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By Team Ace Investors
Company Overview
DroneShield Limited (“DRO” or the “Company”) is a technology company that designs detection systems to detect and/or intercept unwanted drones and unmanned aerial vehicles (UAVs). It has developed multilayered pre-eminent drone detection and disruption solutions that protect people, organizations, and critical infrastructure from the intrusion of drones. The Company's products include DroneGun Tactical, RfPatrol Mk2TM, DroneSentryTM, DroneGun Mk3TM, and newly launched DroneGun Mk4TM and DroneSentry-X Mk2TM etc. All DroneShield’s detection products are underpinned by its proprietary software engine RFAITM and command-and-control software for DroneShield and third-party sensors, DroneSentry-C2TM. The Company helps security forces identify unauthorized drones using real-time alerts and digital evidence collection. The Company's technology uses software and hardware, to detect drones from one kilometre away and alert users in real-time through multiple channels. The Company utilizes audio/acoustic signatures to detect drones. The Company offers solutions for Defense forces, governments, airports, prisons, commercial venues, critical infrastructure, and executive protection.
Investment Rationale
Well-positioned to deliver with a leading portfolio of counter-drone products and an expanded manufacturing base
DroneShield is well-positioned to deliver with a leading portfolio of counter-drone products and an expanded manufacturing base. During FY23, the company significantly expanded its product portfolio with launch of a multi-mission C-UAS solution for mobile and expeditionary fixed-site applications, DroneSentry-X Mk2; its latest highly successful DroneGun handheld C-UAS effector, DroneGun Mk4; a SaaS-based intuitive, tablet-based command-and-control version of its DroneSentry-C2 software for field-based operators, DroneSentry-C2 Tactical; and a sensor-agnostic 3D data fusion engine, SensorFusionAI ("SFAI"), etc. During the year, the company launched the sensor-agnostic 3D datafusion engine SensorFusionAI ("SFAI") for complex environments. The engine is currently deployed as a module in DroneSentry-C2, and the launch enables SFAI as a standalone module to integrate into third-party C2 systems on a SaaS basis, providing smart fusion capability from diverse sensor arrays. The company also integrated its RADA RPS-82 long-range radar into DroneShield's multi-sensor flagship system, DroneSentry, accompanied by enhancement of the Company's Blue Mountains test site. The company also ramped up its mass production capabilities, moved its headquarters including a dedicated manufacturing facility to a 3x larger space in Pyrmont, scaled its existing outsourced manufacturer and set up a second outsourced manufacturer, grew its supply chain, inventory, and deployment aspects, and doubled its team to over 100 staff in 2023. These measures will assist in the immediate or short-term fulfilment of customer orders, including anticipated record-size orders.
Achieved 3x growth in revenue, first profitable and cash flow positive year
DroneShield recorded another record results year by a substantial margin, with revenues up 3x to $55.1 million in FY23, while cash receipts from sales and grants have increased to $73.5 million. The counter-drone industry continues to grow and defence and security budgets rise with the increasing global uncertainty, underscored by the Ukraine war, conflicts in the Middle East, and other global hotspots with extensive use of drones by various parties. The company also continues its transition to a Software-as-a-Service (SaaS) model, with a growing number of products in the portfolio with recurring revenue elements. In FY23, the company achieved a solid 4x growth in SaaS Revenue to $1.39 million versus $0.33 million in FY22. Over time, the company expects that software/SaaS business will form the majority of its earnings. The company also had its first profitable year with an NPAT of $9.3 million, and positive operational cash flow. During the year, the company secured a record $33 million order as well as numerous smaller contracts including the recently announced $4.3 million US government contract, and finished the year with a strong sales pipeline with over $400 million. The company closed the year with a cash and term deposits balance of $57.9 million on 31 Dec'2023, providing a strong base for working capital for rapid order fulfilment.
Completed a $120m underwritten placement to fund its artificial Intelligence R&D to develop counter-drone (C-UxS) products
On 1 Aug'2024, DroneShield completed a $120 million fully underwritten placement (Placement) of approximately 104.3 million new fully paid ordinary shares to eligible sophisticated, professional, and institutional investors for A$1.15 per new share. The proceeds from the placement will primarily be used to fund its Artificial Intelligence R&D to develop new counter-drone (C-UxS) products and new generations of its existing products in response to end-user requirements, to fuel DroneShield's rapid growth. Extending DroneShield's R&D into new products and new generations of existing products is expected to further entrench DroneShield's position as the market leader in the rapidly evolving C-UxS market, enable DroneShield to expand into new markets and products, expand gross profit margins as its revenue mix shifts toward AI-enabled software solutions and accelerate SaaS revenues. Post transaction, the company will have a pro forma cash balance of approximately $120 million, which will support the rapid growth of its R&D programs and fund potential strategic technology acquisitions.
