Etherstack plc (ESK) Earnings Call Transcript & Summary

Good morning, and welcome to Etherstack's Half Year Results Presentation for the period ending 30 June 2026. This morning, we have CEO, David Deacon; and CFO, Adam Hoey, presenting to the presentation. Investors are invited to ask questions, and there is a function at the bottom of the screen. I'll now pass to David.

Thanks very much, Mel. Thank you very much, everyone, for attending the half year results presentation. I'm going to go through relatively quickly the results. We've had a fantastic first half, and even -- we have a better second half and full year planned at the moment. I have 1 or 2 just quick slides to just provide a little bit of background on the business to people who are not familiar with it, that we'll talk about the numbers, and we'll talk about the drivers for profitability this year, next and going forward. The company works in a field known as mission-critical communications, which is essential communications for public safety, resources, electric utilities, transportation, like rail networks, also process over into the defense market as well. We have really 3 core focuses. We have our traditional land mobile radio business, represented by blue box here on the left-hand side, which are the types of police fire and ambulance networks that you see in cities around the world, also used by electric utilities, resources like clients like ours like Rio Tinto, our energy utility customers, Ergon Energy, ATCO Electric in Canada and a raft of electric utilities in the U.S. They provide high-margin network equipment sales, but very importantly, long-term sticky support revenues. And some of those support contracts now have been continuing to grow over 10 to 15 years of time. The middle box is our mission-critical push-to-talk business, which is the activities that we're doing around the world with partners such as Samsung, Nokia, Ericsson, the AT&T FirstNet project, pilots here in Australia with Telstra. And this is a really very exciting part of the business in terms of the growth shift in the business going forward. And the right-hand box represents our defense business, which is a lot of very advanced research on future radios and future communication systems for allied armed forces and also defense wireless equipment manufacturers who we license technology for. And a little bit of scattering of some of our customers around the world, brand name defense companies, switch vendors, telcos, government agencies and organizations. The 3 core businesses provide a diversified revenue mix. The traditional land mobile radio business provides solid revenues. The new growth one, which has also been driving growth this year in particular and next year, really going forward is the MCX business and also our smaller defense business, which is really how we keep our technology fresh in the markets competing globally. Looking at the business and financial highlights for the first half of 2026. It was a fantastic result for the company. We had a record first half revenue, up 40% on the previous corresponding period and the $8.5 million represented almost 84% or a little over 84% of the full year revenue last year. We are currently on track between USD 17.5 million to USD 18.5 million forecast for the full year. The EBITDA margin on the first half was 24%, delivering $2.1 million. The underlying EBITDA was noticeably higher, and I'll come back and talk about that a little bit later about some of the shifts in terms of margin profitability. NPAT was good to return to NPAT, and we expect that to grow materially during the second half and also into next year. Recurring revenue is another key performance indicator, $2.7 million. So the full year ARRs are going to be in excess of $5.5 million, now representing over 30% of all total revenues. Those are very sticky ARRs attached to long-term government-related projects. They're not 30-day SIM accounts or anything else like that. These are usually contracted and measured in years, those growing contracts there. While we delivered some fantastic new wins in the second half of last year, it shouldn't be lost that we also posted over USD 2 million of new contracts in the first half of this year alone, particularly with the Australian Department of Home Affairs. That's expected to be between AUD 9 million to AUD 15 million over the next 3 to 5 years. We have an increase in our British government project of $2 million or GBP 1.6 million. And also our traditional LMR business continues to provide very healthy revenues for the business. Strong operating cash flow again for the business, and that will significantly improve in the second half, and I'll get to some of the point on that shortly. Very important to take a look at this year's first half in reference to last year. And the full year was $10.2 million, and we're fundamentally going to be growing very substantially this year. In the second half of last year, we had 3 record 5-year back-to-back deals announced. One was with AT&T, effectively the world's largest telco for an initial 7-year deal in excess of $20 million. And that's just really the fixed component there. The British government shortly after October, after a multiyear competitive tender process, we were awarded a GBP 15 million 5-year initial deal with them, which is simply about another USD 20 million. So on the back of that, second half last year really there in the top 4 bullet points. In the first half, we've come out of the gates pretty well, posting those 10 million new wins. But really on the cost side of things, it's very important to understand some of the background to some of the margins here. We had to do significant ramp-up at the end of last year and continuing into this year for an additional facility in the U.K., a traditional facility in Reading, the new one in London to support the new British government project and also the completion of the build-out of the security operations centers and network operation centers in support of the AT&T FirstNet project. Besides those offshore activities, the company also delivered major milestones in its Australian defense project, helping to drive revenues in the first half. Taking a look at the second half, as I said, we provided full year guidance in the 17 to 18 and change range. We're currently on track for new record revenue and profits this year, up 70% in revenue growth over last year. Gross margins and net margins are expected to materially increase as a result of the one-off costs associated with the ramp-up and establishment of the new British and U.S. project. And that margin expansion is clearly going to result in significantly improved free cash flow. When we look at the breakdown of the drivers in the second half, these are all contracted deals. The U.K. government deal will deliver approximately $4 million in the second half, existing support and revenue streams, almost $3 million. The Commonwealth of Australia, an additional million. Rio Tinto and LR projects, an USD 1 million, and we are currently in the middle of delivering further milestones actually this month on our [ critical ] Australian defense project. So we're in very good shape for the full year and which also sets up an excellent launching pad for '27, '28 and beyond. When we take a look at how those large wins from last year are starting to flow into this year and next year. combined with our rapidly growing ARRs, which we predict will grow to USD 10 million by the mid or end of 2028. This really gives you a bit of an understanding of some of the growth that we're looking at the moment. The blocks in green are fundamentally open contracts and open accounts, fixed and variable components that are known really underpinning '26 and also next year's revenues, defense projects that we're working on here in Australia and also with the British government. And then additional revenues starting to come through from our new mobile radio product lines and additional MCX deployments. We also announced on 30th of July a strategic review. In light of our $50 million plus order book at the beginning of the year and our expectations of sustained profit and growth, we're doing a review of the company's -- the Board is doing undertaking a review of the strategic and capital management framework, in particular, to look at adjusting the U.K. plc's capital structure for the creation of distributable reserves. I recommend that investors do take a look in more close detail the scope of that strategic review that we announced on the 13th of July. You can find that document on the ASX website or our website. The income statement and P&L included here. I obviously read off the highlights a couple of slides ago. You'll see that very significant step-up in project revenues, yet when you take a look at the net margin, you'll see that clearly impacted by the one-off costs that I referred to before. What's great to see though, obviously, is the other KPI that we do keep trying to chart out every 6 months, which is that rapidly growing recurring revenue base, which helps take a lot of the bumps, historical bumps in past out of our forward projections going forward. Improved balance sheet here. What I'll do probably at this point, Mel, is bring this part of the presentation to throw the floor open to questions from shareholders.

