(ONDS)
Q1 2023 Earnings-Transcript
Ondas Holdings Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.28.
Operator: Good morning, and welcome to the Ondas Holdings First Quarter 2023 Earnings and Business Update Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I’d like to turn the conference over to Mr. Eric Brock, Chairman and CEO of Ondas. Please go ahead, sir.
Eric Brock: Thank you, operator, and good morning. I want to start by welcoming everyone to our first quarter investor call. We appreciate the time you’re spending with us and for your interest in our Company. I’m happy to be joined today by our CFO, Derek Reisfield; and our President, Reese Mozer. In addition we will hear from both, Stewart Kantor, the Founder and President of Ondas Networks; and Meir Kliner, the Founder of Airobotics and President of Ondas Autonomous Systems. Today, we plan to review our financial performance and strategic progress for the recently completed first quarter and discuss our outlook for the rest of 2023. Now let’s turn to the agenda. We will start today’s call with some brief comments about the first quarter performance and recent industry and company specific developments driving the outlook for our business entering 2023.
I will then hand the call over to Derek for a financial review of the first quarter. Our discussion on our financial performance will include commentary around the streamlining of operating expenses. As part of the financial review, I will discuss our balance sheet and liquidity position and provide an update for our outlook of 2023. Then we will transition and provide a business update for Ondas Networks and our OAS business units, where I will ask Stewart and Meir to provide commentary around current business activity. We will then wrap the call and open the floor for investor questions. 2023 is off to a great start operationally at Ondas, highlighted by record revenues of $2.6 million in the first quarter, which exceeds all of 2022’s revenue.
This reflects the beginning of shipments on the backlog secured as we entered 2023. Of course, we have a lot more to do on production shipments and installations on both sides of the business to deliver current backlog and drive new orders from customers. Regarding customer activity, we want to highlight a critical milestone we cleared with Ondas Networks. In March, we saw the Association of American Railroads or AAR formally announce to the rail industry that they have selected the IEEE 802.16 wireless technology as a platform for the new 900 megahertz network. In addition, the AAR publicly confirmed key timeline dates, which include both the September 2025 deadline to retire the Legacy 900 megahertz network, as well as the requirement from the FCC to substantially build out the new Greenfield 900 megahertz band by April 2026.
We believe the formalization of the technology choice in 900 megahertz along with the communication of deadlines is a huge catalyst for the Ondas Networks business. Stewart is going to share more details around these developments and timelines, though I want to emphasize that since this announcements by the AAR, we have seen a significant increase in customer engagements including deployment plans. These announcements from the AAR are also supporting increased activity across the rail vendor ecosystem we expect further development opportunities both with Class 1 freight rails as well as in passenger and transit in international rail markets with both Siemens and MxV Rail as well as with other vendors. At OAS, we have previously outlined fleet adoption is moving along as Airobotics executes commercial fleet orders to the Optimus System from customers and partners in the UAE.
We have now begun citywide deployments of urban drone infrastructure in both Dubai and Abu Dhabi. In addition, we have advanced marketing activity of the Optimus System in U.S. markets and are seeing significant interest in oil and gas, public safety, and other government markets. We will discuss this in more detail as well. I want to once again highlight the fleet deployment activity of the Optimus System is nothing short of groundbreaking for the drone industry and has clearly separated Ondas from the rest of the pack. Flying autonomous unmanned systems in a densely populated urban setting is an unparalleled achievement and demonstrates the lead we have in defining these UAS markets. As we execute these initial fleet deployments, we believe customer adoption will accelerate.
Meir is going to share some details around installation and operation of the systems on behalf of customers and expectations around future growth. So to wrap up the introduction, we are now beginning to scale in both the Ondas Networks and OAS business units with expected revenue growth and a focus on cost controls and cash efficiency, we believe our cash burn will move significantly lower on a quarterly basis as we move through the year. I’m now going to hand the call over to Derek for the financial review. Derek?
