Elsight Ltd

ASX:ELS

Q2-2025 Earnings Call

[Susan Becker, executive]

So good afternoon, everyone, and welcome to Elsight's presentation of our financial results for the first quarter -- the second quarter of 2025 and the first half. My name is Susan Becker, and I'll be your host for today's session.

First, I'd like to extend a warm welcome to the Board members joining us today. David Furstenberg is with us today. And following the presentation by our CEO, Yoav Amitai, we will open the floor for a Q&A session, where Yoav will address your questions. [Operator Instructions] And anybody who does not receive an answer to their question, we'll get their questions answered by e-mail following the presentation. And you're also welcome to register for our newsletter. Please go to our IR page or you can write us [email protected].

Now before we begin, I'd like to remind you that today's presentation may include forward-looking statements. These statements are based on our current expectations, assumptions and projections and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For a detailed discussion of the risks and uncertainties associated with our business, please refer to our most financial -- most recent financial reports and disclosures available on our website. Please also note that we undertake no obligation to publicly update any forward-looking statements unless required by law. [Operator Instructions]

And now without any further ado, I'll hand the baton over to our CEO, Yoav Amitai, to begin today's presentation. Yoav, over to you.

[Yoav Amitai, executive]

Thank you, Susan, and hi, everyone. Thank you for joining us for this webinar to summarize the second half, and in general, speaking about our capital raise that we have done recently and all the other updates that we have. I think, overall, as I always -- I also said in our previous webinar and we're trying to do those on every quarter, we're in a super exciting time in the company. We had a great first quarter in this year. The second quarter was even better. And we are seeing these trends moving forward based on what we're seeing in the market and our pipeline and everything. And I'll try to cover all of it today.

But starting from the beginning, from those of you that are with us for the first time, Elsight is in the highly reliable communication space. What we do basically is highly reliable wireless communication, mainly for on-the-move application. Something like 4.5, 5 years ago, we started to focus the business in uncrewed systems, which include drones, ground robotics, sometimes maritime robotics and so on.

Starting in commercial market, doing different type of missions and use cases there like the last, middle-mile logistics, drone deliveries, inspection, public and private security, agriculture and so on and so forth.

Something like 2 years ago, we started to be pulled into the defense market. And today, we're playing in those -- both of these markets, the commercial and the defense market. Each one of those have different go-to-market strategy, different kind of customers. But the good thing about it is the Halo, which is our product, I'll talk about it later, is kind of one size fits all. So we are using the same unit for those applications, which does not require us to do any additional developments or anything like that. It's just both of them using the same platforms that we're utilizing.

In terms of our place in the market, we're mainly going after what called BVLOS in this market, beyond visual line of sight, which sits both for the distance between the operator and the platform and the assets, but also sits in how many different platforms a single operator can operate. So it's enough that you have 2 drones that you're operating with a single operator, even if it's only 100 meters away. That's already BVLOS. And just to give you an example of what are the type of the markets or where we're playing within the market.

In terms of where we sit and all the excitement we have because of the results that we'll walk through during this presentation, it's all coming from very strong tailwinds starting in the geopolitical environment, then tails into defense budgets and also other trends that are currently happening, which help us or grow the total addressable market by a couple of orders of magnitude for us, also grow our pipeline and also growing our top and bottom line, as you saw in the numbers in the last 4C that we put out, and I will talk about it over the course of this presentation.

In the last -- in the first half of the year, we signed multiple contracts that are super strong from our perspective that just put us in a different bucket of instead of only talking about the tens or hundreds of thousands of dollars of contract, we're now in the millions of dollars of contract per contract or per customers. Those contracts have onetime fee as well as long term of recurring fee. We'll talk about the business model of ours and how it works.

We're talking about super high-margin business, which, on average, 75%, 78% gross margin. Again, we'll get to the business model. And there -- and looking on where we are today in cash flow positive position, having a lot of cash access based on the first half of the year, we are seeing how in the second half, we will become in the profitable bucket and start to actually generate earnings, and not only cross this breakeven point, but actually started to create high profits as a business.

Looking at our pipeline, it's the first time we're sharing with the market our pipeline, which currently sits in USD 151 million. We'll talk about what are the different buckets in this pipeline, how we convert them and what we expect it to look like moving forward.

In terms of production capacity, today, we have $70 million in production capacity per annum. Part of the updates that we gave is how we're going to increase it from $70 million to $150 million in capacity in the second half of the year just to be prepared for the coming contract that will come, also to diversify more our contract manufacturers that are doing the system for us and also be in the local market or in the target market, like we said in the 4C that, that's going to be in a NATO country in Europe to do a local manufacturing there, again, based on opportunity.

So looking on the high level, if I'm looking today between the commercial and defense market, on the short, medium term, we do expect most of the revenue to come from defense because of the geopolitical environment that we'll talk about. But over time, we are expecting and we are -- based on our analysis that over time, the commercial market will become bigger than the defense market. The same inflection point that we are currently seeing in the defense will happen also in commercial. And we need to make sure that we're continuing investing in this market having our market share there, having our presence there with our design-win customers to make sure that when this inflection will happen, that will be the next stepping stone for us as a business, and we will benefit from both markets. So that's how we see the picture today.

Sorry, in the end of the presentation, I'll also speak -- I'll also talk about some of the initiatives we're going to have as part of this capital raise and what we're going to do there.

