Ondas Inc. (ONDS) Q3 2023 Earnings Call Transcript

Good day and welcome to the Ondas Holdings Inc. third quarter 2023 conference call. Before we begin, the company would like to remind you that this call may contain forward-looking statements. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could lead to actual results differing materially from those implied. These statements are discussed in our latest periodic SEC filings and in the earnings press release issued today, both of which are available on the company's website. Ondas undertakes no obligation to revise or update any forward-looking statements to reflect future events or circumstances, except as required by law. During this call, we will refer to certain non-GAAP financial measures. These measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is provided in our press release issued earlier today, which can be found in the Investor Relations section of our website. This non-GAAP information is provided as a supplement to financial performance measures prepared in accordance with GAAP. However, management believes these non-GAAP measures provide investors with valuable insights into the underlying trends of the business. Please note this event is being recorded. I would now like to turn the presentation over to Mr. Eric Brock, Chairman, CEO, and Interim CFO. Please go ahead, sir.

Thank you, operator, and good morning. I want to get started by welcoming everyone to our third quarter investor call. As always, we appreciate the time you're spending with us and for your interest in our company. At the outset, I want to take a brief moment to share some opening remarks before we go through the typical cadence of our quarterly call. As I do that, I want to highlight that the value of our company and our world-class technology platforms has never been higher. This is the case today, and we believe it will be true tomorrow, next month, next quarter, and in the years ahead. Every day we make progress towards wide-scale adoption, and the value we are creating for our customers, employees, and yes, this is critically important to me—the value to our shareholders will increase. We are committed to this, and I believe we are succeeding, notwithstanding the pressures from the capital markets, specifically, the added challenges of having a low stock price and high cost of capital. We are seeing firsthand through our Airobotics team in Israel that a highly volatile and rapidly evolving geopolitical environment is impacting industry globally. I am happy to say today that our team in Israel is entirely accounted for, as the challenges continue to present. I cannot say, however, that they are safe because, of course, the war is being fought on their home front. But they are with us and working hard in a variety of capacities to ensure that their families and their country are as safe as possible. I am proud of our team in Israel and how they are bravely rising to the challenges, as well as how our team in the United States is supporting our collective efforts. As I mentioned, the evolving geopolitical and volatile global economic situation is impacting the industry, including demand for the industrial wireless technology in aerial security and data platforms that Ondas provides. The increasing requirements for performance and resiliency define a critical trend in the services and industrial economy, spanning from transportation and energy to security and defense across the globe. These trends highlight the value we create for customers. Our partners and our ecosystems are supportive of Ondas's long-term success. With the support of strong global tailwinds, we are seeing growing opportunities for Ondas's full-max wireless connectivity platform in our optimism, iron drone, autonomous growth systems, which I will emphasize are now commercially ready and being adopted and deployed at an increasing rate. Of course, we are offering these valuable solutions to large, very sophisticated customers and ecosystem partners in mission-critical environments. We are getting closer and closer, and I believe our investors—and of course, I am one of them—will be rewarded. We look to demonstrate that to you on this call and, more importantly, during the months and quarters ahead. I believe we are on the cusp of great success. I'm joined today by some key members of our leadership team. You will hear from familiar faces in Stewart Kantor, Founder, President, and CFO, Ondas Networks, and Meir Kliner, the Founder and CEO of Robotics and the President of Ondas Autonomous Systems. Additionally, Tenne is joining us today for the first time. As you know, Tim recently joined Ondas as the CEO of American Robotics. We will properly introduce Tim later in the call as we share the update and outlook at OAS. On another note, as we announced last month, I stepped in as interim CFO in place of Yishay Curelaru, who has been called to serve in the Israel army. Yishay and other members of our team at robotics are performing their great honor. We expect Yishay and our other team members to return hopefully soon. From that point, we have had a number of employees who have been called to serve and have done so, but have also already returned to their homes and workplaces. Let's turn to the agenda. We will start today's call with some brief comments about third-quarter performance and the significant progress we've made in advancing the adoption of our technology platforms. I will then provide a review of our third-quarter financial performance, balance sheet, and liquidity position. Then we will transition and provide a business update on Ondas Networks and our OAS business unit. I will ask Stewart and Meir to provide commentary around current business activity and the outlook for Q4. Here, we will ask Tenne to introduce himself and share his thoughts on the opportunities ahead for OAS in American Robotics. We will then wrap the call and open the floor for investor questions. We had a strong quarter operationally, advancing