Etherstack PLC

ASX:ESK

Earnings Call Transcript

[Melanie Singh]

Good morning, and welcome to Etherstack's Half Year FY '25 Briefing. Today, we have CEO David Deacon presenting. There will be an opportunity for investors to ask questions post the presentation. [Operator Instructions] I'll now pass to David.

[David Deacon, executive]

Thank you very much, Mel. Thank you for everyone attending. This is just a little bit of investor presentation to give a little bit of color to the results that we put out earlier this morning. Obviously, very pleased with the results in terms of showing some very strong signs of growth in the business and return to profitability and very good profitability at that.

Let me just jump into the presentation. I'm going to skip over the -- these 2 slides -- next 2 slides relatively quickly. These are primarily for people who are new to the story. I would just say that our primary business is about what's known as mission-critical push-to-talk technologies, which are the solutions that first responders use around the world, so police, fire and ambulance, security services, resources for pipelines for offshore oil and gas platforms, mine sites, electric utilities as well as the transportation and business and industry sector. This sort of spans traditional narrowband radio networks, the new emerging mission-critical push-to-talk elements that we're doing with companies like AT&T, and we have a pilot running up with Telstra in Queensland at the moment in their 5G Public Safety Experience Centre and also push-to-talk over satellite solutions.

The company really has 3 core businesses, which are in different stages of maturity, a digital radio networks business, very high-margin system sales and support revenues. That's been operating now for 10 to 15 years -- or actually over 15 years, but many of the support contracts have been running for over 10 to 15 years. And our clients in that space include people like Australian Border Force, Rio Tinto, a raft of electric utilities across Canada and the United States and also public safety, such as police, fire and ambulance out in Idaho, for example.

The new high-growth MCX IWF business is what we are doing with the likes of our global technology partner, Samsung and also with our new largest customer in the business, which is AT&T, traditionally the world's largest telco and certainly a leader that many other telcos follow in regards to their adoption of technology.

And then we also have a slower burning defense business, which is very much about deep research and development that runs over 5- and 10-year cycles and core technologies to help keep everything that we do fresh and keep us at the front of the field.

Okay. Here are the financial business highlights for the first half. Revenue was up 87% on the corresponding period last year to USD 6.1 million. That figure exceeded our full year revenue last year and so far in the first half of this year. Last year, obviously, was a little bit disappointing with a delay beyond our control in one of our signature projects, but that has been recovered, and we are accelerating with new deals in the space.

The EBITDA margin was fantastic, I'll note. It was 42%. So USD 2.5 million EBITDA on the $6.1 million, delivering an NPAT of $1.3 million on the 21% NPAT margin. What's also not shown there is that we had over USD 7 million in receipts in the first half and positive operating cash flow of about USD 3.4 million, which is another key indicator of our underlying health.

The support key performance indicator, which we always keep drawing out, which is long-term, highly sticky support revenues, continue to trend upwards at a good rate by 20% to USD 1.2 million for the half. So the traditional underlying support revenues before adding in our forward and future communications and services revenues popped into the -- is popping into the USD 2.5 million per annum range before the communications and services. Obviously, we signed a signature deal, which will result in a minimum of $20 million, $21 million over the next 7 years. But on top of that, there will also be additional subscriber base revenues from that contract as well as ad hoc project revenues. Project-wise, we, for example, this year, have done close to USD 4 million combined with services revenue and -- sorry, we will do for the full year approximately USD 4 million just out of AT&T alone.

Recurring revenues sustained upward trend. What you can see there for the forecast for 2025 and 2026 is flow-through from the turning on of our mission-critical push-to-talk InterWorking Function solution in the North American market. That's driving us towards an ARR in excess of USD 4.5 million. And obviously, we're hoping to -- hoping -- we're expecting that to continue to move northwards as we add additional deals to -- additional customers to that Communications as a Service revenue base. I think one of the other things that's important to note that we've also -- here we go. What we haven't done in previous years is really sort of broken out some of our largest sources of revenues to give people a bit of an understanding of the type of quality of the customers that we have and the soundness of the customers that we have.

Here's a quick run-through of the 6 or 7 largest customers and areas that we work in. Clearly, AT&T and Samsung, everyone certainly knows. We have direct contracts with their parent companies in Korea and in the United States. The electric utilities across Australia, Canada and the United States provide us excellent support revenues and additional equipment sales as we upgrade their networks. Rio Tinto, we've done 9 mine site communication systems for their iron ore projects in Pilbara -- in the Pilbara over the last several years, and that will continue, we hope, to be delivered and adopted by Rio Tinto.

Governments, defense, state and federal public safety agencies in the Americas, U.K. and Australia and then industry partners who use our technology in various projects that they do in the same market segments. These customers and types of communications networks, because of their critical nature, can very much be considered as infrastructure, and they have highly sticky long-term recurring support revenues. And clearly, you can see that they have been growing consistently for us in the support revenues alone.

Here's our income statement for the first half year. You can see that we achieved gross profit of USD 3.9 million for the half. And our low gross margin relatively for Etherstack in the first half of last year returned to a healthy level in the first half. Very happy to post a profit after tax of $1.3 million for the first half.

That's really the end of the presentation from -- of the results. I have on the deck after the slides specifically about the [ kind of ] August 2025 announcement. These Communications as a Service revenues here will kick well and truly in this current half that we're in at the moment and also go forward for at least the next 7 years just on that 1 deal of AT&T alone.

Mel, happy to answer any questions.