But before that, a little bit of charts just to show the numbers. We already recognized $4.8 million. Just know that everything is in U.S. dollars. Already recognized $4.8 million in revenue in the first half of the year. Like you can see, we still have a backlog of orders to be delivered in 2025 of $16.25 million. So that's the revenue that we are currently having. If we will stop selling today, that's the revenue we'll have for the year before recurrent revenue. Obviously, we'll not stop selling, and we do expect this number to grow in 2025 as well as making the order book or starting to build the backlog for 2026 and beyond and making those numbers much, much higher.

In terms of the operating cash flow, like I said, it's the first time for us that we have first half of the year which is cash flow positive with nice, call it, $6 million cash access that we have generated. On the cash receipts, because of how our business model works and the fact that we're getting 40% down payment from a lot of those contracts that you see on the top here, 40% of it was already paid. So that's why you see the cash receipt pretty high with $9.2 million in the first half of the year. And looking on all those measures, we are currently experiencing a very big surge in demand in the top line and also pipeline growth when we're moving forward.

Maybe to take you through why now and why all of it is happening, and I want to talk about 3 main trends that we're currently seeing in the market. The first trend, and here, we put defense budget out of GDP for NATO countries, which we all know about 3 weeks ago, NATO countries announced that they are going to increase their defense budget from 2% GDP to 5% GDP by 2035. We already see start of this growth. You can see the comparison between 2014 and 2024 estimates of where these budgetary sits, and we do expect these budget to go up. And that's only in NATO countries. Obviously, we have - we are seeing all over the world is how much governments today investing in defense in general. So that's one trend.

The more interesting trend for us being a big part of the uncrewed system market is how much of those big budgets that are growing are allocating into uncrewed systems. And we're seeing it again all over the world. Just to give you 2 examples for this massive changes we're doing -- we're seeing this shift. First, in the U.S. for what they call the big, beautiful bill of additional $140 billion to their defense budget. 10% of it is going to uncrewed systems, which is massive. In the U.K., another example from the U.K., they just came up 1.5 months ago with what they call the 20-40-40 doctrine, which essentially means that 80% of the Army equipment budget is going to be allocated for different type of uncrewed systems. Germany and Poland also have the Drone Wall initiative and the list goes on and on.

So one trend is the growing defense budget. And the other trend is how much of those budgets are allocated into uncrewed systems, which play very well into our strategy and our total addressable market that is growing. And as a result, we are able to go to more places to increase our pipeline and also show the increase in our sales and revenue in general.

The third one that we're seeing, again, like I said, we're talking both about commercial market and defense market. So the third trend we're seeing is about commercial market and seeing regulatory approval starting to move. That's a process we are a part of this market for the last 4, 5 years. We are seeing it moving slowly. Now it seems to be a little bit acceleration there with just an example from mid-June about a month ago that Trump executive orders the FAA, the Civil Aviation Authority in the U.S., to accelerate the processes to integrate drones into the U.S. aerospace, commercial aerospace for different type of missions, from public safety to inspection, to last, middle-mile deliveries, everything that I mentioned before. We have a lot of customers in this space.

When I'm saying a lot, just to give you a number, on the first half of the year, we had new orders from 74 different customers, some of them in defense, some of them in commercial. So we do expect to be -- to have a lot of benefits for us once this commercial market will start go higher. I would say that this market -- I'm not expecting this market to happen, to go through this inflection point in the next 12, 18, 24 months, but we're definitely starting to see increase in the orders and the quantity of what our customers are doing in this space. So it's definitely an interesting space that we are a part of.

A little bit about our product and what we're essentially solving. Again, for those of you that are new to our story, so I'll start with the challenge. When we're talking about remote operated or autonomous or remote control platforms, and again, those can be drones for whatever mission, those can be ground robotics, those can be maritime robotics, communication is critical element within those systems. The reason being is because if you want to monitor them or control them or to change mission or you have a platform that is traveling around and no one knows what it does, that's a big issue. And communication, wireless communication, let alone wireless communication on the move, that's a critical problem that doesn't have yet the ultimate solution.

I'm not saying that we are the ultimate solution, but I want to take you through how we are disrupting this market with our approach of -- which is a big change of what is the usual solutions that are in the market. But the bottom line, the need is for reliable, high-bandwidth, secure communication. That's what everyone wants.

Our solution is a hardware software solution that combine hardware in the edge with the software runs on it and also software in the back end. And our approach saying that there is no ultimate solution and there are multiple type of solutions. All of them are great from point-to-point radio, like between 2 points, satellite communication, cellular communication, private and public and so on and so forth. All of these are great for different use cases, but none of these are perfect for the entire broad needs of the market. So our approach is saying that why would you choose from each one of these if you can take our product and combine the benefits of all of these together into one secure big pipeline of data in a low latency solution. And that's basically what we do.

This is how the system look like, what you see in the picture and what I'm holding here in my hand. That's what actually sits on the drone. We design it in a way that it will be modular so you can change different type of communication. If you want to put it, for example, 2G, 3G, 5G, LTE; if you want to connect different type of satellite communication terminals from SpaceX -- Starlink, sorry, to Viasat, Iridium; if you want to connect your radios from DTC, Silvus, Persistent Systems, you name it. Basically, this system is network aggregation. So what we do, we take all those different networks, we break the data into many pieces and each one of those pieces going through a different channel.

I'll pause here for a second, assuming that some of you have not watched our video. That will be a 2-minute video that will explain the technology much better than I, and we'll move on from there.

