Etherstack plc (ESK) Earnings Call Transcript & Summary

Good morning, and welcome to Etherstack's Full Year FY '25 Results Webinar for the period ending 31 December 2025. Presenting today is Etherstack's CEO, David Deacon; and CFO, Adam Hoey; and Corporate and the Legal, Martin Duff. Today's format will begin with a run-through of the results presentation, followed by a Q&A session, whereby attendees can submit questions via the Q&A function at the bottom of the screen. I'll now pass it to David.

Thank you very much. Good morning, and welcome to the '25 full year results. It has been an absolutely stellar year for Etherstack. And Adam, if we can move forward on the slides, please. I'm sure everyone here is familiar with the business. But if not, we've just provided a couple of slides at the beginning of the presentation in regards to a little bit about Etherstack and the 3 core markets that we are involved in. We're involved in mission-critical communications technology solutions, in particular, push to talk communications in the public safety, resources and utility sector. Traditionally, the digital land mobile radio market or LMR networks market, the left-hand box in this diagram has been the area that we operate in. That is mission-critical radio networks. We manufacture them, we deploy them, and then we support these networks 24/7 around the world. Very important core revenue stream to the business in terms of providing long-term support revenues for the company going forward. In the middle box, we can see mission-critical communication systems for 4G and 5G, MCPTX. This is some of the areas that's really propelling the business at the moment, in particular, the 2 big wins that we posted last year that we certainly will talk about a little bit further shortly in terms of the AT&T FirstNet win in the United States and also the U.K. Home Office in the U.K. And this is where our global partnership with Samsung is. The third core business area that we're in is in the defense and tactical communications section, which is more of a nascent business in regards to the other 2, but very essential in terms of the types of technologies that we're developing and the types of things that we deliver to government and government organizations around the world. Next slide, please, Adam. Etherstack today has grown a fair bit certainly in the last 12 months. We've gone from 48 staff to 64 staff globally in the past 12 months and operating in 7 countries. The primary group is located in Sydney, Yokohama, London and Annapolis research and development group around the world. And the 3 core businesses, as I said before, operate in those 3 main domains. But in particular, they've all got slightly different characteristics in terms of the types of revenues and how those -- how we generate the revenues in terms of support services revenues, technology and licensing revenues and then future development that we're doing longer term with government organizations. Next slide, please, Adam. Right. '25, absolutely fantastic year. You will see that there's been a 70% increase in the total revenue. We did have obviously a weak FY '24. But in regards to the KPIs that we really focus on inside the business, which is our annual recurring revenue in the support side of the business, that was up 62%, and we'll come back and look at that in a little bit more detail. It was a record year for Etherstack, exceeding USD 10 million in revenue. And importantly, 20% or just over USD 2 million EBITDA across the USD 10 million revenue. Notwithstanding, we did make a modest loss for the year of $700,000 on the [indiscernible] revenue for the period of 2025. But I think it's very important to note when we talk about the 2 deals, the 2 record deals that we did, one in the U.S. and one in the U.K., the growth that the company is currently undergoing at the moment and the costs associated with growing, as I said, the underlying cost base from 48 up to 64 staff and going forward to support the over USD 40 million of revenue that is basically contracted and locked in just on those 2 deals alone for the next 5-year period. Go to the next slide, please. In August last year, we -- following on from 5 or 6 years of development work with Samsung and AT&T, we entered into a new contract with AT&T FirstNet for USD 20 million for an initial term of 7 years. A month or 2 later, similarly, GBP 14 million with the U.K. Home Office. And why these deals are very important to Etherstack and where we stand going forward is that for this type of new technology in 3GPP MCPTX technology, they represent the #1 and #2 deals of this type in the world. So I really can't underestimate the strategic importance for the work that we've done over that 5- or 6-year period and the multimillion dollars worth of R&D investment in this product line. It's been fantastic to see the confidence in our government customers and telco customers in this solution, really positioning the