with customers across the board, Ondas Networks, and Ondas Autonomous Systems. For the quarter, we generated $2.7 million in revenue, which brought us to $10.7 million of revenue year to date through the end of September. Ondas Networks generated record revenues of $2.4 million in Q3. We believe the substantial growth year-over-year puts us on track for the $50 million revenue target we provided last quarter and demonstrates that we are driving adoption across our technology platforms. I also want to highlight the capital raise announced early in the third quarter, whereby we secured $25 million in funding from sophisticated private and institutional investors. As we highlighted on our last call, this capital raise reflects confidence in the value of our proprietary technology platforms and the end markets and customers we are targeting for growth. Ondas Networks field activity progress— we're getting closer to the breakout volume orders driven by success in the 900 megahertz network with Class I Rails. We see deeper, more intentional engagement with the railroad customers around the technical implementation of rollout strategies as FAA deadlines near. Stewart will share more details around our work with Siemens and the Class I Rail customers and the outlook for 900 megahertz deployments, in addition to other global rail markets. Yes. Despite the obvious challenges on the ground in Israel, we continue to perform for customers. We recently announced an order from a governmental entity in Dubai that demonstrates our fleet expansion continues in the city of Dubai for public safety infrastructure. I will highlight again that we believe we are uniquely deploying autonomous drone systems in urban settings that set the gold standard for performance, reliability, and value with our Optima system. This was further amplified by the historic type certificate that we received in September from the FDA. Ondas is just the second small UAS developer to receive a type certificate from the FDA. We believe we are the only certified drone designed for security and data collection applications. This validates the unique quality and reliability of our system and has been well received by customers, as we expected it will undoubtedly help shorten sales cycles for new customers as we look ahead. All, we continue to make progress with customers with the Optima system. We are very excited to highlight the opportunities we see with Iron Drone. As we announced yesterday, we have accelerated our development activity of the Raider, our AI-driven autonomous counter-UAS platform. This activity is targeted at meeting specific requirements of the Israeli Defense Forces for an urgent need to protect critical locations and people from the threat of possible drones in Israel. The Iron Drone Raider is a proprietary counter-UAS system. We believe the Raider has unique capabilities in a medium, large, and rapidly growing market at the right time. Meir is going to share more details regarding this exciting work during the call, and another significant development in OAS, we announced that Tim Tenne has joined us as the American Robotics CEO to lead the expansion of our business in the United States. I am very excited to have him on board; he is the right person at the right time. He has experience, talent, and drive to continue to position Ondas and American Robotics as leaders in scaling drone technology solutions across industrial and government markets. We will touch on this in the outlook and wrap up the introduction. We are now beginning to scale in both Ondas Networks and I am happy with how we are positioned to grow our business in the coming quarters, supported by our recently fortified balance sheet. We expect a strong finish for the year in Q4 as we continue to focus on driving orders, customer adoption, and revenue growth, in addition to maintaining cost discipline as we work to drive down cash burn and move towards profitability. So let's turn to the financial review. As I mentioned earlier, I will handle this section of the call in place of Yishay Curelaru, our Chief Financial Officer, until he is able to return. We will start with the P&L. I want to remind our investors that our financial statements reflect the early stage of platform adoption for both Ondas Networks and OAS in preparation for larger commercial rollouts. We expect significant operating leverage as revenues grow, so today's revenue levels do not yet cover our operating expenses. We generated approximately $2.7 million of revenue in the third quarter of 2023, which was a four times increase over the $630,000 in revenue realized in the third quarter of 2022. Revenue growth was primarily the result of higher product shipments at Ondas Networks. OAS revenue was modest in Q3, after we recognized a large unit sale in the UAE in the second quarter of this year. We expect revenues in OAS to vary from quarter to quarter and normalize into a more predictable pattern as we grow our customer base and more of these customers enter fleet programs and recurring service agreements in the United States and internationally. Gross profit in the third quarter of 2023 was approximately $550,000, up slightly from the $400,000 in the third quarter of 2022. Gross margins were 20.8% in the third quarter of 2023, a decline from 63.2% in the third quarter of 2022. The margins' decline is primarily due to costs, including labor for the Optima, customer service operations related to units in service during a quarter when we recognized a comparatively low level of Optima-related product and service revenues. Operating expenses declined sharply year-over-year to approximately $6.5 million in the third quarter of 2023, as compared to $14 million in the prior year. Despite the larger business operations, which now include a full quarter of robotic expenses, operating expenses declined due to strong cost controls and lower costs from integrating American Robotics and AI robotics under the OAS business unit. In addition, lower