[Presentation]

[Yoav Amitai, executive]

So as I said, basically, what we're doing, we're combining all of those networks together. So if later on, we'll have a question about competition, I would say that we're mainly competing against ourselves because we're coming with a new idea, kind of disrupting technology and all the others are competitors for us, but they are not seeing us as a competitor necessarily and vice versa because sometimes if there is a drone that's using whatever communication piece, we will come there and say, why won't you add our layer of smart comms, which will make your system basically much more productive and in higher performance, and that's basically what we do.

So taking those trends that I said before of what currently happening in the market with us being in the right place, in the right time with the right product, and today, after this first half of the year, actually it's something that started around 8, 10 months ago that having a lot of case studies in hand of how we can -- how we are actually changing the real life in the battlefield or in the commercial space on those 2 markets, that's just putting us in a super interesting position, an exciting point in time of taking over this opportunity, being more aggressive, go to more markets, making sure that we are taking advantage of this time window that we have to grow this business much bigger than what it is today, even after we did this massive growth in the first half of the year, and we do expect this trend to continue over the -- to the next quarters and the next years to come.

Speaking a little bit about our business model and what we're doing there, but I want to start before that with our go-to-market strategy. So our old go-to-market strategy is what Intel said it, call it, in the 70 design-win strategy, which essentially means that we want our customers, which is the drone manufacturers, the prime contractors, the e-system integrators and so on, we want them to take our units and to integrate it into their solution. Then they will use our APIs. They will use our cloud service to get a lot of data. They will use our different tools that we are providing them with. So we will increase the stickiness of the product within their systems, not because we're doing it for the [ bad ] because we're providing them more and more solutions, more and more features, basically they can utilize.

By them using many of our features, that will become a very hard decision, close to impossible decision for them to replace it with the competition that will come sometime in the future. And that's the concept. So when we're saying that we have 74 active design wins in the first half of the year, that basically means that all of these are design-win customers or we call them partners because we really partnered with them rather than customers of ours. And each one of those represent a tip of an iceberg because as long as they are selling their units, their drones, their robots, their whatever, we are benefiting from that by having more basically, let's call it -- it's not a sales channel, but they are increasing the demand that's coming to us. So that's the whole idea of the go-to-market.

By the way, that's the same in defense and commercial market. The strategies or the tactics are different in the sales and marketing, but overall strategy is exactly the same between those 2 points. And we want to get as fast as possible to the place where they will heavily integrate our systems with their system. And again, by doing that, that's basically where the sales effort has stopped. And from there, it will just be to -- I'm saying sit next to the fax machine and way to orders, but you can be comfortable that we don't have a fax machine in the office, but just as a phrase.

So going back to the business model, it all start with the unit economic -- the unit sales of hardware sales. Those are going for thousands of dollars. Again, all the U.S. dollars. Speaking of margins, we sell those in around 78% gross margins that our current average. And it's average because we have different flavors of the product, but that's the average of 78% gross margin. And it doesn't matter if we're talking about big contracts or we're talking about small ones. We're not in a race to the bottom story. And again, I think it's also something that can speak to our position within the competition, but that's where we're at in terms of our margins.

Like I said, every unit is connected to our cloud service. And cloud service is not necessarily on our infrastructure. That can also be on the customer data center. As you can expect, government clients don't want everything to be on our cloud, they will have it on their government cloud or their data centers, and that's where it sits. Those are also a big portion of our recurrent revenue. Like I said, every unit we are selling, we have the long tail of the sale of the recurrent revenue that they will have to pay on a per annum per unit basis for every unit as long as they want to use those drones that they are using. In terms of gross margins there -- and that's, by the way, just to give you order of magnitudes, that's in hundreds of dollars per annum that we're charging for that.

In the gross margin, if you compare it to other software gross margins, that's fairly low, it's 71%. The reason is because we build a massive infrastructure based on AWS, Amazon Web Services, all over the world, which basically we have the cost, the fixed cost. And as we add more and more systems into this cost, the margins there are going higher. Just to give you a reference, for those of you who don't know our previous numbers, this number in the first quarter was 52% to 55% on average. Now it sits in 71%. And again, we are seeing these trends moving forward. Instead of steady state, once we get to full scale, this gross margin will go much higher and will be around 85%, 90% gross margin on this all side cloud element.

The last piece, those 2, if I'm putting a line here, so those 2 pieces of the business model are mandatory. And for every client that want to use our system, it doesn't matter which market is it, what region and what is the use case, they all pay for that.

The additional one is the data usage. Like I said, we're utilizing public network like the Telstra and Optus or Verizon or AT&T of the world. And we saw that it's a big challenge for our customers to go and do contract with all of those different vendors. So today, we're offering it as a bundle basically. On one-stop shop, one invoice, you can get not only our devices in our cloud service, but also the actual data usage and which kind of become mobile network virtual -- mobile virtual network operator for those of you familiar with this business model. Today, our gross margins there is on average of 51%. The quantity of it or the amount of it is changing because it's a per use, so it really depends on the use case of the customer, but that's basically how we saw our margins there and how we price our product there.

Moving forward to the pipeline, and I'm skipping some of the slides that we have in the deck, feel free to ask if you have specific questions about them. Just want to be focused on the most important parts. So like I said, showing a pipeline of USD 150 million in different stage of the pipeline starting from the bottom of order backlog. Those are orders that we already have actual advanced payment for them. And then I want to draw a line in the middle of the pipeline between the qualification and the evaluation in progress.

