT. The EBIT result for COGs is pulled back by SpaceLink, SpaceLink is within the comms business. So $21 million came out of the comms EBIT results to support SpaceLink. Space Systems itself suffered a bit of a decline this year. There were a series of contracts concluding, plus ongoing R&D drove the SpaceLink EBIT down. However, as I said before, the net result was a very slight decline in EBIT and underlying EBIT. Next slide, please. Can you hear me? Sorry about that technical glitch. I was talking about communications. Well, it's not my mistake. Anyway, back to cash flow. The net cash flow for the year of $6.7 million. The $225 million of payments to suppliers and employees included $48 million of payments for R&D, for SpaceLink and for facilities. Important to note that this year, we established a working capital facility. The company has not had debt for some time, and we were very pleased to be able to pull down a $35 million working capital facility. This obviously helped us support the company for the year. Altogether, there was $29 million of CapEx. That's made up of $10 million into R&D, $16 million into SpaceLink and $2 million for production facilities. The headline through my mind, though, remains as our CEO said a moment ago, we managed to crystallize $95 million from the overseas contract. And that had a significant impact on the movements in the contract assets, which I'll speak to shortly. Next slide, please. So EOS is continuing to invest in near-term growth opportunities. Altogether, we've put $125 million into significant opportunities over the last 2 years. Of that -- of that $125 million, R&D was $27 million, space in 2021, $47 million altogether, SpaceLink $37 million in 2021, $51 million altogether, and production facilities, which is largely about maintaining production capability in offshore regimes so that we can maintain local content, altogether $29 million, $13 million last year. Importantly, IT is a very big part of where we're going these days, working from home, of course, but most importantly, security. So within the $13 million that we spent maintaining, production facilities was $2 million CapEx improvement in [ ITP ]. And so I can take the next slide, please. So I thought it was worth just making a note about the contract asset because that was -- that attracted quite a lot of comment last year. We closed FY '20 with a contract asset of $138 million, which needs to be understood. The contract asset is effectively just the timing difference between the revenue that we recognize per accounting standards and the invoicing that we're eligible to submit in accordance with contract payment schedules. And while it doesn't appear to have moved that much during the year, $138 million down to $128 million, the fact is that we managed to crystallize $98 million of payments, which drew it down, but then we recognized $80 million worth of revenue as well, plus some other movements from foreign exchange. So I think the important thing to note here is that the contract asset is likely to be an ongoing feature of our business, and we will provide a reconciliation into the movement of that as we go forward. In terms of managing the contract asset, as Ben spoke about a moment ago, the -- this major overseas contract is stabilized, and we expect to maintain stable production rates and deliver good gross margins. And that's at the end of my presentation, I'd like to introduce Glen Tindall, who is CEO of Space Systems, and I'll hand over to Glen.

Good morning, everyone. Next slide, please. So I've got 3 slides about the Space Systems business, which, as I like to say, is a tricycle with the front wheel of the tricycle being our SpaceLink business. We're very pleased with the progress made over the last year on SpaceLink. If we roll back a year and a bit, it was just a twinkle in the eye. Today, it is a business, which is -- has built a very strong pipeline, representing over $200 million a year of customers -- of risk-weighted revenues. And we've already signed our first customer, a relatively small government contract, and we have -- we are closing in on 3 key deals, which are likely to drop within the next quarter. Separate to this program, we have also identified a cheaper and faster way to get to -- get on to orbit. And we believe this new program will be very much in the interest of shareholders in terms of retaining value for EOS shareholders. Next slide, please. The more mature parts of the tricycle in particular, the EM Solutions business continues to go from strength to strength. EM Solutions is delivering fantastic year-on-year growth with a record order book representing around 18 months revenue. We are currently the standard in about 6 navies around the world, NATO navies predominantly, and the Australian Navy. And we have an excellent and strong pipeline with new product lines entering the market within this year. We continue to advance opportunities in new markets, particularly markets allied to Australia. And there are strong efforts going there, which have yet to bear fruit. But of course, in the very larger markets, when you land a deal, it's a very substantive deal normally. Next slide, please. And the third part of Space Systems is really our space domain awareness capability. If we go back a few years, space domain awareness was really a scientific curiosity. But today, with the establishment of space divisions or space forces, among many allied militaries, space domain awareness is a fundamental underpinning to any operations in space. EOS through the R&D conducted over many years now has really a precision technology, which is highly differentiated from some of the other ground-based technologies such as radar. In essence, radar provides a lot of data, but a relatively low fidelity. We are able to provide very precise data. And once you have a precise data, that means that further intelligence products can be generated such as conjunction analysis that is knowing when collisions may occur. One of the other aspects continuing in our heritage is that we have a very strong R&D program continuing in space domain awareness. We have this year, developed daytime centers, so -- which means that we can operate not just in the night time, but also in the daytime. And indeed, we have adaptive optics and other programs well underway. Michael noted earlier that there was a dip in profitability in Space Systems this year. Really that was driven by gaps between certain programs finishing and the second phases restarting. We fully expect to return to profitability by 2023. Next slide, please. I'd like now to hand over to Grant Sanderson, the CEO of EOS Defense Systems.