operating expenses were supported by a reversal of stock-based compensation charges due to executive departures at American Robotics. Cash operating expenses in the third quarter of 2023 were approximately $7.5 million, which was lower than expectations. Cash operating expenses exclude non-cash operating items, including $1.3 million in depreciation and amortization and $800,000 of non-cash interest expenses, offset by the reversal of stock-based compensation. Lower cash operating expenses reflect management's focus on tight expense control as we invest and grow our business. Operating loss narrowed by 56% to approximately $5.9 million for the third quarter of 2023, as compared to $13.5 million for the third quarter of 2022. The decline in operating losses was primarily due to sharply lower operating expenses. Other expenses increased to $1.4 million for the three months ended 2023. The increase in other expenses was largely due to interest and amortization expenses related to the convertible notes, which we did not have last year. The company recorded an EBITDA loss of $6.9 million, which was sharply lower than the EBITDA loss of $11 million in the third quarter of 2022. The EBITDA loss benefited from the aforementioned cost controls. Now let's turn to the cash flow statement. We ended the third quarter with $21 million in cash, which was supported by the $25 million in gross proceeds raised from the previously announced financings that Ondas Networks and Ondas Holdings secured early in the third quarter. Cash used in operations during the first nine months of 2023 reflects ongoing investment in the business. So the year-to-date burn was elevated due to certain one-off and non-recurring costs realized early in the year, which were related to the acquisition of American Robotics and the integration of robotics into the OAS business unit. Operating cash flow included cash use of approximately $5.1 million for investment in working capital year-to-date through 2023. In addition, as we mentioned in the second quarter, we had used $5.5 million in cash for debt repayments in the first half of 2023. As discussed, the recent financings fortified our balance sheet, helped grow our cash balance, and positions us to continue to execute our growth plans. We ended the quarter with $21 million in cash. Between the original and new convertible notes, we have approximately $30.4 million in outstanding debt. I also want to highlight that the convertible notes have maturities in April 2025 and July 2025, which means we have quite some time to manage the amortization and create conditions to equitize on more favorable terms. As previously discussed, it is our objective to equitize these notes as soon as we can by using shares to retire the notes either via monthly amortization or to see these notes convert entirely to equity prior to maturity. I want to highlight two important features of the convertible notes that may not be widely understood by our investors. First, the investor is limited to only 4.9% of our outstanding shares. So that limits the amount of amortization we can see in the notes when our stock price is low. Secondly, amortization of the note via payments of common shares or cash does not necessarily happen every month, as a convertible note investor has the option to defer amortization into the future. In practice, the convertible investor has done this. The convertible has deferred amortization options from time to time. At the end of the day, the way to drive the equitization of the notes, and by extension, a deleveraging of our balance sheet is through the execution of our business plan and growing our market capitalization for the benefit of our investors. Let's now move to discuss the financial outlook before turning to a review of our business units. Firstly, I want to reiterate that 2023 has been a critically important year for Ondas. Through many years of hard work by our team and important support from our investors, we have now transitioned our business from platform development to market adoption. This is evident from the $10.7 million in revenue we have generated year-to-date, which is more than six times the revenue growth compared to the first nine months of 2022. Additionally, we expect to generate approximately $4.2 to $4.4 million in revenue during the fourth quarter of 2023, meaning we expect to achieve our prior target of $50 million of revenue for the full year 2023. I want to highlight that both business units have grown significantly in 2023, again reflecting that platform adoption is in motion. While Ondas Networks has expected top-line sales extended relative to our previous calls, our OAS business unit is expected to deliver its original growth targets presented at the time of the robotics acquisition. While we are proud of our strong growth in 2023 versus the prior year, we also know that we have just scratched the surface of our potential large markets we are addressing. There is much more to do. We're not going to give a specific outlook for 2024 at this time. However, I want to reiterate that we expect substantial growth to continue in both business units next year. As we scale adoption and deliver revenue growth, we will remain focused on controlling expenses as we drive toward improved profitability. We expect cash operating expenses to be approximately $7 million for the fourth quarter of 2023. We are continuing to manage Opex efficiently going forward. Now we will transition to a review of our business units and ask Stewart Kantor and Meir Kliner to share updates on recent activity in the field with customers and industry partners. We will also ask Tenne to share some comments regarding American Robotics and drill down a bit into the outlook for OAS in the United States. We will start with Stewart, who will update us on the current status with the rails on DOT 16 adoption and focus on the work with customers in our preparations for volume deployments on the new 900 megahertz network. Stewart?