The reason I'm drawing a line here is because what we're doing, we're trying very early in the sales process to get the customer to show us that they have skin in the game by having some small orders. And a small order can be a couple of thousands of dollars or tens of thousands of dollars, not more than that. We just want to make sure that we're speaking with the right person. We have the right champion there. Meaning that they know to touch budgets, they know to drive decisions, they know to open us as a vendor in the big corporate that, that process can take long.

So all of the customers that are in these buckets, and that's including existing customers and new customers, all of these are already -- have had some level of purchase from Elsight, which means that the conversion on this part of the pipeline is much higher than the top of the pipeline, obviously, or not. And we are expecting this pipeline to convert and some of it will take more time, some of them will take less, but we definitely expect this part of the pipeline to convert because there, we have a much higher confidence, let's call it, of where we're at in terms of customers and where is it in the sales cycle stages.

The top 2 pockets of the pipeline are a little different. Starting in the top of the funnel, the identified opportunity, what we call here. Those are programs that we know that or exist. We already have first touch point with the customer. We haven't heard yet from the customer what is the evaluation process, how many -- what is the time line, how the program is going to look like, but we did started to have the first engagement with the customer. And the qualification, those are customers that went through what we call the discovery call, and we understand what is their processes, what is the time line they are expecting, what is the evaluation process that we're going to go through and how we're going to do that. And that's helped us to push the sales through the bottom of the panel and push it down towards actually revenue and sales. So this is the overall pipeline that I wanted to share with you and how the picture looks like.

In terms of just taking a use case or a case study of how our typical process look like, it's always start with small orders for this, what we call, SMART Start, which is eventually proof-of-value kit that they can take, integrate with our drones, robots, whatever, start to do evaluation. Then it's growing into the tens of thousands, sometimes hundreds of thousands of dollars. And from there, it's growing into the millions and then multimillions dollars, like happens to us in this first half of the year with customers that have the first small order grew into hundreds of thousands of dollars, then into millions. And with our capabilities on board, they, our partners, were able to go to their customers, which will be the government entities, the defense entities or the commercial entities and go and sell to more entities like that based on our capabilities that we provide them with and based on the tools that we are providing them with.

So this is how we're seeing the pipeline growth or how we see, sorry, the different type of pipeline numbers that we have. And obviously, we expect over time to see those numbers converting and also the number, the top line are growing as we add basically more initiatives and go to broader markets. And to talk about that, I would -- I want to talk a little bit about where we see our biggest opportunities.

So today, for those of you who don't know, we have all our operation is done from Israel. Sales marketing, development, everything is done here. Part of the initiatives we have as part of this capital raise of what we're going to do, like I said in the beginning, being much more aggressive in our go-to-market, have localization in target markets where we see the biggest opportunity, basically. And to start with, we are seeing the North America, U.S., mainly U.S. and European market, and that's different part of Europe that we have the biggest opportunities both from lower fruit -- low-hanging fruits perspective, but also those fruits are very big because of all the trends that I mentioned to you in the beginning.

As I said, we do see the vast majority of our revenue in the next 18, 24 months to come from defense. So this is where most of our focus is. Having said that, we also opened it for commercial and making sure that we have the ground for commercial, and we have the customer base and prospect base, so once this market will go into this inflection point that will happen, we will be there to be the biggest or one of the biggest beneficial from that.

So there are different opportunities in the U.S. and in Europe. What we're expecting to do is to open local offices in those regions, starting with sales and support initiatives and growing from there as we win more programs, making our pipeline bigger and adding basically and iterate on that.

I would say that those initiatives should do 2 things for us. That's on the short, medium range. The first thing is looking on our pipeline, having people with the boots on the ground, that will help us to accelerate those pipeline conversion because we will be closer to the customer physically, culturally, by language, by any type of -- any measure basically, which will help us to convert this pipeline.

In addition to that, the fact that we are closer to those kind of customers or partners or prospects, that will also help us understand what other opportunities we have in the market, whether they are net new or taking existing one and broaden it to more type of solution we can have there.

Just to give you an example for a mega corporate that we're dealing with, taking Northrop Grumman, we announced to the market that we were chosen to their, what they call, FedTech Accelerator program, which is 12 weeks program that we are basically introduced with the different programs that they have internally within Northrop Grumman. We are only in the -- or we are actually in the middle of this program. We still have pitch day and we still will have a mentor that will take us through those programs. But just to give you an example, this is a company that has multiple programs siloed, none of these are connected to each other. And just for us to discover and to know everything that is happening there, only that, that can take a long time and we need to be very close for them, very close to them to accelerate that. So that's just an example.

And just to give you a hint, this is not something that is in our pipeline because we put much more tangible opportunities in the pipeline. So the entire pipeline is not including Northrop Grumman as an example. We are talking about more tangible opportunities, but that's just how those local boots on the ground will help us to accelerate and to grow also the top line and to accelerate the revenue on the bottom line by converting those sales.

In terms of our scalable capabilities and what we can do there, I'll start with the fact that all our IP today is in the software. We do have -- that's a proprietary hardware of ours. I always say, for those of you who are new to do those webinars or to us, to Elsight, I always said that Elsight is a software company that happens to have hardware. The reason is because we never found a hardware that will be good enough to our partners and to us, to our needs, so we had to go and develop hardware. But all the IP, most of the patents, all our efforts is developed or is focused on the software level. Obviously, we do have a lot of hardware iteration, but the software is the head of the system.