Derek Reisfield: Thanks, Eric. As I get started, I want to remind our investors that our financial statements continue to reflect investment and preparation for larger commercial rollouts within our Ondas Networks and Ondas Autonomous Systems business units. We expect significant operating leverage as revenues grow, though today’s revenue levels are not yet covering our operating expenses. Revenues for the periods presented have been generated by both Ondas Networks and OAS business units and totaled approximately $2.6 million for the first quarter of 2023. This was a significant increase from the $400,000 of revenue generated in the first quarter of 2022. Revenue growth was primarily the result of higher product shipments at Ondas Networks and installations of Optimus Systems for OAS.
Gross profit in the first quarter of 2023 was approximately $1 million, a nearly ten-fold increase from the same period in 2022. Operating expenses increased to approximately $13.7 million in the first quarter of 2023 as compared with $10 million in the prior year. The increase in operating expenses was primarily due to one-time costs related to the reduction in force and termination of certain development programs at Ondas Autonomous Systems, as well as professional fees associated with the Airobotics acquisitions. We expect these elevated expenses to come down in the second quarter. Non-cash expenses totaled approximately $2.5 million for the first quarter of 2023; stock-based compensation was $1.3 million in the first quarter of 2023, a slight decrease from the prior year.
Depreciation and amortization expenses increased to approximately $1.2 million in the first quarter of 2023, up from approximately $900,000 in the prior year. Excluding non-cash expenses, operating expenses were equal to approximately $11.1 million, which were about in line with expectations and again reflected elevated costs at American Robotics due to the restructuring. The company realized an operating loss of approximately $12.7 million for the first quarter of 2023 as compared to $10 million for the first quarter of 2022. This loss includes the aforementioned non-cash and non-reoccurring expenses. The company realized a net loss of $14.5 million for the first quarter of 2023 as compared to a $10 million loss in the first quarter of 2022.
The higher loss included some of the non-cash and non-reoccurring costs previously discussed. In addition, we incurred $1.8 million of mostly non-cash interest expense, which was related to the accounting treatment of the Original Issue Discount or OID of the convertible note. We generated an EBITDA loss of $10.2 million in the first quarter, excluding these non-cash expenses as compared to a $7.8 million EBITDA loss for the first quarter of 2022. Before turning to the balance sheet, I want to emphasize that we expect to see the full benefit of lower spending at OAS on a quarterly basis beginning in Q2, as such, we expect to incur approximately $9 million of cash operating expenses in the second quarter of 2023, which is a more than $2 million decline from the elevated $11.1 million of OpEx in the first quarter.
Now, let’s turn to the balance sheet. We ended the first quarter with $14.2 million in cash. As described, cash expenses were elevated in the quarter and included certain costs related to the reduction in force and termination of development programs. We also used $3.7 million of cash to repay debt for both amounts due in connection with the Airobotics closing in January and for cash amortization payments on the convertible note. That outstanding convertible note had a net carrying value of approximately $26 million. That debt amortizes on a monthly basis and matures in October 2024. Outside of the new convertible notes, we maintain a minimal long-term debt and a $54.2 million equity position. Of course, our equity position reflects the substantial investments made in our technology platforms.
I will now hand the call back to Eric.
Eric Brock: Well, thank you, Derek. As you know, we believe 2023 will be the year that Ondas begins to monetize the substantial investments we have made in our business development. We expect to generate significant revenue growth for the full-year 2023 and are reaffirming our revenue outlook from February. Recall that our revenue target for 2023 is $26 million to $30 million. That outlook included targets of approximately $8 million for revenue at OAS and $18 million to $22 million at Ondas Networks. Our revenue outlook is supported by the $13 million backlog we entered 2023 with and by visibility into expected additional demand from customers. Visibility on customer ordering plans is improving noticeably and Stewart and Meir will share more details.