Great. Thank you, Eric. At Ondas Networks, we had another record revenue quarter driven by product shipments for customers. We delivered approximately $2.4 million in product and development revenue in the third quarter, with a new record delivery in product shipments to Siemens, business coming off a strong second quarter of approximately $1.5 million in revenue, which was the prior record quarter for shipments. The continued growth demonstrates that we are growing our production capacity. Total revenue year-to-date through September 2023 was approximately $5.1 million, a 250% increase over the comparable period in 2022. We continue to be fully engaged with Siemens, the Class I Rails, and now transit customers to further prepare for large-scale commercial deployments. Furthermore, we continue our work with the AAR and our rail customers, which includes the development roadmap for a number of future products and additional networks beyond 900 megahertz. We continue to work hand in hand on deployments with key rail personnel with direct budget responsibility. Several of the railroads are engaging us directly in the field with network migration, planning, testing, and implementation services in order to accelerate deployment activity given the impending deadlines. We are in discussions with one of these customers that is seeking a turnkey solution, which would include Ondas providing field services to deploy the system upgrade and execute the migration to the new 900 megahertz band to meet their deadline. Our initial deployments are focused on critical networks and high-traffic locations, as well as new vital communications such as railroad crossings. We believe this sport and the areas of focus reflect positively on how the rails have come to value the 900 megahertz network opportunity. Simultaneous to this fieldwork, Siemens is actively negotiating purchase orders with select rails. MxV, which is the technical subsidiary of AAR, continues to be engaged in the DOT 16 network integration plans with an immediate focus on the new network controller and critical DOT 16 functionality, including high-demand features like peer-to-peer networking. The network controller project and peer-to-peer development activity are advancing, and we are negotiating with MXV to proceed with the preliminary technical work on the next 160 megahertz network, which we expect to commence in Q1 of next year. On the production side, we've now solved most of our supply chain challenges and no longer view parts components as a constraint. In early October, alongside Siemens, we attended the railway system suppliers conference, where we continued our planning discussions with the Class I and engaged with several new transit customers. As we have stated previously, we continue to move forward aggressively on securing new orders and now have the capabilities to meet our customers' production needs. At the same time, we will continue to advance our existing development programs while new development programs continue to present themselves in our pipeline. The Siemens locomotive radio program for Europe continues to advance, and we are expecting responses from the proposals we submitted on several major passenger and transit communications upgrades. As we grow, we will pay close attention to the spending levels on operating costs as we drive towards profitability. As revenue and gross profits grow with increasing demand and shipments, we are focused on moving towards profitability as we move through the year and into 2024. Now I'll hand the call back to Eric.