business for growth going forward, as the world goes from traditional land mobile radio to the new mission-critical push-to-talk technology around the world in the upcoming years. Not to just ignore, obviously, in November, we also announced a AUD 2.5 million win with the Department of Defense. We're certainly looking forward to doing future work with the Australian government. I think anyone who's been following the Etherstack story will also know that these deals with the Defense Department in Australia and the Commonwealth in general have been continually increasing on a broader scale over that period of time. Thank you, Adam. This graph here just sort of shows you one of the key KPIs that we continually call out. While I appreciate that 2024 versus 2025 was a little bit anemic to say the least, but the key thing that we've always been calling out, if you look back at our historical record, really is that key performance indicator of recurring revenues. And this graph here shows the traditional recurring revenues that we operate that we provide in the teal at the bottom of the bar. And now the new recurring revenues that are coming through on the middle business on that sort of first slide I showed you, which was in relation to the emerging 3GPP business that we're going forward. On contracts in hand at the moment, sure we continue to deliver with them on time. And I'm certainly very pleased to say that we made our first deliveries to the U.K. Home Office during January and received our first acceptance certificate for those on Friday last week. Then you can see the impact on our revenues going forward, recurring revenues, more importantly, from the new types of revenues that we're receiving from this technology. Go ahead, Adam. One thing that should not be missed is while we have been talking about the KPIs, this is an example of the total combined revenues that are now being sort of turbocharged from the MCPTX. After the uplift from last -- from 2024, which was unusually weak due to delays outside of Etherstack's control, you can see that we've provided forecast of a further 60% year-on-year uplift this current financial year based on contracts in hand. So we're providing guidance for FY '26 north of the $16 million, $16.5 million range at the moment, again, driven by deliveries for contracts currently in hand. This slide here is primarily just to give, again, people new to the story, a bit of an understanding of the largest source of revenues for Etherstack in the last 3 years, either by client or category. AT&T, one of the world's largest telcos traditionally, providing project and new communications as a service revenue. Samsung is the world's largest telecom -- largest electronics company in the world, and we've been providing this technology to them, generating both technology licensing and ultimately support revenues. Our electric utilities base in Australia, Canada and the United States, we've been supporting now for over a decade. And these P25 or digital radio networks we're deploying in these countries are providing very substantial 10- to 15-year plus support tails, as well as renewal sales for us, as those networks we maintain and we go forward. Rio Tinto projects related to Rio Tinto in the Northwest of Western Australia. We've now moved into last year, mines 8 and 9 for digital radio networks, one of the world's largest miners. And very similarly, these are large infrastructure projects that have got highly sticky tails going forward. I touched on before some of the work we're doing for government in regards to defense and state and federal public safety agencies and certainly from industry partners such as Icom in Japan, Zetron here in Australia, who license technology or work on projects with us accordingly. Go ahead, Adam. The income statement is there we put out this morning. Obviously, you can see a very substantial uplift year-on-year from the previous year. But more importantly, obviously, for 2026 is that we're highlighting the forward revenues increasing towards the $16 million mark going forward. So very pleasing to see the headline number bounce back. Gross profit around the 50% mark. And relatively considering the scale of the growth that the company is going through, a fairly modest loss of about USD 700,000, and we certainly look forward to publishing the mid and full year results this year. If we go to the last statement, and here's the impact on the balance sheet and cash flow statement for the year. Fantastic positive operating cash flow as -- again, for about the eighth year in a row and then a corresponding increase through the work that we're doing in terms of the growth in the net asset base underneath. The company is extraordinarily well positioned with these 5- and 7-year contracts in the U.K. and the U.S. going forward and certainly great interesting demand in the product line around the world. Thank you very much. I'll throw the floor open to questions.