I want to note that we are currently tracking to the low end of that revenue range at Ondas Networks, and this is primarily due to certain component tightness in the supply chain, which may constrain production plans temporarily. We are working to alleviate the near-term supply challenges as we deal with the complexity of ramping up our production. We expect cash utilization to improve significantly beginning in Q2. Improved cash efficiency comes from operating expense leverage at both Ondas Networks and OAS with expected growth in revenue and gross profit. In addition, Q2 will be the first full quarter, which reflects the cost savings from the restructuring we announced in Q1 when we established the OAS business unit. We expect cash operating expenses to be approximately $9 million for the second quarter of 2023 versus our target of $11 million in the first quarter, so we are tightening OpEx and we will look for even more efficiencies going forward.
As we outlined, EBITDA loss was a bit higher than we expected in Q1, so we are tracking a bit above our original target. From here, we plan to focus the company on delivering revenue growth and very tightly managing expenses, which we are doing. To be clear, we expect profitability to improve as we move through the year. To that point, we reiterate our targets for Ondas Networks to achieve EBITDA positive levels on a quarterly basis by the end of 2023, and for OAS to be similarly profitable by the second half of 2024. The bottom line is we expect operating cash flow to improve structurally as we move through 2023, given the expectation of revenue and gross profit growth and the commitment to continue to tightly control costs. I also want to touch on the balance sheet.
We are confident in our ability to raise additional capital and we believe we have a variety of potential sources and strategies to pursue. Firstly, we believe both certain financial and strategic investors have interest in supporting Ondas. Further, we do have access to the ATM, which can also be a source of equity capital. There are other non-dilutive financing strategies to pursue as well. For example, given the growing level of orders, we expect from Siemens in the need to respond to rail customer deadlines we believe that down payments for inventory can be a significant tool to help manage working capital. Similarly, credit lines are likely available with a growing order book that we expect. Net-net, it remains a difficult funding market in the early stage nature of our business in this environment has contributed to an unfortunately high cost of capital for Ondas today.
Nonetheless, we believe we will have sufficient access to capital to fund our business and we will seek to execute this funding in the most optimal way for our shareholders. We believe we are creating tremendous value from investors and as we execute our growth plan, we believe we will be rewarded for this hard work. Now we will transition to business unit review and ask Stewart Kantor and Meir Kliner to share updates on recent activity in the field with customers and industry partners. We’ll start with Stewart who will update us on the current status with the rails on 900 megahertz and focus on the important milestones we have achieved with the AAR regarding platform acceptance and the drivers behind the accelerating order pattern we anticipate.
Stewart?
Stewart Kantor: Great. Thank you, Eric. We’re off to a strong start in 2023 at Ondas Networks. We began volume shipments to Siemens to fulfill the order we received in the second half of 2022, and are ramping production to meet the backlog. We generated $1.1 million in revenue for the quarter and expect to deliver sequential quarter-over-quarter growth in 2023 as we track to our target. Commercial deployments in the field are now happening with rail customers led by BNSF and CSX. BNSF is deploying Siemens Airlink ATCS systems as they upgrade the legacy application. The initial deployment in Minnesota is now operating live and we expect expansion of field deployments in other locations with BNSF. CSX is deploying our Venus platform at 900 megahertz for a critical interlocking use case.
CSX’s first deployment in Northern Florida, is also now carrying live traffic, and CSX has identified a number of new locations for installations of our 900 megahertz Venus platform. As Derek mentioned, the first quarter was marked by a critical milestone. The Association of American Railroads formally announced in March that the IEEE 802.16 industrial wireless broadband standard will be the platform for the Greenfield 900 megahertz band. This was a major achievement and has resulted in a significant increase in commercial activity across the Class 1 rail sector around planning for the 900 megahertz integration. We will discuss this in greater detail in a moment, but suffice to say, customer intentions around purchasing dot16-compliant system have accelerated and we are seeing increasing visibility in our customer pipeline.