Thank you, Stewart. I will now ask Meir Kliner to take the floor and update us on progress with customers at Ondas Autonomous Systems and provide some insight into recent developments at OAS and the outlook from here. Meir?

Thank you, Eric. Before providing the Q3 update, I would like to acknowledge the exceptional efforts of our team in Israel, some of whom have been called to serve in the Israeli Defense Forces during the conflict. Our team has worked tremendously hard, as they always do, and I'm very grateful for their efforts and commitment to our success through this commitment and in respect of our US-based team, Ondas Autonomous Systems, we are maintaining operations in Israel. Turning now to the third quarter update on Ondas Autonomous Systems— we continued to deliver our business plan for 2023 and maintain momentum in the global markets. In the Middle East, fleet expansion in Dubai, UAE continues to advance, as evidenced by the recently announced $2.6 million order to fully meet the delivery of additional Optimus drone systems from a local governmental entity. The Optimus fleet expansion in Dubai illustrates the effectiveness of our Optimus system in public safety and environmental applications, and ongoing advancement of activity with existing customers. We have successfully deployed the Optimus One infrastructure in Haifa port in Israel and successfully completed a proof of concept in maritime security. This proof of concept was conducted in a complex port compound in Israel consisting of seven ports and corporations. The successful outcome paved the way for further deployment in Haifa port, marking a significant advancement in maritime security technology for many other ports authorities and facilities worldwide. OAS continues its expansion beyond Israel, creating partnerships, marketing, and distribution agreements in the Kingdom of Saudi Arabia, India, and Morocco, which we announced last week. In Morocco, we have initiated a new relationship with Maghrebnet, an IT solution provider focused on North African markets. Under the MOU, we will offer to Maghrebnet our advanced drone infrastructure in North Africa. The agreement includes the potential for the manufacture of Optimus systems in the Kingdom of Morocco and the Republic of Senegal, as well as the establishment of a joint center in Morocco. We also received funding from the Israeli Innovation Authority (IIA) to advance the Iron Drone Raider, our AI-driven counter-UAS system. The funding was approximately $450,000 and will be used for the development of advanced features such as enhanced night vision and flying in GPS-denied environments. This grant represents the level of innovation of the Iron Drone Raider and the interests of Israel in aerospace as a global leader in this innovative solution. The interest in the Iron Drone Raider, a counter-UAS platform, continues to increase in Israel and beyond. We announced yesterday that we have accelerated our development timelines and are advancing specific system enhancements to meet the requirements of the Israeli Defense Forces for urgent needs related to the conflict in Gaza. We are working closely with Israeli defense contractors to support system integration and readiness for deployment. This work is further supported by the financial grant mentioned earlier that we received from the IIA. We believe Iron Drone Raider is an exceptional system meeting a very large and growing market opportunity to protect people and both government and private sector critical infrastructure from the rapidly growing threats posed by hostile drones. There are many public research reports pointing towards billions of dollars in the market opportunity for solutions such as the Iron Drone Raider. We are happy to share this review, and we will continue to work hard to deliver these urgently required solutions for our customers. I look forward to keeping you informed of our progress. In the meantime, I encourage you to review our prior disclosures and visit our website Ondas.com for more information about the unique capabilities of the system. As we announced in early September, our Optimus was well received and will receive this type certification from the FAA. This is the second-ever type certification granted by the FAA for a small drone and the first-of-its-kind, fully non-air carrier fully automated drone designed for security and data collection operations. With the Type Certification, OAS will be able to improve with the FAA complicated unmanned aerial operations, such as flying over crowds and people. OAS is currently the only manufacturer in the USA to hold FAA type certification for a drone designed for security and data capture operations. The certification of Optimus One was achieved after four years of intensive engineering and agency review processes. We believe that this will support the ongoing business development activities of American Robotics in US commercial and governmental markets and serve to accelerate demand and shorten sales cycles. In the US market, American Robotics, along with our customers, the Massachusetts Department of Transportation and American Department, will soon launch a pilot program we previously announced in June. This program will include provisional demonstrations to relevant stakeholders such as government agencies, showcasing our Optimus system abilities for emergency response and critical infrastructure monitoring. We look forward to sharing more details on this launch soon. In addition to launching the Massachusetts program, our customer pipeline is maturing and expanding, and we expect to secure additional engagements for the first quarter. Of course, we expect the addition of Tim Tenne, who is now leading the expansion in the US as the CEO of American Robotics, to have a significant impact on driving an expanded set of defense and commercial opportunities. I'm now going to ask Eric to introduce Tim, so we can share more comments on American Robotics and the opportunities we see looking ahead. We are excited to have Tim join the OAS team as we continue to drive platform adoption globally.

Thank you, Meir. I will now ask Tim Tenne to share a few words on why he joined us and on the opportunities we have at American Robotics to drive industry leadership and growth in the United States. As I hand over the call, I wanted to emphasize that Tim is a major addition to our leadership team. I've known Tim for several years now, and I've been incredibly impressed with his business acumen. In addition to his very obvious aviation, multimode transportation operations and regulatory experience, he has a broad and deep understanding of UAS technologies and services and has extensive experience in developing end-to-end solutions for large, sophisticated UAS customers in international markets ranging from industrial and government to military. I believe Tim will have a tremendous impact on Ondas, and I'm thrilled to have him join our leadership team. Tim, I will now hand the floor to you.