DroneShield achieved a solid 106% YoY growth in revenue to $23.3 million.
For the half year ended on 30 June 2024 (1H24), DroneShield achieved a solid 106% YoY growth in Revenue to $23.3 million compared to $11.3 million in 1H23, with the company achieving a 40% increase in customer cash receipts. The Group recognized a net loss after tax of $4.8 million in 1H24 compared to $2.9 million in 1H23. However, the Net loss for the period remains steady at $2.1 million after eliminating the share-based payment expense. During the period, the company recorded a 207% increase in share-based payment expenses to $2.7 million. The second half of the year has traditionally been a stronger period for the Company, with the 2H23 being 79% of the total FY2023 revenues.DroneShield continues to expand its product portfolio and launched a DroneSentry-X Mk2 Expeditionary Fixed Site Kit in Jan 2024. During the period, the company secured around $14.7 million in contracts including a $5.7 million U.S. Government Contract for several C-UxS systems and a $4.7 million contract for multiple vehicle-based C-UxS systems from a non-government Swiss international customer. The company also completed a $120 million underwritten placement to fund Artificial Intelligence R&D into new counter-drone (C-UxS) products and new generations of existing products in response to end-user requirements, to fuel DroneShield's rapid growth. After the half year, the company secured a $13.5 million U.S. government contract for its C-UxS systems and an $8.2 million European government contract for dismounted and vehicle-mounted systems counter-UxS systems.
DroneShield provides a proven market-leading suite of solutions directly or through its network of 70+ in-country partners globally and the diversity of its pipeline is one of its key strengths. Drones and counter-drone systems are now used in every conflict globally, including the Ukraine war, Hamas attacks on Israel, Houthi attacks in the Red Sea, and most recently, the attacks on the U.S. bases in Jordan. Apart from that, non-military use cases for drones are also growing in the intelligence community, airports, prisons, border security, stadiums, and other facilities hence creating market opportunities for counter-drone products. The outlook for the defence industry looks positive with the growing geopolitical tensions and increasing Government spending in Australia and in other markets. For 1Q-3Q 2024 (YTD FY24), DroneShield reported a 20% YoY growth in cash receipts to $30.5 million and 1Q-3Q 2024 revenues of $31.1 million vs $39.0 million 1Q-3Q 2023 due to the delivery of a material $33 million order announced during the 3Q2023. There are material deliveries already delivered and scheduled for 4Q2024 from existing orders, of which an additional $24.1 million in revenue is estimated for 4Q2024, resulting in an estimate of $55.2 million in 2024 revenue only from the existing orders. DroneShield is well placed to deliver orders at short notice before year-end, with $240 million in existing inventory (completed and in progress/long lead items) held by sale value.
ACE’s Recommendation
DroneShield Limited (ASX: DRO) is a technology company with demonstrated technical capability. DroneShield is well-positioned to deliver with a leading portfolio of counter-drone products and an expanded manufacturing base. During FY23, the company significantly expanded its product portfolio with launch of a multi-mission C-UAS solution for mobile and expeditionary fixed-site applications, DroneSentry-X Mk2; its latest highly successful DroneGun handheld C-UAS effector, DroneGun Mk4; a SaaS-based intuitive, tablet-based command-and-control version of its DroneSentry-C2 software for field-based operators, DroneSentry-C2 Tactical; and a sensor-agnostic 3D data fusion engine, SensorFusionAI ("SFAI"), etc. The company also ramped up its mass production capabilities, moved its headquarters including a dedicated manufacturing facility to a 3x larger space in Pyrmont, scaled its existing outsourced manufacturer and set up a second outsourced manufacturer, grew its supply chain, inventory, and deployment aspects, and doubled its team to over 100 staff in 2023 to fulfil its orders. For the half year ended on 30 June 2024 (1H24), DroneShield achieved a solid 106% YoY growth in Revenue to $23.3 million compared to $11.3 million in 1H23, with the company achieving a 40% increase in customer cash receipts. During the period, the company secured around $14.7 million in contracts including a $5.7 million U.S. Government Contract for several C-UxS systems and a $4.7 million contract for multiple vehicle-based C-UxS systems from a non-government Swiss international customer. The company also completed a $120 million underwritten placement to fund Artificial Intelligence R&D into new counter-drone (C-UxS) products and new generations of existing products in response to end-user requirements, to fuel DroneShield's rapid growth. DroneShield is well placed to deliver orders at short notice before year-end, with $240 million in existing inventory (completed and in progress/long lead items) held by sale value. We believe that a favourable defence industry outlook and a strong sales pipeline will support growth into the future. The stock closed the day at A$ 0.695/share and presents an investment case in our view. So, we would like to recommend a SPECULATIVE BUY rating on the stock.
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