In March 2023, the wireless communications committee within the AAR made an industry announcement confirming that the Greenfield 900 megahertz network would standardize on the IEEE 802.16 technology promoted by Ondas and Siemens. In addition, the AAR publicly confirmed key deadlines around the 900 megahertz network migration. The Class 1 rails are required to retire the legacy 900 megahertz channels and return the spectrum to the FCC by September 2025. In addition, the FCC is requiring that the new Greenfield 900 megahertz band be substantially built out by April 2026. And subsequent to the AAR announcement, the American Railway Engineering and Maintenance-of-Way Association also known as AREMA moved to ratify the selection of 802.16 as the wireless standard for the 900 megahertz network.
AREMA’s members include railroaders and rail vendors and the ratification happened by vote at the end of April with over 98% of the votes cast in favor of the dot16 standard. As a result of these announcements, we have seen a significant increase in rail customer activity and discussions around deployment plans. We believe we are moving closer to the significant order ramp we have been expecting and that orders will begin to move higher. There are a number of additional trigger events that we believe are driving adoption. As we mentioned previously, the key rail organizations have now authorized and require the use of 802.16 technology and have recognized the need to vacate. Other rail equipment suppliers are facing significant supply chain issues — forcing the rails to look for alternative and standardized solutions.
Certain legacy technologies are deteriorating due to age interference issues and the lack of robust modern security protocols. Other applications and protocols are creating capacity constraints in the critical PTC 220 megahertz band and are now required to move to new frequencies such as 900 megahertz. Furthermore, the recent derailment in the Midwest is fueling the need for additional defect detectors, which have a good home in the 900 megahertz Greenfield band. And lastly, transit agencies in the U.S. and internationally are facing significant end of life legacy radio issues where our radios offer a capacity and application upgrade. All of these combined lead us to believe that we are at a growth inflection point. Now, I’ll hand the call back to Eric.
Eric?
Eric Brock: Well, thank you, Stewart. I’ll now ask Meir Kliner to take the floor and update us on progress with customers at Ondas Autonomous Systems and provide some insight into the outlook for the rest of 2023. Meir?
Meir Kliner: Thank you, Eric. We had a great start to 2023 at Ondas Autonomous Systems. We delivered $1.5 million of revenue in the first quarter, largely related to fleet deployments with the Dubai Police. We also advanced on the Grant activity in Abu Dhabi with SkyGo, a new relationship we announced in January. We have now installed the first system in Abu Dhabi with SkyGo at critical infrastructure locations. We are meeting our performance applications and expect the SkyGo installation to translate into Q2 revenue. We look forward to soon sharing more details around the SkyGo smart cities operations and our joint venture plans. In parallel, we have been working hard marketing and qualifying customers in the United States.
We are excited to bring Optimus into the U.S. and believe the opportunity to drive fleet adaption as one infrastructure is substantial. We expect to share more details on our U.S. plan soon and expect the national customer deployments in the fall as Optimus inventory is delivered and customer contracts are finalized. Lastly, I want to remind you that we introduced the Iron Drone counter UAS solution to the market in March, and we are receiving a lot of customer interest. On the strategic side, as you well aware, the first quarter was the first where American Robotics and Airobotics were combined under the OAS, Ondas Autonomous Systems business unit. We have now completed the OAS integration and we have closed on the Iron Drone acquisition, which adds counted one capabilities, leveraging advances in AI computer vision technology to our set of autonomous drone solutions.
The combination of American Robotics and Airobotics has created significant benefit from operational efficiency. We have streamlined research and development and operations on a single platform, the optimal system, which places OAS in a strong position to deliver solutions to customers globally. We are benefiting further from sharing technologies, regulatory approvals, customer pipelines, and ecosystem relationships. I want to also highlight that the SkyGo relationship is striking strongly. As mentioned, we have advanced installations in Abu Dhabi to provide smart city aerial data services. We expect to enter into a joint venture with SkyGo to provide these services and look forward to sharing more details as they emerge. At the World Police Summit in March, we also announced an expanded relationship with the Dubai Police.