Thanks very much, Glen. To your next slide, please. Defense Systems had a pretty good year in 2021 after an extraordinarily difficult year in 2020. We've improved revenue and cash and profitability across the board as briefed by the Chief Finance Officer. We've also managed to expand the user base over this year, bringing 2 new customers into the fold, and we brought new products to market and achieved new contracts with some of those products in the last 12 months. We've managed to, across the business, improve the resilience of the business by continuing our investment strategies internationally. And that has given us the ability to be much more prepared for some of the shocks and uncertainty that's coming through the geostrategic challenges. We're in a much better position to be able to take advantages of what's happening around the world. We've also, over the last 12 months, it's been -- put a lot of effort into achieving increased efficiencies in the production cycle, and that effort will continue throughout this year. We had a record year in production. And the big -- one of the most positive changes in the last 12 months has been the establishment of a now fully effective and functioning global supply chain. This allows us not just to improve the cost inputs and our control over those globally, but to also meet an increased level of customer focus on being done locally. That's not just a trend in Australia. That's a trend all around the world, and we're in a good position to be able to meet all of our customer demand in that area. Next slide, please. So the positives out of this are, we have maintained our capability and technical lead over the market. We have continued to improve our products and the perform -- and demonstrated the performance of those products. And the gap between us and the next most technically-competitive company in our market is sustained. As I said, we brought new products to market. We have sold the first of the R150s. We have the R800 under customer evaluation. And we've added some new lethality capabilities in the forms of further integration of missiles and rockets to our platform. Also positively, we are now starting to see the significant growth in the sustainment business. We've had a 30% increase this year, and that will, I think, become a trend over the next few years. And as stated on this slide, we are in negotiation for major system upgrades to existing customers, who have been quite large existing fleets, which is something we've been predicting for quite some time. That will provide a significant level of [ pull ] to the business over a long period of time, and we'll start to generate some annuity kind of revenue for the business, and that will become a much more significant part of our bottom line. Next slide, please. We've also, as we have predicted over the last couple of years, seen the growth in the unmanned ground vehicle sector. We secured 2 contracts. We've made deliveries already, and we're in negotiation for -- with both those customers for increased staff, but also with new customers. The development cycle around this has moved into a customer-funded pace, whereas before we were backing ourselves and the R&D was predominantly in EOS activity. We are now moving to a point where the customers are funding significant new development in the incorporation of AI and optimization for specific platform. Next slide, please. Directed Energy, there's a couple of, I think, key issues here. The 35-kilowatt directed energy hard kill system is now production ready. We will continue to do demonstrations and improvements on that product, but we are now in a position where we can move forward if and when we get significant orders. Production on directed energy systems is a new thing globally. No one produces these things at scale. What we have clearly demonstrated where our market advantages is in the cost of our large laser modules or high-power laser modules. We have a significant cost advantage in the way that we design and manufacture those, which is giving us an advantage in the market. The more powerful system will be in the field towards the end of this year. There was -- and we talked a lot last year about demonstrations in the Middle East. That was overtaken by some funded activities from specific customers, which we conducted last year. Next slide, please. And as Ben mentioned, there is the increase in drone warfare, has continued in 2021. The demand for counter-drone system is increasing to match. The challenge remains in customers working out how they want to acquire these systems and how they want to operate them. That's put a lot of pressure back on to us for demonstration, so that we can show them what we can do and how they can better manage the challenges of having counter-drone systems operating in various environments. We have demonstrated our ability to do very cheap kill on ground, which is actually one of the asymmetric factors in growing warfare, and we are very confident that we have the market lead in that area as demonstrated by the fact that we are now offering our hard kill solutions, both directed energy and working station hard kill as parts of other companies counter-drone solutions around the world. Next slide, please. And of course, one of the significant successes of the 2021 cycle was the C4 EDGE program with the Australian government. Despite the challenges of coordinating 30 companies across this country during COVID pandemic, which had significant restrictions on movement, we successfully delivered the contracted demonstration on time and on budget with the army. This will continue as an activity. The shape of that will be fleshed out in the next few months, and we just got more discussions with the [ bank ] and the 2 takeaways are that this will have significant impact for us over the 2022-2024 period, but also the core capabilities being developed in C4 EDGE with managed control space. I also have critical value to a number of our systems products with global opportunity. And this will enhance not just the export opportunity for EOS, but also for the other 30-plus Australian companies involved in. Next slide. Handing back to Ben.