Thank you, David. [Operator Instructions] A few have come through. So firstly, as you grow your support/CaaS revenues, how high should we expect margins to go? Are they purely variable depending on product mix? Or will they increase as recurring revenues become a greater proportion of total?

Look, as the recurring revenues grow, basically, we have to have ultimately a fixed support base around the world to be able to support the 24/7 365 support. You'll see that in some years that the gross margins have trended as high as the upper 60s. We can certainly expect to see, I think, certainly growth well and truly over 50% into the 60% and low 60% range as has occurred in previous years. This particular year of '25 and a little bit into 2026, certainly, we have a bit of drag associated with these 2 major projects in regards to the establishment of new security operation centers and support operations centers in both the U.K. and the United States. But once that fixed base is actually sort of put in place between the 3 major support organizations around the world that follow the [ sun ] model for our public safety clients, we certainly expect to get further growth in the gross margin underlying it.

Thank you, David. Next question. Outside of Australia, do you know how many other countries/cities are performing trials on MCX into working function capability?

In terms of pilots and very little -- we do very little in Australia. So when you say outside of Australia, the Etherstack business predominantly is global. And Australia certainly has had 2 pilots before that we were involved in, one for the Commonwealth there and the states in 2023, the other for Telstra with their public safety experience center and their 5G exchange in Queensland last year. So if you look at all the developed nations in the world, 37 OECD countries, in particular, also on top of the 37 countries in the Middle East and populous nations, almost everyone is either preparing for a pilot or preparing for procurement in the next 2-, 3-, 4-, 5-year period. We're really at a very much inflection point, as we go from the old traditional land mobile radio technology to the new 4G, 5G technology. And I'd say this year alone, there would be half a dozen to a dozen pilots globally. We're involved very much in the same way that we won these 2 deals last year. we are clearly involved in other pursuits with major vendors and other governments around the world. So I don't want to put a -- the different stages creates -- is it probably a dozen different pilots happening around the world this year. I suspect 4 or 5 countries will make a decision this year, which -- where they go and a similar number and growing each year subsequently until we start to fill up that 37 to 50 initial customers around the world, not us, but I'm saying wins around the world by different parties over the next 3 or 4 years.

Another question here just regarding how is 2026 looking in terms of executing new contracts without disclosing negotiations underway with any potential new clients? And is the focus still on the U.S. and U.K.

U.S. and U.K. are effectively done deals. Those are 5- to 7-year projects, U.K., U.S., respectively, on those 2 deals. And they will contribute very significantly to the total combined revenues. As you will see from one of the earlier slides after the KPI, the recurring revenue KPI support KPI slide, that's really where the step-up change, which will be sustained from those 2 deals actually comes into play. In regards to the rest of 2026 and certainly a little bit into 2027, these deals don't happen and they're not won on a 3-month basis or a 6-month basis. There's very substantial investment in time, resources, planning and commitment of multiple rounds of bidding, expressions of interest and so on. So our confidence, we rarely provide guidance. So the guidance that we have provided for 2026. And certainly, the general guidance we're providing for the 4 years past that is based very much on those 2 anchor contracts in the U.K. and the United States. So we're certainly getting great guns for 2026.

So regarding the Samsung agreement, so it's due for renewal -- having renewed in 2021 for 5 years. Do you expect to renew this on different terms or just an extension of the existing?

Well, I think we previously advised the market that the exclusivity terms associated with the initial deal have fallen away. Samsung is a great partner. They obviously have won the U.K. Home Office for their section of work. So while Etherstack is directly contracted with the British government to provide our componentry, we expect to see other deals in other countries around the world, where we will work together hand-in-hand in partnership with them, either potentially as a subcontractor or as a partner contractor to a telecommunications company or a government in particular. So we certainly expect to see our relationship with Samsung continue. The details of the deal for us at the moment, probably less important than all of us delivering to the public safety community globally.

There's a question here specifically referring to Slide 10. Can you provide a bit more detail on Zetron work/relationship?

Look, Zetron are a venerable U.S. and Canadian brand in the public safety radio industry. They're owned in Australia by Codan. And in different markets, we do different things together. In some markets, we supply technology to them, in particular, the United States and Canada. They are a major customer of Etherstack, and we -- the relationship is fantastic. If you take a look at the announcements in relations to Zetron over the last 5 or 6 years, you can typically see that they are close to almost 10% of Etherstack's underlying revenue base. And certainly, the relationship is good, and we continue to work and grow together. in the international markets.

Who would you consider your major competitors? And what do you see as the competitive advantages for Etherstack?

Yes. Look, there really -- we like to think that in the high-growth area of the interworking business that we don't have clear competitors. We'd like to think that we're several years ahead in this new technology area, and we certainly believe that winning the #1 and #2 deal in the space globally helps or give weight to that argument. The technical barriers are -- certainly [ offered ] by themselves are extremely, extremely high. But I don't think people appreciate the organizational, logistical and other barriers associated with trust and relationship with governments and telcos, the security concerns that are involved with them. These are not contracts that just come along for new players in the industry. This really very much is about Etherstack's 20-year participation in this mission-critical communications industry. And so we're very, very comfortable with where we currently sit.

So final question here. So when do you expect your first dividend payout?

Currently, we have -- Adam, I'll ask you the question shortly. We have negative retained earnings in the business. But certainly, what we're expecting in the next 1 to 2 years that we will see the washout of any negative retained earnings in the company. Personally, as the largest shareholder of the company, I am very interested like all Etherstack shareholders to see that date as early as possible.

All right. Thank you. So that concludes the Q&A segment of the webinar. A recording of the webinar is available by the registration link. If you have any further questions, please reach out to Etherstack via the Investor Relations details provided on the company announcements. So thank you, everyone, for joining, and have a great day.

Appreciate it. Thanks very much, guys.