Thank you, Eric, and it's great to attend my first investor call with Ondas. As Eric mentioned, I have spent a career that spans defense and commercial aviation, and most importantly, drone technology. As a previous leader at the Federal Aviation Administration, I led the establishment of the UAS Traffic Integration Office that was part of the initial cadre that developed the world's first drone regulations, including the small UAS registration rule and the commercial UAS rule Part 107, which established requirements for commercial drone operators and led to much wider adoption of drone services across the United States and beyond. I'm very familiar with Ondas Networks, American Robotics, and Airobotics, and for a long time, have been extremely impressed with the world-class technology platforms we bring to global markets. The automated data and information services provided by the drone-in-a-box solutions define what are the most important segments in the commercial drone industry. Although there are multiple segments or categories in the drone sector, fully autonomous technologies are critical for scaling and driving growth throughout the spectrum of use cases. With a long history as a leader in industrial markets in defense, I know what is required to meet and exceed customer expectations. And now, as a leader supplying the same clients, I want to ensure we continue to develop, scale, and win in all segments across the market by developing the right talent, partnering with the right organizations, and delivering on our own capabilities and solutions. The first order of business will be to drive the adoption of Optimus and Iron Drone systems within the United States and the Americas. We have a customer pipeline that is maturing and growing, and given the FAA type certification of our unmanned aircraft, I believe the market potential is massive. This includes inspection, security, safety, along with a multitude of defense applications. Given our advantage of being only the second company in the world to achieve the gold standard FAA type certification, I believe we are going to be very successful in driving adoption and garnering support and partnerships throughout the industry. I'm confident we will continue our positive momentum, continue to scale, and expand our operations and services to exceed the demands of our clients due to having the specific expertise in a very complex and highly regulated market, developing world-class programs and offering the right mix of capabilities and solutions. American Robotics is a strong and trusted provider of drones, services, and data solutions, and we are committed to scaling it into a successful industry leader, uniquely capable of providing turnkey solutions for our customers. We also believe the regulatory environment is rapidly improving, which will support accelerating growth within the drone sector. For example, we have seen a significant increase in the FAA approving beyond visual line of sight (BVLOS) waivers, which lead directly to an increase in drone revenue-generating capability. We also see the new regulations advancing, including pending Part 108 rule, which will among other things improve the scaling of drone field operations by allowing a single pilot to operate multiple autonomous drones simultaneously. While regulations continue to grow more favorable, the FAA has also recently announced a new administrator who has much experience in advanced Air Mobility, including the integration of drones into the national airspace system. With the improving regulatory backdrop and continued advancement of our autonomous drone platform, I could not have a more positive outlook on the ability of OAS and American Robotics to continue to drive market share by gaining traction and scaling with our clients to ensure our strategies meet expectations. We are rapidly developing our go-to-market plan that includes leveraging our growing partnerships, building on our current platforms, and increasing our offerings and capabilities and solutions for our clients. These offerings will include comprehensive aviation and aerospace solutions. I will now hand the call back to Meir, who will share the outlook for our OAS business unit.

Thank you, Tim. We expect a strong end to 2023 for Ondas Autonomous Systems. This is true despite the operational challenges presented by the Gaza conflict in Israel, as mentioned, the public safety Optimus infrastructure order was for immediate delivery, and we are working to fulfill that order in the fourth quarter. This positions us to achieve the $8 million revenue target that was established for OAS at the beginning of the robotics acquisition. In addition, our customer pipeline in the US is both maturing and growing, and we expect that to accelerate now with new leadership at American Robotics. This activity is further supported by the type certificate we received for the Optimus drone in the United States. We are in discussions for initial proofs of concept with several customers and distribution partners in security, government, as well as in oil, gas, and other industrial markets. The Gaza conflict in Israel is likely impacting our inventory delivery schedules, and we expect our initial 10 of 15 systems to be available over the course of Q4 into Q1 2024. We have five systems in the production queue and continue to expect to increase production orders in 2024. We are pleased with the growth in 2023 and the work with our team. This completes my formal remarks. Eric, I’m going to hand the call back to you now.

Thank you, Meir. This concludes our formal remarks. Before we turn the call over to Q&A, I want to reiterate that we remain bullish on the outlook for Ondas and believe our business is strengthening considerably. We are seeing growth, and I am optimistic when I look at our customer pipeline in both business units that we will finish 2023 strongly. Our visibility of demand continues to improve, and I believe we are positioned for significant expansion across our businesses in 2024. With that said, let's see if there are any questions. Operator?

And the first question will come from Timothy Horan with Oppenheimer. Please go ahead.