Thank you, Grant. I'm dealing here now with, in general, a few minutes talking about the outlook of the companies. And I think my starting point has to be what are the tailwinds and headwinds that the company is facing. And I want to go through these in a little bit of detail. Obviously, the company has been stating for several years that there were certain national security events that were going to drive demand, and we've made significant investments, some at shareholder expense in counter-drone capabilities, in directed energy, in the counter space capability to defend assets in space. And in particular, as Grant referred to developing trust effective laser modules. And to put it in perspective, the laser modules that we've worked on have driven 90% of the cost of the counter-drone system or counter-missile system. So having a cost advantage there is significant. But the geopolitics is driving demand. That's positive. Productivity output and profitability all growing. Obviously, the fundamental engine room of the company is doing really well. Notwithstanding COVID, I think all the indicators we have are quite strong. And given a comparable runway to what we had last year, I think we'll continue to see those key metrics improve, especially, the business model improves all the time as we improve the quality of the design effort. The return on investment improves, especially as we add more and more customers to the customer list. And the COVID-19 management of the company has been -- it's not good to dwell on past successes with COVID, because there may always be surprises around the corner. But the team has done a terrific job in terms of managing output and supply chain control. The headwinds almost counted one-for-one what those tailwinds are. The human resource limits we face in Australia are quite severe. COVID has cut off immigration. And the Department of Defense estimates that the national economy is short, about 200,000 people to meet current demand. We -- this exacerbates the situation that was already in existence 2 years ago because the growth in defense expenditure in this country was driving very strong shortfalls in skilled staff in the defense industries. This has been really severely exacerbated. And this is a problem that all defense companies in Australia are dealing with. We are very fortunate that we have significant foreign resources, particularly in the U.S., Singapore and in the Middle East, where we can expand with a little less containment issues due to skilled labor. Cost of capital is really important to us because we recorded 18% growth in 2021, and we regard that -- and our shareholders, I think, will regard that as a modest growth here compared to the potential of the company. Companies that grow typically need capital. What we've seen is the situation with respect to capital change in the last 12 months and particularly the impact of inflation, which is emerging in most Western economies is likely to not bring us any early relief. So that's a factor we have to take into account. Basically, just as it's a massive asset and advantage to us in a tailwind because the asset value is growing, it comes with a certain capital requirements. And those have to be scaled in a way they're digestible by the company. And so we'll talk in some length about that in a moment. And obviously, COVID-19, even though the supply chain and management productivity and output, elements were dealt with really well by the management team in EOS, COVID-19 delays to contract awards showing up in several aspects of the business and where we see it most highlighted is in our backlog, which has fallen to -- as I'll talk about in a moment, 1.5 years of revenue rather than our preferred level of 2 years. So the company's responses to this have been quite clear. We've trimmed the pipeline to better focus on the higher yield, higher profitability opportunities, and we'll talk about that in a subsequent slide. But -- and we have to take into account human resources availability, capital availability and how they distributed around the world, both resources and capital. And so that's been a conscious effort on the part of the company to adapt in a sense, cut out [ cut, set out ] cloth and not sacrifice the growth that we would otherwise have wanted to have, and I'll talk about that in a slide or 2. And the second thing that we've done is, we've revised SpaceLink to much smaller initial capital requirement. And the initial requirements were obviously well over USD 700 million. And that was the trajectory that we're on in consultation with capital markets right through 2020 and into the early parts of 2021. I'd say, in the mid part of 2021, capital markets started to turn. And the key metric we use there is basically a particular investment pool in the U.S. that's focused on space investment, and we're very well connected to that pool. And we've specifically and deliberately adapted the scaling of SpaceLink to match what that pool, I think, would be attracted to in terms of making investments in future space communication capability. So those 2 responses, I think, fundamentally address the headwinds and capture in the energy