This expanded collaboration calls for further technology development around our AI capabilities and other technological upgrades. As part of this agreement, the Dubai Police also expressed the intent to purchase Iron Drone system, this came after a successful system demonstration. As the threat of hostile drones is widely understood, we are working on distributing the Iron Drone solution to additional geographies and customers. We expect orders and installations to grow in Dubai as we move through 2023 and we continue to scale up the urban drone infrastructure with this important partnership. We continue to expect strong growth in the OAS business unit. We enter the year with $5.5 million of backlog, which we will deliver this year. We believe existing customers will provide new orders for 2023 and 2024 as citywide fleet deployments continue.
We are excited to bring Optimus to the U.S. And as we mentioned, initial qualification of customers has been positive development. We expect to announce new customers in the oil and gas as well as new partnership and initial customers in public safety and government markets as we move through to 2023. We are finding that the U.S. customers value the unique capabilities of the Optimus System, which include the ability to swap payloads and batteries, which allow the system to perform as a multipurpose infrastructure for industrial and municipal end users, and to provide a wide variety of data sets. These capabilities in addition to the proven reliability of Optimus are strong selling points with the U.S. customers. As we have described previously, entering new markets required additional tailoring of solutions, we have implemented 5G wireless connectivity, and we are in advanced stages of integrating payloads specific to the oil and gas markets in urban and industrial environments.
Specifically, we are adding OGI and TDLs capabilities to the Optimus System, and these technologies are being integrated based on customer preferences. Similarly, we are integrating the TASA detect-and-avoid technology with the Optimus System to support business operations, as well as advancing the Optimus System type certification with the FAA. This cutting edge capabilities will enable the Optimus System to operate in complex and urban environments. Lastly, I want to remind you that we are building via our contract manufacturing partner in Israel, an additional 15 Optimus System. We expect delivery of at least 10 units by the end of the year with initial systems being ready to install later in Q3. This completes my formal remarks. Eric, I’m going to hand the call back to you now.
Eric Brock: Thank you, Meir. Let’s wrap this up with a couple of closing remarks before shifting to questions. I want to reiterate management is committed to delivering for investors, and we think we are well down the path to monetize the significant investments we have made in our platform technologies. We are particularly excited that Ondas Networks as the hard work we’ve put in to create a valuable next-generation wireless technology for safety critical networks is now being recognized and adopted with a Class 1 rails. We are particularly pleased to see the AAR take the next step to formally select 802.16 as a technology platform for 900 megahertz. This milestone can’t be understated as it has provided greater than expected energy to our conversations with customers.
We think this momentum will build over the initial 900 megahertz migration and beyond. We will be very busy in the coming years scaling with Siemens and the rail customers. Similarly, fleet deployments of Optimus are off to a great start. Our initial customers have launched our urban drone infrastructure in major cities, strong operating performance with these initial installations are expected to lead to continued fleet expansion with these customers. The success with the Optimus platform helps reinforce the opportunity we have here in the United States. As Meir shared, we are progressing in qualifying initial customers and partners in the U.S. and we look forward to sharing more details when available. We expect revenue growth across the business units and a focus on efficiency and tight expense management will demonstrate our ability to drive shareholder value as we deliver on our plan to improve profitability as we move through the year.
Again, this is shaping up to be a great year for Ondas. With that said, let’s see if there are any questions. Operator?
Operator: Thank you. We’ll now begin the question-and-answer session. [Operator Instructions]. First question will be from Mike Latimore, Northland Capital Markets. Please go ahead.
Operator: Thank you. And the next question will come from Timothy Horan of Oppenheimer. Please go ahead.
Operator: Thank you. Next question will be from Matthew Galinko of Maxim. Please go ahead.
Operator: Thank you. [Operator Instructions]. Our next question will be from Carter Mansbach of Forte Capital. Please go ahead.
Operator: Thank you. This concludes our question-and-answer session. I’d like to turn the call back over to Mr. Eric Brock for closing remarks.
Eric Brock: Okay. Well, thank you, operator. I want to close the call by just thanking you once again for attending. As always, we have a lot of work ahead and we’re going to get right back at it. So as we just talked with Carter, we’re going to keep — look forward to keeping you informed on our progress. Have a great day.
Operator: Thank you. Conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.