And the reason I'm mentioning it because one of our objectives when we went out with this piece of hardware was to make it as simple as possible. We don't -- I mean, we don't really care if someone will do reverse engineering on the hardware and will go out with exactly the same kind of hardware. That will be a shame, but it won't be a big hit for our IP or for our production or anything like that. And the reason we went in this direction is because we wanted every electronic manufacturer to be able to manufacture it for us. So basically, it's more of an integration of off-the-shelf components. We don't have any chip that we design from the -- on the chip level, on the ASIC level, we just integrate different off-the-shelf components into a system that is our proprietary system.

I'm telling you all of that just to show how easy and fast we can scale our production capacity if we will need to do that by using another contract manufacturers. So today, we have 3 different contract manufacturers. The -- we are not using the entire capacity of those contract manufacturer. The reason we have 3 of them is mainly for redundancy to make sure that we are, okay, if something happened to one of them, we still have the other 2 to handle it and vice versa.

We did announce the market that we're going to open a new contract manufacturer in Europe, a NATO country for multiple reasons. One is to increase the capacity to $150 million annually manufacturing line. Second is to be, again, closer with the manufacturing. Sometimes, we're seeing programs that require local manufacturing. So that's what we do. Third is to show that we are able to take our manufacturing lines and to put it elsewhere and to start manufacture there as the mitigation for future problems that we might have anything from U.S. tariffs, which currently we don't see any challenge with it, but just for future risks that might come, we will be able to mitigate them. And in general, to have local manufacturing. Many defense clients wanted to be like that, and they get different reimbursement on local manufacturing and so on.

Obviously, derisking our -- having all the contract manufacturing in the same region and start to spread it and to have a much more sustainable and resilient supply chain. And the bottom line, which I want to say is that all of these processes of opening a new contract manufacturer, which, for us, is mainly qualification, quality assurance processes and so on, all of these are super light in investment that we need to do in CapEx investment. We're not building our own manufacturing line. We're not expecting to invest millions of dollars. It does have some level of investment, but it's super low investment, which, like I said, very attached to the different processes and qualification that we need to take our contractors through but not more than that.

Speaking about IP protection, I saw there is a question about that, so I want to answer it upfront and also to talk about it. So on one hand, we have the obvious protection of IP and patents. Now we have 13 family of patents. Like I said, most of it is on the software part of it for future ideas that we have, which that's great. But for us, for sure, in the defense market, that's not the best protection to have because at the end of the day, I'm not expecting big governments wherever they are around the world to say, "These guys have patents, we are not going to do what they do."

Having said that, the real moat that we have around us and the way we are seeing it is the accumulative experience that we accumulated over the time. So today, we have more than 400,000 flight and drive hours in real-life environment. That includes commercial and defense from border patrol to private and public security, deliveries, actual battlefield experience and so on and so forth. And what we're doing with all of those hours, we're collecting a lot of data, taking data, this data lake backwards and develop on that the product in a better way, making our algorithm better and making the feature more feature-rich and so on and so forth. So I think that's a real moat of us.

If you want to compare it to other SaaS model, that is kind of a network effect that we have because today, we're adding a lot of hours on a daily, hourly secondly basis, actually. Even as I speak now, our systems are around the world, doing work, we're collecting the data, taking this data back and making our algorithm better. So that's the real moat around the technology. And I'll also add that if there is one thing that you cannot buy for money, it's time and having all this extensive experience, that's definitely one of our biggest advantage of what we have.

Looking forward in product development, and I was talking a lot about the market and what we're doing today, but I also want to talk a little bit about what we're expecting to have moving forward. So starting with what we're going to do is develop what we call Halo 2.0, which essentially will enable us more processing power in the edge to enable different AI edge application to run there. We are going to build kind of an app store, if you want to reference it to our regular life. So think about what Apple have on their phone with the App Store. What we're going to do is we're going to develop kind of an App Store. So we can develop application for this. And third-party developers can also develop application for them with the idea to increase the recurrent revenue per unit or what we call in the SaaS world, the ARPU, average revenue per unit.

So I'm not expecting the price of the device on the hardware to be higher, but I do expect the recurring revenue to go higher because we will add more and more services. It will also add to the stickiness of the product that I mentioned before and will position us in a much centric location within those platforms. And doesn't matter if you're talking about aerial vehicle, ground vehicle or over surface maritime vehicle, it's all the same of building it.

Once we have this foot in the door of having the hardware on board, then adding more software layer on it, it's become less complex. I'm not saying that it's easy, but it's becoming less complex and less challenging, and then we can open this door for new vendors to come in and to partner with us to develop their own application, and that will obviously also will be driving our revenue stream by having our cut as part of what they're doing, exactly like those models of how those App Stores are looking like. So that's what we do.

Just to give you some examples for feature that we're already working on. From positioning, we see a big challenge with finding in a non-GNSS environment, where there is no GPS or there is spoofing or jamming of GPS, how do you find the location of the drone. That's a super interesting use case that we already have some POCs with customers. Video encodings, so how we can do the actual video encoding as part of what we're doing and so on and so forth. Those are just examples of features that we're going to do.

So all of that, that's kind of evolution of where we're at today and where we're going to, how is the evolution of the road map and the product is going to look like based on customers' needs and discussion that we have with customers, understanding of trends in the market and so on.