that's in the tailwinds that are driving the company. Next slide. Now this slide, I will not dwell long on this. This is just -- I propose the actual options across our whole portfolio in terms of the addressable -- total addressable market. And this is not a shopping list or a laundry list of computer-based research. Every one of these listed items is a program, we have a significant contender. And I would say that for at least 3/4 of these, we will be shortlisted in the top 4 or 5 contenders or bidders in any global market search by a potential customer. And of course, in several of them, we are 1 of the top 2 companies. So just for future reference, the scale of these opportunities is really quite significant. And we have to bear this in mind when we look at how we trim the sales of the company, taking into account things like the human resource and capital restrictions that may be facing us. Next slide. So the key metrics -- one of the key metrics we use to manage and control the company's pipeline and backlog. And I mentioned, I'll start at the bottom pipeline. We've adapted -- sharp observers will notice that the pipeline -- the risked pipeline has reduced to $2.6 billion. This is contracts to be awarded fully risked as in probability weighted over the next 3 years. This pipeline is more than enough to maintain growth probably above the levels that we could resource with the human resource pool that we can address in our key resource -- human resource centers such as Australia, the U.S., Singapore and the Middle East. So the pipeline is still very, very strong. And my key comment here is, don't -- shareholders should not be concerned that the pipeline has shrunk. It has been quite a deliberate attempt to focus on wallow hanging fruit. We're profitable, particularly as we develop better metrics about where the profitability elements are in our company. We're focusing more on the profitable lines than the less profitable ones and the ones that are more likely to be funded because we've got 2 years of COVID experience now. And that drives the way that we select these opportunities. I guess the key point on pipeline for me is contract awards that we're expecting across all product lines and across all markets. In other words, we've had to make some bets in terms of where we've spent our R&D money, where we spend marketing money and counter-drone's unattended ground vehicles, short-range air defense and so on. These -- all of these programs are accelerating at a great rate. We predicted this 2 years ago. It's easy to be wise with the minute of hindsight. But we've been on the record for at least 2 or 3 years, saying these trends would continue, and they would be funded because the national security environment cannot ignore those new threats. So the $2.6 billion in the pipeline, I think risk pipeline is a very strong feature in this report. Backlog, clearly, we're not as happy with. Backlog has fallen partly because of our success in manufacturing last year, but also partly because there's been a complete halt to e-contract awards over the last 4 or 5 months as foreign administrations and Australia recover their administrative processes from COVID. And we already see a significant number of those announcements in those contract awards shaping for Q2 and Q3 of this year. So we think that will recover to the level that we're more comfortable with, which is at least 2x our prior fiscal year in revenue. Next slide. So in summary, across the year, the core -- the machinery of the company is very profitable and doing well. I mean it's moving forward with off record production levels and record profit margin levels in 2021. There was a disappointment that we did actually record a full year loss, but that was due to the deferral late in 2021 of a chunk of revenue and EBIT into the first quarter of this year. Cash conversion has improved in 2021, and we plan to maintain that momentum through '22. As I've already referenced on the previous slide, the backlog from delayed awards should recover through 2022, particularly through the middle part of this year. SpaceLink, we've spoken about it. We've got significantly reduced project risk, execution risk and risk to our FCC licenses, which once they're secured, we will underwrite the future of that business. And in parallel, the customer demand is increasing and in recent events, will only drive that harder. Growth across the portfolio, the indicators here are not only the funding that's indicated in customer tenders, but also in where they spend their pre-tender money. I mean we're looking at significant cash flow coming from pre-tender awards from customers prepositioning products and services or urgent acquisition. We've taken the right measures, I think, to overcome the resource and capital limitations to discuss that, but we will obviously continue to monitor that situation and continue to make adjustments. And finally, we're well positioned as a company. Grant touched on this. We're very well positioned to support allies, who are currently under severe pressure in terms of the national security environment and near-term threats. And I'll stop there for questions. Thank you.

