Etherstack (ASX:ESK) Presentation, FNN Online Investor Event, November 2021

Etherstack Limited (ASX:ESK) CEO and Executive Director David Deacon presents on the market opportunity for Etherstack’s push to talk and land mobile radio solutions, the company’s deal with Samsung, contract wins and financials.

David Deacon: Thanks very much, Clive. My name’s David Deacon. I’m the CEO of Etherstack (ASX:ESK). I’m really happy to be here today to tell you a little bit about our company.

Etherstack is a wireless technology company, specialising in critical communications, which are essential communications for, typically, first responders, police, fire, ambulance, electric utility linesmen, the resources industry, defence, and transportation. The company started out as a technology licensing company, purely R&D company, in the space. And we’ve licensed our technology to radio equipment, wireless equipment manufacturers all over the world over many years. And we receive royalties from the products that they make with our componentries and software inside it.

Besides actually doing the technology licensing, we’ve branched out over the years to provide our own mission-critical radio networks — in particular, the softswitching cores for digital radio networks, for electric utilities, public safety, police, fire, ambulance, those sorts of things. And we have those networks deployed around the world — in particular, the United States, Canada, Australia, across Europe, a little bit in the Pacific. And the deployment of those networks has been really important for our growth and our financial growth, in that not only do we get, you know, significant upfront revenues at great margin for deploying those networks, but we also then get really long, 10-, 15-, sometimes 20-year support tails on the back of those networks. And it’s really those support revenues that are stacking up on top of each other that’s really made a significant turnaround to the financial fortunes of Etherstack in the last couple of years, as you’ll see from our financial results.

If we take a look at our three core markets, we have, as I said, digital land mobile radio, which is, you know, firefighters, bush fires, police, electric utilities, and so on. And this is our core business area, where we’re growing at a very good rate at the moment, and it’s providing good profitability to the company. Two new markets on the left and the right there. The cellular network space, where, with the new 5G networks going out in urban areas around the world, the governments are asking the carriers in each country to provide mission-critical push to talk to services over specialised 5G handset devices for their public safety agencies. And that’s driving a whole new wave of investment in push to talk over cellular. And this is where we announced our global teaming agreement last year with Samsung in this space, for Samsung to license technology from Etherstack to deploy to these telecommunications carriers around the world. I’ll talk a little bit about that shortly.

Equally, in rural areas, so non-urban areas, the big trend, really, is satellite push to talk. With all of the new LEO and MEO satellites going up at the moment, it’s causing a crash in bandwidth price for satellite bandwidth. And the implication for that is that what was previously unaffordable for emergency services in rural areas, it’s now perfectly financially feasible to do push to talk over satellite, connected back into the command and control systems inside the core networks.

So they’re sort of the three core markets that we’re operating in. And we have a burgeoning defence business at the moment as well, which is really directly related to… A lot of this technology crosses very cleanly across from the public sector to the defence sector as well.

The company has got a globally-diversified high-quality customer base. Some of the biggest brand names in the world in terms of defence companies, NEC in Japan, Samsung, direct customer relationships with Australian, American, and Canadian and British government entities, and a raft of electric utilities, including ACO Electric in Canada, and three of Warren Buffet’s ten electric utilities in his first energy group across North America.

Etherstack is… I like to sometimes describe it as the world’s smallest multinational. We have a small team, but we have had R&D offices and support offices established in New York, Yokohama, and London, in the UK Reading, for over a decade now. So we’ve already got offshore, we’re hitting the winds overseas, and then providing the support and delivery from those local deployment bases.

In the cellular network space, as we move to 5G networks, what you can see here on the left hand side of the slide is the types of public safety radio networks that exist today, which are digital land mobile radios that you traditionally deployed everywhere. As we move to 5G in urban areas — 5G will not be rolling out beyond city fringes or corridors — there will be what’s called public safety or push to talk LTE inside these areas.

Now, to bridge those two networks together, so ambulances in the city and command and control stations in the city with ambulances in the bush, there needs to be a special type of gateway to hold those two things together. And this is really some of the core technology that we’re licensing to Samsung, is to be able to bridge from the traditional networks into the new networks today. And that new software is embedded inside the carrier network, inside their data centres. It’s delivered… A very software-as-a-service-like revenue model, where they pay an upfront licensing fee and then an ongoing support — quite a long tail support revenues going forward. And again, typically, because the lifespan of a digital radio network is 10 to 15 years, we expect very substantial support tails to be coming from the carrier networks introduced to us by Samsung and the ones that we hopefully find ourselves.

The Samsung deal, which we announced in the middle of last year, has already delivered its first major contract to us. The first contract was US$8.5 million, or just under A$12 million, with the majority of that revenue to be recognised in the 2022 and 2023 financial years, with financial calendar year, financial year end. Besides that initial carrier win, we’re currently engaged with multiple carriers around the world with Samsung to deploy our joint solution together. And this is our target. We’re expecting approximately about 25 contract wins in the medium term from now until 2025, with each one of those deals just stacking on top of each other, again, for the recurring revenue support growth.

