Counterdrone Tech Co. on Revenue Growth Trajectory

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DroneShield Ltd. (DRO:ASX; DRSHF:OTC) achieved some record numbers in H1/24 and increased its sales pipeline, as noted in its 2024 Half Year Results presentation.

Headquartered in North South Wales, the company provides end-to-end counterdrone solutions, combining proprietary artificial intelligence-backed software with a suite of hardware products, for detecting, identifying, and defeating aerial, ground, and maritime threats. DroneShield's customers include military and intelligence, government, and law enforcement, along with critical infrastructure and commercial entities.

The company achieved its highest-ever H1 revenues and cash receipts this year. At AU$24.1 million ($24.1M), they were up 110% from AU$11.5M in H1/23.

"We are encouraged by the step-up in expected revenue at all stages of the sales life cycle in H1/24 versus full-year 2023 (FY23) and see sales accelerating in H2/24," wrote Shaw and Partners Senior Analyst Abraham Akra in an August 27 research report.

Similarly, cash receipts in H1/24 were DroneShield's highest ever in an H1. Totaling AU$21.4M, they were 40% higher than AU$15.3M in H1/23.

Revenue from the company's software-as-a-service (SaaS) offerings in H1/24 were AU$1.3, 93% higher than AU$663,000 in H1/23. This is attributed primarily to customers needing DroneShield's latest artificial intelligence software "due to evolving threat," according to the company. It plans to release additional SaaS-based solutions during the next 12 months.

"We anticipate further margin expansion as SaaS revenues increase as a proportion of the overall [gross margin]," wrote Bell Potter Analyst Daniel Laing in an August 27 research report.

DroneShield has an AU$32M contracted backlog and an AU$1.1 billion (AU$1.1B) sales pipeline. The latter doubled in value since March 31 due in large part to multiple governments in Asia having initiated programs against Chinese drones.

Akra noted three contracts that could significantly impact the sales pipeline:

1) Airservices Australia: This AU$30–60M revenue opportunity, as estimated by Shaw and Partners, would involve deploying a drone surveillance network at 29 Australian airports.

2) U.S. Army: The Army's fiscal year 2025 budget has been raised by US$400M, and an incremental US$2.2B has been requested for unmanned aircraft systems (C-UAS). The U.S. Department of Defense (DOD) has recommended DroneShield and two other entities as suppliers.

3) NATO Framework Agreement: This agreement is likely the reason for past and future sales in Europe and a large part of DroneShield's current AU$111M European Union sales pipeline, Akra wrote.

"We see [the agreement's] significance on par with the endorsement from the DOD," the analyst wrote.

DroneShield's after-tax net loss during H1/24 was AU$2.1M, reported the company. It, historically, has performed more strongly in H2 than in H1 and expects to do the same this year, according to its Aug. 27 investor presentation.

Laing agreed, writing, "We remain confident the company will deliver a significantly improved H2 performance based on 1) the significant level of inventory on hand to facilitate rapid fulfillment, 2) the historical seasonality of the business with more than 80% of 2023 revenue recorded in the H2 and 3) numerous near-term sales opportunities, including recently announced military aid packages."

DroneShield has about AU$230M in cash and zero debt or convertibles.

The Catalysts: Additional Contracts/Orders

DroneShield has several potential stock-boosting events ahead, according to Akra. They include additional contracts and orders resulting from the NATO agreement and from the DOD funding for counter unmanned aircraft systems, or C-UAS. Quarterly financials showing cash flow growth also should move the needle, as would Airservices Australia awarding its C-UAS tender to DroneShield.

"We see DroneShield reaching an inflection point in sales and profitability with the NATO agreement supplementing the DOD recommendation and solidifying DroneShield as a market leader in jamming C-UAS," Akra wrote. "We expect DroneShield to experience considerable operating leverage due to rising global defense budgets and a focus on C-UAS."

Revenue Momentum To Continue

In their respective August 27 research reports, Akra and Laing discussed what they like about DroneShield.

Shaw and Partners' Akra noted the defense technology firm is poised for strong growth in the medium term. Also, it is sufficiently capitalized "to lead counterdrone tech development and capture market share," the analyst wrote, having raised AU$235M this year to bolster working capital, further research and development (R&D), and expand capability via mergers and acquisitions.

DroneShield has ramped up (R&D) in response to customers' request for "a technology-defined product roadmap, particularly addressing emerging cellular and maritime drone threats," explained Akra. "This shifts the focus away from the sales pipeline, with product releases now driving market demand, and customers actively seeking to integrate DroneShield's solutions into their layered C-UAS strategies."

Given this focus on and investment in R&D, Akra added, Shaw and Partners is confident that DroneShield will achieve its 2028 revenue goal of AU$300–500M.

"We anticipate revenue exceeding the lower end of this range, driven by entry into new markets and segments, accelerated product rollouts and rising SaaS revenue," wrote Akra. "C-UxS Marine and multisensor C-UxS vehicle systems are expected to contribute to sales throughout the forecast period."

The counterdrone company plans to add a new member to its board, thereby enhancing corporate governance and, in turn, potentially giving the board more autonomy.

"This move could boost investor confidence and strengthen strategic decision-making and networking, potentially leading to a rerating," wrote the analyst.

On DroneShield, Akra has a Buy rating and a target price, implying a 7.7% return.  

Bell Potter's Laing pointed out DroneShield's solid revenue momentum in recent periods, including its 228% year over year increase from 2022 to 2023, taking it to AU$55.1M.

"We believe this momentum is likely to continue in 2024," the analyst added, based on the company's contracted backlog and sales pipeline.

DroneShield should benefit from continuing structural growth in the military market, driven by expanding defense budgets in light of increasing hostilities worldwide, wrote Laing. In the U.S. alone, in 2023, aggregate military spending exceeded $2.4 trillion.

"Asymmetric warfare, including drones and counterdrone defense, is one of the fastest growing subsets within this growing military market, the core competency of DroneShield," Laing added.

Another way DroneShield could grow is by expanding into adjacent markets, electronic warfare for example, the analyst noted, which could be "extremely lucrative."

Laing reiterated his Buy rating and raised his price target on DroneShield by 8%. His new target implies a 3.7% upside from the current share price.

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.

Regarding capital structure, DroneShield has 872.02M outstanding shares, 782.35M free float traded shares and 27,000 shareholders.

The company's market cap is AU$1.16 billion. Its 52-week trading range is AU$0.245–2.72 per share.