[Operator Instructions] The first couple of questions comes from [ Gothos Investments ]. During the SpaceLink webinar, the expectation was expressed that the first commercial customer would be signed by the end of 2021. This appears not to have occurred. Despite the apparent expertise of the SpaceLink team in satellite business will also appear that the customer expectations and financing requirements have come to a surprise to SpaceLink EOS resulting in Block-0 interim step. Why is this so?

I don't think -- can I answer that, John?

Yes.

I don't think it came as a surprise. I mean, this has been a continuous process. So we've been engaged -- deeply engaged with the capital markets in the U.S. through the whole process. And the base capital markets, you could say that's the change one could argue Q1 in 2021 or Q2, but we could comfortably say by the middle of 2022, there was a transition in play. And SpaceLink, of course, was aware of this. And customers are aware of this. So customers are very, very well informed about the space market and about the satellite market. So the customers that we talk to also talk to the capital sources, and they look to -- and also to our satellite provider. So it's not a closed community where information is [ state-of-the-art ]. So the fact that the key customers -- we're not signing by Q4 was because EOS was not signing it satellite contract by Q4 because we are adapting and adjusting the entire terrain that we're exploring to match the reality. So there's something very grounded and very stable about the SpaceLink approach and the professional approach that the SpaceLink team takes and that the financing team here at U.S. takes, and that is we bring all that information together as well, and there's a continuous process of adjustment. The Block-0 process was really driven and enabled by new technology that came out of the relationship with OHB. And we drove and we funded development of particular technologies so that we would have options to do a Block-0 or a Block-1. And so developing the options was a key part of the whole process. Now the decision to make the switch from Block-1 or the much larger satellites to the smaller satellites, was only made last week as and when it was announced. So we positioned ourselves to be able to do it, and we maintained a discussion with capital markets for some time. I mean, the process really closed very, very recently. And those customers -- none of those customers have gone away. It's not a matter that they've refused to sign. And it's not a matter that the profitability of the entity has gone backwards in time because of the delay. In fact, it's come forward. And cash -- the breakeven point for the business has actually been brought forward by this. And one of the things that we're still working on is to make sure that the overall profitability is higher under the new structure of satellites and launches than it was under the previous one. So I understand where the question is coming from, and that perception could easily be generated. But as I said, it's a parallel process of customers, satellites and so on.

Ben, it's as a follow-up question from [ Gothos ] which is sort of unclear to me whether the Block-0 cost of $240 million is in addition to the $700 million, $750 million cost for the full operation of Block-1 satellites.

It's not in -- it's not in addition in the sense that the Block-0 satellites will deploy a significant fraction of the ground-based infrastructure that Block-0 would otherwise -- Block-1 would otherwise have required. So if the business model is supported, which we fully believe they will, Block-1 will still follow as night follows day, but it will not cost $700 million.

The next question from [ Gothos Investments ] is the ASX announcement on Friday implied in the presentation that the SEC mid-'24 spectrum license is a hard milestone date and failure to meet this milestone would result in ERS SpaceLink losing access to the spectrum. In the EOS first half results, when questions on scheduled risk meeting the FCC deadline, the company stated that EOS had sufficient buffer in COVID extensions that would cover any slip. So is the FCC license expiry data hard milestone or not, Glen?

Yes. So the FCC milestone is set by the FCC. So ultimately, the FCC has complete discretion to do what they want. However, we're treating it as a hard milestone in the sense that we believe it would be an unacceptable risk for investors to be investing in a program which may be late. And that was -- and as the schedule buffer tightened over time and the capital raising requirements, the capital markets tightened somewhat. We made the decision to move to Block-0 to remove that risk and improve the situation both for the FCC and both for the investors and for the customers. Hopefully, that answers the question.