Another initiative, it's more of a revolutionary initiative and not evolutionary initiative, which is eventually in today's world, I'll start -- I'll take it one step backwards. In today's AI world with everything is about data, reliable data and structure and unstructured data, and those that have actual reliable data from actual field deployment have a very strong asset, like a gold mine in their hands.

And we have those 400,000 flight hours and drive hours that I said it. We accumulated and still collecting on a daily basis. Taking this data lake and develop on top of it, more initiatives, and I won't go into specifics here, but we actually already started to develop something that is going to go for a new market, it's adjacent market, not in the drone and not in the uncrewed space, but adjacent for that, but utilizing our -- the data lake that we collected, using our market access, let's call it, and our connection in this market. And I would say that this initiative, when it will be the right time, we will announce it to the market, and we'll talk about it.

I would say that it's going into very mature market, which we believe we are going to disrupt this market with the new technology that we're going to come with. And we do expect it's not something that is going to take 3 years to get there in our time lines. And when we are expecting it, we expect to have the first paying design partner, customer within the next 8 to 12 months. So this is the time frame when we expect to have an alpha or a POC for this product. Then from there, we can iterate. I would say that this can be -- that alone can be a new kind of company going to a very big, massive addressable market, and that will be part of -- a big part of the investment that we're going to do.

So before I open it to questions, I just want to summarize all of it and saying that we -- I think we showed market that we are able to deliver basically. We are executing well and we have the strategy in place of how to take it and make it much broader with the different initiatives I said from sales and marketing, from R&D perspective and product development and making sure we're doing it efficiently and making sure that we're executing because at the end of the day, it's all about execution.

And I think even though we had a very, very strong first half year, I think we are literally just scratching the surface. For us internally, in the company, I would say that we're super excited of where we're at and what is the opportunities and opportunity that we have ahead of us. And today, after completing this capital raise, mainly to go harder to the market, being more aggressive in the sales and marketing activities and product development activities, we are well equipped to take over this opportunity. And I think it's super interesting point in time to be part of the Elsight journey.

With that, I will open the floor for questions, and Susan, you will take us through that.

[Susan Becker, executive]

Thank you, Yoav. First, I'd like to acknowledge our Board member, Howard Digby, who had joined us much earlier in the call.

The first question is what is the gross profit rate and the net profit rate?

[Yoav Amitai, executive]

So I mentioned over the presentation, I met the gross profit on the product. I would say that currently, we're running super lean organization, so we are also -- we'll be able to show net profit on the other side. That will be higher because of the way we're acting and that's how we will continue to be super-efficient in our investment and making sure that every dollar we're putting into whatever initiatives we're doing, either sales and marketing or product development will result in the other side in more than $1 or $1 or $2. So that's how we play.

I called out the gross margins, those that look on our reports and financial reports and understand how the bottom line will look like. And like I said, we do expect the second half to be already in profit to have -- to actually start to generate profit. So that's, I think, what answered this question.

[Susan Becker, executive]

Next question. Can the system be defeated by jammers such as referring to DroneShield, DRO? Jammers are now endemic in Ukraine. And to defeat this, they use fibrotic fixed wire which obviously limits range.

[Yoav Amitai, executive]

Yes. So that's -- the last point is exactly right. We are not seeing fiber optics as competition for us. Just because those are more tactical for super low ranges and also very tactical when we need to have -- you don't need to have light of sight, but you cannot do a lot of maneuvers if you have trees or buildings or so on, if you have a fiber optic tail for the drone.

Speaking about the first point, I think that's the reason -- and not commenting on specific regions or specific technologies for EW, for electronic warfare, I would say that what we're doing basically is we're exactly overcoming those systems by utilizing the entire spectrum and the entire set of technologies. And when we see a jam in one spectrum or when the system sense that we have this kind of spoofing or jamming, that will automatically or actually concurrently use the entire spectrum to overcome that.

I would add that today, we are operating in many different, very challenging EW environments, and we have great feedback from different customers around the world. So I think that a big part of our win rate is exactly in this point of bringing the right solution and overcome some of those EW threats or challenges.

[Susan Becker, executive]

The next question. The company, L3Harris also markets a BVLOS solution. They quote, "The first multiuse broad purpose network of technologies that enables commercial UAS to fly much farther and safer BVLOS in national airspace, the L3Harris UAS network." How does Elsight's solution differ from L3Harris?

[Yoav Amitai, executive]

So there are a lot of companies that are talking about frequency hopping and those SDR-type of networks. L3 are one of these. Obviously, we're in touch with them and others. And this is one example out of many companies that are saying that this is what they do. And they actually do it. The way they're doing it is by utilizing their proprietary network. What we are doing differently is that we're seeing -- we're not building any proprietary infrastructure. We will utilize whatever infrastructure you will have. That's included, by the way, L3Harris infrastructure. So if you have a radio that work on this network, we are able to use that, and we don't require any pre-integration to our product.

So if you are Mr. drone developer, develop your own radio, we don't need to do any pre-integration with you. You just plug it to us, and what our algorithm will do, it will learn this new link and start to utilize it as it can based on quality of service. So it's latency, bandwidth, jitter and other parameters that we're measuring on every new link that is connected to us. And over time, we're landing those links and making those ratios much better. So L3Harris is a good example for one of these companies that are providing great communication products for different purposes, but again, they are building proprietary network. Our statement is that why would you rely on single proprietary network if you can utilize the entire spectrum of technologies and infrastructures.