If we take a look at the immediate medium-term market opportunity for Etherstack, we’re talking about an addressable market for us of about $250 to $750 million that really consists of, in the OECD countries, which is our primary focus with Samsung, between 60 to 90 contracts we expect to come up for award over the next five years. Typically, we get upfront licensing fees of several million dollars per transaction, and then the long-term support revenue beyond that.

There’s only a handful of key market participants in the space, and we’re very pleased to be in a global team agreement with Samsung. They’re really acting as a fantastic salesforce multiplier for Etherstack.

Besides the OECD countries, over five to 10 years, of course, all of the other smaller countries around the world and developing countries are likely to follow exactly the same path because it’s an international 5G standard for this particular technology.

In our traditional land mobile radio business, we’ve been experiencing fantastic growth. And so, if you take a look at the financial results for the calendar year for Etherstack, that’s primarily driven by our traditional business. It’s a very high-barrier-to-entry market. It’s a very conservative market, quite understandably. And these are just some examples of some of our clients around the world, the types of networks and solutions that we provide to them so that they can provide public safety services to our community.

Those networks, as I say, stay in the ground for at least 10 to 15 years typically, and the support revenues on those are fantastic. Obviously, the majority of those network works in public safety are really government-owned or government-backed revenues. So, in the years going forward from now, we think that’s a very, very stable revenue stream. And, in particular, with the increased stimulus spending as a result of the coronavirus pandemic, as governments around the world try and get the economies up and running, we think that the environment for large infrastructure spend, which flows down to this sector, is a very important tailwind for Etherstack.

In terms of the total addressable market for us, this market is about a $14 billion a year market globally at the moment. The total addressable market that we can tackle at the moment is about 3 billion in small- to medium-size networks that we categorize in the half a million to US$20 million range. There’s scores of target-size contracts that come up around the world available to competition, and there’s limited market participants. This is where we are seeing our growth as a direct result of delivering on time, having a better product, having better pricing, and most importantly, providing superior support to the traditional vendors in this space. And that really what’s been driving the growth of the business, the profitability, and also our positive operating cash.

Here’s just two example wins that we’ve had in the last 12 to 24 months. One was with the Royal Canadian Mounted Police, the federal policing agency of Canada. Initial order of about C$1.7 million. Additional sites will be added to that network in 2022, and we would be expecting long-term support revenues for at least 15 years going forward from here. And we’re very well positioned to compete for future tenders within the federal policing space in Canada as a direct result of the successful and timely delivery of that solution.

Another one is a large iron ore network in Western Australia for one of the world’s largest mining companies. The initial order that we received last year was $400,000. They liked the product. They gave us a $600,000 order in May 2021. And we’re expecting a third expansion order on that initial network some time between now and the end of the year. That particular miner seemed to be very happy, obviously, with the repeat orders, with the solution that we’re providing them. And that miner has scores of mines around the world that we can deploy this same type of solution in as they go through radio network refreshes around the world.

On the satellite network space, as I mentioned, the falling bandwidth cost is really driving this as an opportunity for us. We’ve been developing products in the space for over three years. We currently have trials with different federal and state government agencies in Canada, the United States, and Australia in public safety of our push to talk over satellite product. So, we’re very excited about the potential growth streaming in push to talk over satellite. So, really, those three core businesses are traditional digital LMR, which is going great guns under our own steam, Samsung certainly acting as a force multiplier for us in the 4G, 5G cellular space. And then us keeping right at the front of the game from a push to talk over satellite perspective, as that technology gets deployed around the world.

Financials and outlook. Here is just a smattering of some of the key deals with different governments and technology companies that we’ve done over the last 18 months. You know, France, Canada, Australia, United States, Korea, the UK Ministry of Defence.

What we’ve seen in our traditional business is a very substantial uptick in this calendar year. Our first half was up almost 80 per cent on the previous corresponding period from the year before, and the contracted revenue for the second half is already substantially along similar lines, as already has happened in the first half. So, we’re going to have an absolutely great year, after making a profit last year and having positive operating cash flow for several years in a row.

As a result of this, we’re on track to be fundamentally debt free before 31 December. Good, positive EBITDA numbers, good NPAT numbers, and good operating cash flow and debt reduction.

In terms of our recurring support revenues, you can see this underlying cash stream just growing as we stack every type of network, all the support contracts on top of each other each time that we deploy a network. We would expect this to accelerate in coming years as a result of the new relationship that we have with Samsung, plus the fact that we’re finding it easier and easier to get wins, because wins beget wins inside this very conservative space that we’re operating in. Thank you very much. I hope you enjoyed the Etherstack story. Back to you, Clive. Thank you.