All right. Next question comes from Owen Humphries. Why do you need a more highly powered laser than 35 kilowatts, -- do you think this may see delays in customer contracts awaiting new system to be designed and produced, Grant?

Targets. It really comes down to the types of targets you want to engage. We have the 35 kilowatt system is very effective against drones in what we call the category 1, 2 and low category 3 area and also the ranges and speeds with which they move. So a lot of the targeting is calculated over how fast the target is moving, how long you have due to the engagements and how many targets you need to be able to cycle through in a certain period of time. As those targets get harder, tougher, more militarized and therefore, more harder. You need to be able to supply more energy at longer ranges for longer periods of time to have the impact that you want. The second component is, we're moving from a very much a counter-drone target set also into a counter rocket and [ tele ammunition ] target set as we grow the power of the loading. So it becomes a much more wider -- a system with a much wider utility on the battle space with more power. As to whether or not that development cycle is going to give some customers pause about whether or not they buy now or later. Quite frankly, that's therefore completely different functions. And in fact, 35 kilowatts is a very, very powerful weapon. So we're very confident that we will see sales of that product.

All right. There's another question from Owen Humphries. Where would you expect the backlog of revenue to land at the end of calendar year '22 plan? Glen, sorry, Grant and…

At this point, we're not able to give specific guidance on revenue or where the backlog will land other than there's been a compression of opportunities out of '21 into '22. There's been a change in the geopolitical circumstance last week and quite a severe change. That will run through priorities for a lot of our customers. And we're better placed than most to respond to those new needs. But at this point, there's really no way because we're in discussion with those customers on a real-time basis now. There's no way that we could give guidance now into what we think the impact could be, but there will be an impact.

Question from [ Graham Newen ]. Missiles were a large part of previous presentations, but the subject was scarcely mentioned today, please update us on the progress in this area.

I'll take that one. So the sovereign missile lines, our partnership with Nova and the bid into the government guided weapons enterprise, a sovereign guided weapons enterprise for the country is very much still underway. There has been no decisions taken that we are aware, whereof inside defense and there's certainly been no announcement. Nova and EOS continue to work together on our offering, and we maintain contact with the Commonwealth. I suspect in 2022, there will be some further direction from government about how that opportunity is now in progress. I suspect there is going to be some more nuance in the way that the country approaches this objective. And it will be spread across a number of different activities, one being the acquisition of more capability to the Australian nation and all the support systems that required to manage that standard fleet, which will primarily just the whole products that we already have. And there will also be a significant focus over the future, longer term, on how we become much more independent and sovereign in the development of nation's requirement. The EOS Nova joint venture in Sovereign Missile Alliance is very much focused on the second part of that equation, which is leading the Australian capability for it. So we suspect that we will be asked to do more work in that area this year, and we are well prepared to do that. But we are completely aligned on government decision-making process for that to be initiated.

Grant, there's another question on the Sovereign Missile Alliance. When does EOS anticipate adding a product to offer market? Are we developing a new technology or variant license to build existing technology than when does EOS expect to see revenue materialize?

Again, I'll referred to my previous answer. I mean everything right now is dependent upon the pathways that the government decides that it wants to pursue as part of the guided weapons enterprise. There has been an enormous amount of work going on inside the defense department and in government on that. But industry has not been deeply engaged it yet by government in what they want and how they're going to pursue that. And we have a strategy, which I don't want to talk about publicly of how we will provide the capability offerings from SMA is very much targeted at the future of the sovereign capability and a targeting technology capabilities that the nation is going to need over time that are different, yet complementary to the existing fleets of missiles at the ADF operator. I think that as far as we want to go at this time.

Another question from [ Graham Newen ] is to Glen. What is the makeup of the USD 240 million CapEx, especially in relationship to the satellite cost ground facility costs, et cetera?

Yes, so it's a good question. So approximately half of that value is in the launcher and the spacecraft themselves. The other half is related to engineering and ground-based systems. So -- and that's fundamentally the reason why Ben was saying that when Block-1 comes along it, so it will be less than $750 million now because some of that investment has already been made.