[Melanie Singh]

Great. Thanks, David. [Operator Instructions] The first few questions we've received is what do you believe is the value of each major component/subsidiary of the business. And I guess, there's a second part to that, David, before is in light of your response, do you believe the company is significantly undervalued.

[David Deacon, executive]

Look, it's a very good question, Melanie, in that we really do have 3 different speed businesses operating in the company. As I said before, I sort of described one. The first one is our traditional business. It really generates the company a lot of cash and a lot of profitability with long-term customers in 3, 4, 5 and 6 down here. And we don't break out at this point in time the revenues attributable to that particular business unit nor its profitability and cash generation capabilities for the company.

The new emerging business for us, which is the one that we expect to outperform and dwarf the other businesses longer term is very much what we're doing in the mission-critical push-to-talk space with what we've been working on with Samsung, for example, over the last several years and obviously, now with the new win with AT&T. In that sector, those public safety projects of that new generation technology will be implemented in every country in the world. And we are in a very good position at the moment, world's first 3GPP InterWorking Function to leverage that position. The defense business, certainly well and truly washes its face, but it's a research and development slower business.

In regards to the value of those businesses, I certainly do have a view to them, to the value of them. And I think you certainly can consider all of the significant components of the company. Do I believe that the overall company is undervalued? At the end of the day, the market sets the price, and yes, that's what we've got to accept. But certainly, we will always -- the Board and myself are always looking at different ways to potentially unlock returns to the shareholders going forward.

[Melanie Singh]

Thanks, David. Can you please give us some color on the margins, which will be earned from the recent contract with AT&T?

[David Deacon, executive]

Look, obviously, it's commercially sensitive information. We have described it as high margin. One of our primary focuses will be to try and maintain gross margins more in line with the current half this year. They can be affected from period to period by some project revenues, but the more that we get into recurring and run rate revenues, the more stable those margins will become going forward. But I can certainly say that they are definitely a high-margin business in that when you set up 24/7 support centers for mission-critical radio networks around the world that are designed never to stop, each incremental network that you add on top of it obviously drops pretty promptly to the bottom line, revenue perspective and profitability perspective.

[Melanie Singh]

Thanks, David. Just a few questions here on customers and competitive landscape. Sam says you've done a great job attracting some big name customers. The revenue you're generating from these customers seems like a drop in the ocean for them. Do you foresee plenty of upside in revenue from the likes of AT&T, Samsung and Rio? And in terms of the competitive landscape, is Starlink a competitor?

[David Deacon, executive]

I'll answer the last question first. Starlink is not a competitor. Starlink is just an alternative communications bearer, and we do push-to-talk applications and solutions and systems over multiple different satellite types, whether it's Starlink or Viasat or Inmarsat or so on. At the end of the day, they are a bearer, like a piece of copper or fiber for us to deliver these types of solutions to. In regards to the size of the total addressable market, it is very, very substantial.

In regards to the digital and mobile radio for our traditional business, which we are continually growing, very conservative space because of its -- these are used in life and death situations. So we are very happy with that consistent growth that you will have seen over recent years that we're demonstrating there.

In regards to AT&T and Samsung, that's where we keep describing as what we think is going to be really very much a breakout solution for Etherstack in that we are right out in front with the world's largest electronics company in this particular area and the world's largest telco under our belt with other pilots and other pursuits well underway at the moment. And this is just starting to give a little bit of color to the potential revenues that may be able to be derived in this space.

I'll give you one example, is that if you remember back in the '90s when people first started doing SMSs to each other on their GSM phones, there was a little Irish company who produced the world's first SMSC or short message service center. After they won Vodafone in the U.K., they went on to deliver to [ 180 ] telcos around the world that solution. So for us, having the world's first InterWorking Function in 3GPP or public safety with the signature accounts, we certainly hope to capitalize on that in the years coming forward.

[Melanie Singh]

Thanks, David. One more question from [ Jacob ] -- actually 2, we've got. Do you believe Etherstack will be able to replicate the AT&T contract with other providers in the short or medium term?

[David Deacon, executive]

Absolutely. There's almost -- management have a very, very positive view on that subject. The -- every country you can -- every developed country in the world you can poke a stick at is all barreling down the same path at the moment with multiple procurements on the street and planning underway for the nationwide public safety networks of this new technology type.

So these are all the types of trade shows that we attend and talk to. Tomorrow, I'll be in India doing exactly the same thing in regards to how the Indian government looking forward was going to come into consideration on this sort of stuff. No, it's definitely a -- like all 3GPP standards, once they're adopted, they start just to move through.

[Melanie Singh]

Thanks, David. And our final question is will Etherstack provide guidance for the full year results in the near future?

[David Deacon, executive]

Look, that's a really good question as well. We have made it fairly clear in trading updates that we've put out in the last couple of months that we expect at least 1, if not 2 material deals to come through in the very near term. And certainly our view that after those are realized or not realized that we'll be in a much better position to provide accurate guidance for the full year, and we certainly intend on doing so. I will say that in our May release, May trading update, we've made it very clear that we think that we're well and truly on track for an extraordinary year.

[Melanie Singh]

Thanks, David. That is the end of the questions we've received. If anyone has anything further, feel free to e-mail me. My details are at the bottom of the release. David, I'll pass back to you for final comments.

[David Deacon, executive]

Look, thank you very much. Really happy that we're able to deliver such strong results today. I just want to thank all of the team at Etherstack, lots of late nights, lots of hours standing up data centers in the United States, working on bids around the world and very, very pleased with the way that the company is developing. And we're achieving, hitting our goals in the various markets that we have certainly said that we are going to focus on. So thank you again, and thank you for joining us today.