Hey, guys. Thanks for the time. On the counter-UAS systems here, including a $1 billion market in '23, can you talk about what the competition looks like and how you measure that $1 billion market? I guess does anyone have a system like this? And if not, maybe how much intellectual property do you have a year? I know you have grown from $5 billion by 2030. Just a sense of what percentage comes from the different ways to do counter-UAS systems? Like how important will be your type of functionality be in the growth of that market?

Yeah, sure. Hi, Tim, and thanks for the question. So, if you look at the counter-UAS market, there are principally two types of technologies that are used to counter or neutralize hostile drones. The first type is the jamming of radio frequencies, GPS, which interferes with the operation of the drone. Those sorts of technologies have pluses and minuses. One of the complications with deploying a jamming system is when you're jamming radio frequencies, it can interfere with other wireless communications and have public safety implications. For example, at an airport, you want to be very careful if you're using jamming technology. On the other hand, with the system we have, a capture type of strategy or platform, this system is fully autonomous. So when we deploy this infrastructure, it's typically going to be deployed at borders or important locations such as power plants, government buildings, places where people congregate, like stadiums, for example, refineries, and other critical infrastructures. These are places where jamming is not acceptable because when you jam radio frequencies, you run the risk of things falling from the sky, in addition to the other drawbacks around public safety and wireless communications. So we see a very significant market here, and the market is for security—there's a Homeland Security or defense aspect of it as well. In terms of the market size, as we've looked at, we see the public reports from various research groups all pointing to very large markets that are rapidly growing. Now, when we think about the value of the drones and why they're growing rapidly, we can pick up the paper any given day and the front pages are talking about hostile drones, and that's likely something we will see more of. We think the demand for the security we can provide with Iron Drone Raider is very valuable, and we like where we're positioned. Let me add, autonomy is unique; the way we deploy these systems is that we deploy them again in critical locations to counter the threat of a hostile drone, but it is fully autonomous. So the system is typically integrated with a radar or other detection type of technology, allowing us to identify a hostile drone coming in and react to that drone autonomously. Of course, when drones are moving rapidly, the speed of reaction to neutralize the threat is of critical importance. So when we deploy the drones to the radar, we can identify the location, but of course, this is a moving target. We can autonomously, once we launch the radar, lock into that hostile drone and then, of course, apprehend it with a net. So, the autonomy around what we're offering is unique. So, hopefully, that was helpful.

That's really helpful. So, it's fair to say the majority of the market right now is GPS blocking. I mean, does anyone else have a similar competitive landscape?

Yes. So the majority is jamming techniques. We're aware of at least a couple of others that have a capture capability, but they typically do not have the form factor, the cost point, and the autonomy that we're delivering, which I think we're uniquely capable of at all those levels.

Yeah, very interesting product. Good luck on the rail side. Can you give us maybe just an update on how much you think the rails need to spend in the next two years to address existing spectrum? Just a rough idea on timing of when you expect big orders or big deliveries to occur and when they must be finished? Thanks.

Sure, sure. So the total addressable market (TAM) that we're addressing starting in 900 megahertz doesn't change. We calculate that based on the base station infrastructure or the coverage network and what we believe they need to deploy in terms of edge remote endpoints in the field, along the tracks, etc. The TAM is still what we discussed in terms of where we are with the customer. As I said, we're seeing a lot of very intentional work with the railroads. We're very optimistic that we're getting to the point where we're going to see material orders and the deployments begin to scale across the industry. I'll remind you that the bulk of our work for the first three or four years with wireless constituted the WCC, which is a central group underneath the umbrella of the AAR. Now they made a statement in March that the 900 megahertz network will use DOT 16 technology. At that point, we began to work with the folks in the field, specifically the communications and signaling group for CNS groups. We’re doing a lot of work with them as we go through the training and implementation of how to deploy the system. Of course, they need to operate and pay for the network. This is a system that involves a lot of complexity in terms of migrating while the trains are still running. So we're going through the necessary processes to ensure that all this activity is repeatable and scalable as they go through the deployment. Once again, this is mission-critical while they're doing that—they need to keep the trains running. We are progressing very well, but I can't specify a date. However, we believe that 2024 is going to be a very big year for growth, and we're tracking orders now.

I know it's early, but it's pretty important. I mean, can you give us some kind of range of revenue or how you're thinking about revenue next year? Are we talking about 100% growth or 500% growth? I'm not looking for specifics, but any thoughts on what the revenue you can do next year would be really helpful?