[ JD & Investments ] got a question on guided weapons and explosive audience in enterprise. Does EOS expect to benefit from the Commonwealth of Australia's GWA enterprise announcement when this is made and what investment to date has EOS made on [ SMC ].

So we have not committed a lot of capital into the establishment of SMA. There are people, both in Nova and EOS that are working full time on our proposal and acquisition. However, until we've seen the full commitment from the government and from the Department of Defense, we haven't -- we're not investing significantly in CapEx at this stage. What I would say is, I think there has been -- I think it's fair to say there has been a significant maturing in the government and defense department's approach to the Guided weapons opportunity and that they have a much better handle on the how, the when and the size of the investment. However, none of that has been made public yet. And certainly, industry hasn't been approached to provide more detail than we did in the last 12 months. As I said, we have a very specific focus where we're targeting the efforts of SMA. And whilst there will be, I think, some -- we are well positioned to secure a chunk of the guided weapons development budget, I don't expect that to have too much impact on the fleet.

There's a question from Peter Atkinson. I know EOS has done work on the global supply chain. What mitigation strategies is applying to deal with the worldwide shortage of computer chips?

I'll take that one. So it has had an impact, both not just chips, there's also a squeeze in some other key components particularly to do with screens that support the weapon station. We lean forward at the end of 2020 and made a significant purchase in advance of production on a number of critical fund. It wasn't a lot of money. It was in tens of thousands of dollars, but it secured our production assets through the end of -- the contract that we had. There is also a significant engineering effort that's been going on for the last 18 months to broaden the supply that we could tap for those critical components. So assessing different products or part components in the system and testing them out, working out what the impact of those would be on our input costs, on the technical fall into the solution and in the production and how that would impact the NPI. So that's pretty well progressed. There's still some challenges. There is still particularly in the global chip supply area, significant uncertainty about how that's going to be resolved. But we're pretty well positioned for the next 2 years of production to see out what we have in front of us.

The next question is for Glen. And I think, Ben, how much will EOS need to spend on SpaceLink and R&D in 2022 and how will this be funded?

So we have -- so R&D. So we have set 2 budgets for SpaceLink for this year. So there is an operating budget and a capital budget. The 2 will be -- broadly speaking, the operating budget is funded through EOS. And broadly speaking, the capital budget will be funded through our capital markets activities, which I will now pass the baton to Ben to describe.

Glen, you've covered it. That is the plan and that's what we're executing now, and we have no reason to believe that's not what will happen.

All right. Then next question is from [ Jerry Nito ], which is to Glen. The amount of space junk that's accumulating, is EOS doing anything to counter this and become the leader in cleanup?

As you say, I'm glad you asked. So our laser technology, really, it's a stream of bolt-ons, which are being pushed up into space and directed into a certain basis. An object that's moving in space only needs a very slight pressure on it to actually cause its course to deviate. And so there is a research program underway to look at deviating the orbits of space debris in order to put them in a more suitable place. It's very far from a science at this stage and is still somewhat of a dark art. So while we don't have an active paid program at this stage, this is an area of development, which is getting a lot of intense interest from Australian and allied governments. We haven't put anything in our forecast for paid services there, but it is something that's on our development horizon.

One for Ben and we're just about running out of time. Trevor Gluck, do you see a return to shareholders in the way of dividends?

There's 2 parts to that question. I think I'll take it as, do I see a point where U.S. generates significant profits. Yes, the dividend policy is set by the Board and how those profits are applied is a matter for the Board to determine in the interest of all shareholders.

Another one from [ Graham Newen ] is, have there been any defense contract to the EOS had a high expectation of securing that were, in fact, awarded to competitors over the past 6 months or so?

No. Grant, we would have both could have given. So there's been no such contracts awarded.

All right. I see that we've come up and finished the hour. There are a number of questions that we haven't had time to complete. I think there's one analyst that would like us to fill out in spreadsheet, which we can't do. So if you've got any questions, by all means e-mail and I'd like to hand it over to Ben.

I'd like to thank you all for your time and attention for this presentation of our results. And please I don't -- I regret that 11:30 has come and questions will stop now. But we're always happy to take the questions on the website or directly to the leadership team. Thank you, John.

Thanks.