[Susan Becker, executive]

Next question. What is the percentage of income between Halo and Elsight?

[Yoav Amitai, executive]

So I'll give it, on the unit economics level, I would say that every unit that is being sold, every Halo unit sold have the long tail of the old site's recurrent revenue that we have to have. I would say that today, we are charging for the old site cloud or the recurrent revenue, we're charging around 20% per annum from the hardware cost. And playing with the number there, I think it's enough information to do the extrapolation. Obviously, I'm not going to talk about specific dollar amount just because we have a lot of competition, and we want to keep it like that, but I think that's enough information so you can iterate or extrapolate from there what is the split between old site and onetime or recurrent and onetime.

I will add another point that those drones are usually in use between 3 to 5 years. So the lifetime value of a platform is between 3 to 5 years, very depend on the use case. Obviously, some of them are much shorter, some of them are longer, but that's as a ballpark, if you want to do different models on how it can look like.

[Susan Becker, executive]

Do you have any feedback about why Walmart did not proceed with DroneUp?

[Yoav Amitai, executive]

We don't have specific comment on that. It's about commercialization, I guess. I would say that in general, this commercial market of drone deliveries, and we are in touch with some of the biggest players in this market. It's about -- more about proving the concept of the unit economics that it can work rather than doing actual business. So the companies that are now in this business are investing a lot in growth, out-of-pocket investment and not necessarily generate revenue.

I think once this point will be proved, and it's obviously -- it's very clear how it was going to get there, then they will start talking about how they're actually making their products much more reliable and much more sustainable. And that's our time to get into those products.

Walmart are still doing their initiatives. They're growing it slowly, but growing it. And we are definitely looking on this market as, like I said, in general, the commercial market is a super interesting market.

[Susan Becker, executive]

Are you able to tell us who the third-party data storage providers you use?

[Yoav Amitai, executive]

Data storage, we are using -- I'm not sure I understand the question, but if I understand it correctly, today, most of our infrastructure is built on AWS, Amazon Web Services. We also utilize Azure, which is Microsoft; and GCP, Google Cloud Platform. We use all of them all over the world. We want to be as close as possible to the operation because of latency measures. So if I understand correctly the question, this is where we store the data.

If you're talking about the airtime, which we're actually selling, so we are using many of them. We are -- today, we can offer SIM cards of network all over the -- literally all over the globe, and customers are buying it all over the world based on contract that we have with local providers and worldwide providers and so on. That's included, by the way, cellular and satellite. So that's what we're doing today. I hope I understand your question correctly and answer it.

[Susan Becker, executive]

Yoav, well done on the first half and the recent capital raise. You mentioned now being well funded to pursue organic and inorganic growth opportunities. Are you able to provide some additional color on the kind of strategic opportunities you are looking at or would be interested in looking at?

[Yoav Amitai, executive]

Yes, of course. So I think on the organic growth, we are -- I spoke about it over this presentation of saying what are the different initiatives we're going to do in our current market and also in new markets. I will take it even backwards. I would say, as a CEO, I always said, since I became the CEO of Elsight 4.5, 5 years ago, I said that for me, a small company like ours need to be laser-focused to know exactly where we're going to so we can create those spark aha moments to our clients and customers saying, this is the solution I was looking for, for a long time.

Today, I think we're already proved that we can start and broadening that and not only being this laser-focused but started to go into adjacent market and started to broaden it based on the success we have, not doing it too fast, by the way, by doing it in a very calculated way and growing the market and growing in the direction we're going to.

Going back to the question, when we are looking on the market today, it's a super fragmented market. There are a lot of companies developing very interesting technologies in different parts of this ecosystem. I can say that we will not go -- most probably, we will not go to the vertical direction, meaning that going to be a drone company, for us, it just will be a race to the bottom. It will be to compete with many of our customers. We don't see a lot of competitive advantage we can bring there, we can bring them. So that's not our direction.

Direction is more of horizontal, seeing what other needs there are on those platforms, understanding that we have the boots or we have the foot in the door. And now as we add -- as we will add more tools, let's call it, that will be easier upsells or cross-sells that we can do with our existing customers.

So it will either be new interesting technologies, which are still small and will be interesting and will be aligned with our strategy or entities that will give us access to new customer or new markets that we currently don't have access to, which will help us to accelerate our go-to-market strategies.

[Susan Becker, executive]

How quickly do you expect recurring revenue to become the majority driver? And what gross margin do you anticipate on that recurring mix?

[Yoav Amitai, executive]

So on the recurrent, we anticipate -- like I said, we anticipate that to get to around the 85%, 90% gross margin level that we expected to be once we're getting to scale. In terms of the split of when we're expecting it to happen, I do expect, over time, that the vast majority of the weight will move from hardware to recurrent or to software, let's call it. The reason being is because every unit we are deploying have this recurrent fee attachment. So as we deploy more and more units, we will see the growing recurrent revenue happening.

I will comment on that. I would say that I think that in the short term, we will see more on the hardware just because we are currently accelerating our deployment in the first half. As you can understand from our numbers, we deployed much more units than what we deployed in the entire previous year. And we do expect the second half to be even stronger, more deployments, much more units to go out in the field, which will increase over time the recurrent revenue. But in the short term, I do think that most of the revenue will be in the hardware because of this reason of this acceleration. Once we will get into kind of the more steady-state growth, the revenue -- most of the revenue will come from the recurrent revenue.

