Sales Pipeline of Defense Co. Reaches AU$1.1B

DroneShield Ltd. (DRO:ASX; DRSHF:OTC) just had a recent earnings call, and company management showed that its growth strategies are working.

The 10-year-old company develops and provides artificial intelligence-powered hardware and software solutions for detecting and defeating drones.

"Every year of our existence, we have reported record results," Chief Executive Officer (CEO) and Managing Director Oleg Vornik said in the recent earnings call. "When we started, we were one of the very original pioneers, and we grew with the industry. We believe it presents a really strong opportunity for DroneShield going forward."

Sales Pipeline Doubles

The company's AU$1.1B sales pipeline comprises 110 prospective projects for high-quality government customers, primarily in the U.S. (44 projects), its largest buyer, but also in the United Kingdom, Australia, Europe, Asia, and, to a lesser but growing extent, the Middle East, Vornik explained.

He attributed most of the pipeline growth to projects for governments in Asia looking to beef up investment in counter unmanned aerial systems (CUAS) given the threat coming from China. Other factors include the expanding use of drones in defense worldwide and the concurrent need for counterdrones.

"We have been working with all of those customers for years," said Vornik. "We're ready, and we have the right relationships to take advantage of those opportunities."

Signs of Growth

The new financial results shown in the presentation show DroneShield had its best ever first half of a year (H1). Historically the second half tends to be stronger, particularly the fourth quarter.

In H1/24, the anti-drone company generated AU$24.1 million (AU$24.1M) of revenue, an amount 110% higher than the AU$11.5M in H1/23. Cash receipts totaled AU$21.4M, reflecting a 40% year-over-year increase.

DroneShield expects to land additional purchasing agreements in 2024, the company said, given that governments generally place orders in the latter part of the year. 

DroneShield's largest business segment out of three, software-as-a-service, providing device software updates, yielded AU$1.3M in revenue, nearly double that (93%) of a year ago. The other two lines of business are hardware and electronic warfare.

At Q2/24's end, or June 30, 2024, DroneShield's contracted project backlog stood at AU$28M. Its cash balance was AU$146M, including AU$115M from the equity raise done earlier this year. Debt was AU$0.

Operationally in Q2/24 to keep up with growth, the company began acquiring a significant amount of inventory. It expanded its staff to 151 individuals, including 114 engineers in various fields, established a dedicated data engineering team and engaged several on-the-ground salespeople in various ex-Australia countries. It signed a lease for another 1,800 square meters of space at its Sydney HQ facility effective as of this August, taking the total to 3,900 square meters.

Well-Positioned for Growth

Moving forward, DroneShield remains focused on growth, Vornik said, primarily in the defense sector, currently accounting for about 75% of its revenue, but also in civilian applications of CUAS, at airports, stadiums and events, critical infrastructure, prisons, corporations and the like.

The total addressable worldwide market, the CEO added, is about US$10 billion in value.

In April, the company received the first-of-its-kind, signed North Atlantic Treaty Organization (NATO) framework agreement, meaning European NATO countries may place orders with DroneShield.

Despite the pullback, Technical Analyst Clive Maund remains bullish on the DroneShield. "The company is still on a stellar growth trajectory that has not been changed one iota by the plunge in the share price over the past week or two," he wrote in his July 25 report.

"We expect for it to drive material sales," Vornik said.

DroneShield has characteristics that differentiate it from other companies and afford it an advantage, noted Chief Technology Officer Angus Bean in the earnings call. The company has been in the counterdrone space since its origin and provides a diverse set of CUAS products and solutions, including hardware, software, and back-end infrastructure. The defense firm can tailor solutions to customers' needs and budgets. It always is evaluating new technologies in light of new threats and is open to developing new offerings.

"We're not relying on any contractors, third parties, or specialist technologies, and we're able to build everything we need ourselves," said Bean.

Also working in its favor are numerous sector tailwinds that collectively should "lead to meaningful and consistent order flow for DroneShield across the near and medium terms," the company said and listed them in its July 2024 Investor Presentation.

Burgeoning Counterdrone Sector

The global counterdrone market is forecasted to expand at a compound annual growth rate of 26% between 2023 and 2032. By then, the market will reach US$15.3 billion (US$15.3B) in value, up from US$1.9B, according to Global Market Insights.

One of four expected growth drivers, the market research firm cited, is increasing geopolitical security concerns. Many now are playing out around the globe, and among them drone use is a common theme. They include the war between Russia and Ukraine, the conflicts between Hamas and Israel and between Armenia and Azerbaijan, and tensions between Iran and Israel and between China and Taiwan.

The other three drivers are increasing governmental spending on defense and aerospace, increasing advancements in drone technology, and unauthorized drone activities, all of which are happening to some degree.

The Catalyst: More Sales

DroneShield expects to land additional purchasing agreements in 2024, the company said, given that governments generally place orders in the latter part of the year. 

Buy Now for Future Upleg

The company's stock price hit its year-to-date peak mid-month and since dropped about 43%. Vornik indicated nothing had changed with the company to warrant the pullback and speculated it resulted from a media report asserting the defense firm was overvalued, Bloomberg reported on July 18.

The CEO discounted the claim, saying, "DroneShield can become a much, much larger business than it is today, and the valuation is incorporating that upside."

Despite the pullback, Technical Analyst Clive Maund remains bullish on the DroneShield. "The company is still on a stellar growth trajectory that has not been changed one iota by the plunge in the share price over the past week or two," he wrote in his July 25 report.

Maund explained that the drop was a major step in clearing the "speculative froth," and once this finishes, "the stock will be free to advance anew after a period of stabilization and base building to allow time for sentiment to recover." He warned that DRO could dip a little further beforehand, but recommended investors start buying it again.

Simply Wall St. also views DroneShield favorably. Its AU$4.95 fair value estimate on the defense firm implies a 232% return from the price at the time they wrote their article.

"DroneShield is undervalued and, as such, presents an opportunity for investors looking for a company poised for growth," Simply wrote in a July 15 article. The stock analysis firm forecasted DroneShield will grow its earnings by 45.6% and its revenue by 33.1%, annually, "outpacing the Australian market significantly."

Ownership and Share Structure

Management and insiders own 11% of the company. CEO Oleg Vornik owns 2.23% of the company with 15 million options on a fully diluted basis.

Non-Executive Chairman Peter James owns 0.58% of the company with 920k shares and 3 million options, on a fully diluted basis, and Non-Executive Director Jethro Marks owns 0.22%, with 1.5 million options, on a fully diluted basis, according to DroneShield.

The largest independent investor, Charles Goode, owns 4.41% of the company with 21.5 million shares, while strategic investors own a total of 13.99% of the company.

Eprius Inc. is the second largest shareholder, with 3.16% of the company having 18.5 million shares.

The company reports that there are about 763 million shares outstanding and about 56 million free-float traded shares.

Its market cap is about AU$1.5 billion, and it trades in a 52-week range of AU$1.37 and AU$2.02.

Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of DroneShield Ltd.
2. Doresa Banning wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor.
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