Our first question relates to the strategic review. Is the strategic review limited to capital management? Or are there other components up for consideration, for example, selling off some of the IPs.

Look, it's a very good question. And the scope of the review is listed in the 13th of July announcement. So please do encourage people to go and take a look at that. It's a broader review. Many things are on the table for consideration. Our primary focus is how to accelerate returns to existing shareholders and hopefully new shareholders as well. It's very important as we transition to a whole new revenue level and profitability level that we previously have not been operating at the best way to deliver some of those returns to the shareholders.

Thanks, David. And we have a few questions here on margins. So my first one, can you quantify the one-off costs that impacted the gross margin? And how much of those will not repeat in the second half of FY '26?

Yes. We called out in the 4D certification, there were some extra details in that one. There's USD 300,000 or USD 400,000, USD 350,000 or USD 400,000 conservatively in the first half in the net margins and flowing down to PBT. And so a lot of those were to do with new recruitment costs in terms of expanding both the British and the U.K. team, new facility costs and also rebalancing of some of the team, some of the roles here in Australia moved to roles in different regions to provide better 24/7 support around the world. So to a large extent, those growth impacted costs have fundamentally already now washed out. And so we expect to see a significant improvement in all metrics in the second half. And we have provided previously a bit of guidance there to say it's worthwhile looking at the gross and net margins in the FY '21 to 23 years as good guidance to where we expect the full year to end up when the business is running on a stable footing as opposed to going through a growth phase.

Thanks, David. And just further to that, so in regards to your comments, looking at FY '21 to '23 margins, should investors look at that on a similar revenue to first half '26?

On the margin basis. So if we look at full year '25 versus full year '26, the 2 years halves are exactly the other way around. The first half of last year was unimpacted by one-off growth and expenses. The second half significantly impacted. That impact in the second half last year spills over into the first half this year as we finish the build-outs of the U.S. security operations centers, network operation centers and new facilities in the U.K. And then the second half of this year is much more similar to the first half of this year when those one-off costs and margin improvements fall away.

And then just a question on cash flow from operations. Should that also be stronger in the second half? And do you believe Etherstack will generate free cash flow for the full year?

Without question, and it will be the 10th year in a row, I believe, with 7-figure operating cash flow and that it will be materially higher than in previous years. Hence, the undertaking of a strategic review at this moment to take a look at ways that -- the best ways that we can provide returns to existing shareholders.

And then is there a comment in the FY '26 second half outlook about a material. There is a comment, sorry, in the second half '26 outlook about a material increase in growth in net margins. Can you expand on the drivers behind this?

Yes. I think very much it's probably the same question asked just in a slightly different way by someone else or queued up in the system. Really, there are going to be very few more net human adds on that side, less additional one-off expenses associated with the procuring data center equipment and facilities and one-off costs associated with all of that. And that's where the improved underlying -- you get an improvement by having that -- those costs fall away added with the improvement that the additional revenues on the top line will provide to provide a significantly outperforming second half to the first half.

Thank you, David. And then the presentation notes over $50 million in new orders since August '25. What is the likely timing for delivery and recognition of those revenues?