[Susan Becker, executive]

Congratulations on the $60 million raise. With so much capital now at your disposal, how do you ensure spending remains disciplined and focused on driving sustainable, revenue-generating growth rather than falling into the trap of wasteful scaling?

[Yoav Amitai, executive]

Yes, that's a very good question. We ask ourselves this question many times in the last couple of weeks. The answer for that is pretty straightforward. I would say that we, as a business, and that includes everyone here on the call, obviously, including the Board, including -- we have here Dan our CFO, and Oz our Director of Finance, who sits very tight on the budget and making sure that every dollar we're investing go to something that will generate ROI on the other hand. I think Susan can testify on that on the marketing side, and here she is smiling. We are making sure that every dollar we're investing is the right dollar.

And I must say that we're taking every dollar that we're receiving from investors, we are treating this, on the dime level. We're treating it like it's our own funds. And I think we were able to show it over the years being super lean where we can be lean, being super aggressive when we need to -- where we need to be aggressive. And if there is one thing I can assure you here and I have done it over the last couple of days is that we will continue to be like that and not spending for the sake of here we are deploying this capital into work. We will be super accurate of how we're going to invest this capital into revenue generation.

As I said, we -- all of us are also -- part of our compensation is based on actual profits and what is the profit that we're creating. So obviously, we're looking on this as well and not only top line growth, but actually how we continue this profit margins and how we keep those gross margins. So that's the best answer I can give. But I will say that keep us accountable for that in the following quarters and years. I think we'll be able to show that we're doing it in a very thoughtful way.

[Susan Becker, executive]

Can your tech overcome EMPs? And if I understand that to be the electromagnetic pulse, a short burst of electromagnetic energy that can disrupt or damage electronic equipment.

[Yoav Amitai, executive]

Yes. So I said, in general, what we cannot do. When we're talking about drones or robots, there are multiple ways to mitigate or to take out those kind of threats. There are the EW, electronic warfare type of solutions. Those are frequency jamming, frequency spoofing and so on and so forth. This is where we excel. That's where we have a very good solution. The other part are a different kind of kinetic solution or takedown solution like the one that is mentioned in this question. There are laser solutions like EOS. There are kinetic solution like different solution in the market actually crash another robot into the robot that they want to take down.

Obviously, from our perspective, that's not what we do. We're not protecting the entire drone. We're making sure that if the drone is still alive and flying, it will be able to communicate, that's what we actually do. We are not dealing with protecting the entire assets just because it's not our business. And if you have a drone that someone shoot a laser beam and hit it, that will be very hard to overcome those laser beam, or if it, let alone, another drone that crash into your drone. That's not our business.

[Susan Becker, executive]

We have one more question. We're a minute before the hour. Should we take it, Yoav?

[Yoav Amitai, executive]

Yes.

[Susan Becker, executive]

You mentioned limited competition due to your data aggregation approach. However, others exist in the market, perhaps not in drone applications that aggregate across networks. Examples include Peplink and MIMO Connect. What is Elsight's edge in the market?

[Yoav Amitai, executive]

So in general, this technology, and it's absolutely right, this question, it's what called SD-WAN. That's if you want to give a title or if you want to learn a little bit about this technology and how this technology works. What sets us apart is 2 main elements. First of all, we were able to take those algorithms and press them into a super light algorithm that requires super light processing power, and this is how we can come with what the industry called low SWaP, size, weight and power consumption, because of the efficiency of the algorithm, not because of hardware capabilities, but because of the efficiency of the software that can run on super low system. So that's one competitive advantage that we have, and we are today not aware for anyone else that can do it in 84-gram system with 8x8 centimeter size. That's one.

The second part, one of the reasons why we go to this market, we started as a niche but now growing is that how you do multipath, single, it's getting a little technical, sorry for that. But how do you do single UDP stream over multiple paths, and that's what most of the systems are not dealing with just because it's not a very common use case, and this is what happened in ground and in aerial robotics in general. This is what they're looking for, and that's what we do. So that's why we could not consider any of those like the Peplink that was mentioned and others as a competition. They do have ground system that they put on the ground next to the operator, but we are just in a different market, going to a different direction. And by the way, they have a great product, so yes.

[Susan Becker, executive]

Thank you very much. And this is the end of our presentation. I want to remind you that you're welcome to write to us via [email protected] or go to our website, elsight.com, and you'll find our Investor page where you can sign up for our newsletter and stay informed. Thank you very much, everybody.

[Yoav Amitai, executive]

Just before my thank you, I would say a short note. Obviously, in the last couple of days, we have a lot of calls with existing shareholders and new shareholders. And from where we are seeing it, I must say to all of our investors, existing ones, new ones and those who come that, like I said, we are doing everything we do and everything we are thinking about is how to make this company greater, bigger and move faster for the benefits of our shareholders and the benefits of ourselves basically.

The only thing that we will benefit from is if this company will grow from the business, and I always say happy customers drive happy investors, and that's where we are focusing on making our customers and prospects happy so they can continue the business with us. And by that, that will create happy investors by showing more results that will drive the share in the right direction.

We understand it's all on us now. We have all the tools we need to do that. And we're looking forward for this challenge and this exciting time which we have ahead. So I want to thank all existing shareholders, all the new ones that will come, and I think it's super interesting point in time to be part of our journey. So thank you again. And like Susan said, we are welcoming any questions if you have any more on [email protected]. See you on the next webinar in the next quarterly.