Yeah. So, without a doubt, when we're looking at 2024, we're looking at multiples of what we've done this year. We've really just begun to get our production moving, build that capacity and capability, and start to provide inventory for the early activity we have with the railroad. So, we anticipate significant growth next year.

And can you give us a sense of the breakdown between rail and drone on? And then secondly, can you give us a rough idea of what you're thinking about for the gross margins next year? I mean, I know there's a lot of moving parts.

Sure. So we're going to hear—so at the moment, we're planning with Siemens and the customers for 2024. It's a little early for me to give specifics. On the drone side, we do expect to continue fleet expansion in the UAE. As you know, we have established partnerships with local firms in India, Morocco, and Saudi Arabia as well. We think we will gain traction there. With the maturation of our pipeline here in the US, we expect to see significant growth. We've said in the past that we expect to be able to double our revenue across the businesses next year, and I’d like to think we can do even better than that. However, we’re going through the proper planning and will provide additional details early next year. Regarding margins, we believe that our technology platforms are providing very attractive margins, even at these low-volume levels. You will notice some lumpiness—our margins were down this quarter, and to provide more insight as to why, we have a sort of fixed level of costs at the OAS business unit for field service operations. We have personnel in the field who are tasked with serving customers and growing the business. It's a bit debatable whether this should be classified as a cost of sales or SG&A, but we will review that at the start of next year. We had costs related to these service operations when we recognized a very low revenue quarter for the drone business. When you look at margins next year and beyond, we are targeting at least 50%, and as we achieve more volume and operating leverage—even on the gross margin line—we're going to see some expansion.

Thank you.

For the next question, we will come from Matthew Galinko with Maxim Group. Please go ahead.

Hey, thanks, and thanks for taking my questions. Can you touch on the opportunity that Stewart mentioned to provide a turnkey service to a Class I Rail around the 900 megahertz deployment? Can you go into a little bit more detail around why that became a direct engagement and how that changes the scope of what you're delivering?

Sure. Actually, Stewart, I'll let you take that.

Sure. What we're starting to see is that, as we're getting closer to the deadline, the customers are looking to some of our expertise in deploying wireless networks. I wouldn't say that it's a solid trend right now, but it does open up new opportunities. We see that their confidence in us is growing in terms of our capabilities, whereas historically, many of the rails have tightly managed their deployment processes internally. We're beginning to see more trust in our ability to assist and accelerate deployment. We think this represents a new opportunity. While we are not forecasting it heavily, it does indicate additional confidence in our capabilities.

Yeah, I’ll amplify that. That’s a great point—our expertise, as I alluded to, involves a lot of complexity in migrating while the trains are still running, right? Migrating from legacy technologies, literally decades old, to a new modern IP network. So, it’s rightly said that the expertise we bring is valued highly on a daily basis. At a minimum, we will be strongly involved in advisory capacity, training folks new systems and how we key deployments and operation of the network. However, we are likely to be called on to provide certain instances for even more significant services around that.

Thank you. That’s helpful. I apologize for the multipart follow-up, but I think it all goes into the same point. Can you provide a little bit of color around the cash operating expenses for Q4? Can you talk a little bit about—again, I know I’m asking for color around 2024, but can we take your general gross margin run rate, factor in Opex and sort of get to your burn rate? And thirdly, regarding that opportunity on rail about helping manage that complexity, is there a scenario where you’re staffing up around that time if it becomes more of a pronounced trend? Thank you.

Great question, Matt. So we’ll look at it a couple of different ways. First, I’ll say that our cash operating expenses as we enter next year shouldn’t increase dramatically. We do believe we’re going to gain significant operating leverage across both businesses. Specifically, around Ondas Networks, the operating leverage will be even more apparent because most of our expenses are related to development of the technology platform and products that the railroad customers are desiring. To the extent we have to add more in terms of field service, as we were just discussing, that will likely be accretive to profitability, since we will be able to charge for those services. I don't see a significant increase in Opex for Ondas Networks. As we scale with customers and generate revenue on the drone side, specifically with the US, you might see us expand the team to service that growing business. But that won't be a big shock to the headcount. For instance, a lot of the field services might be contracted in a transitional manner with third parties. So we are likely to see us establish the right partnerships on the field services side for the OAS business unit.

Thank you.

Our next question will come from Mike Latimore with Northland Capital Markets. Please go ahead.

Hey, guys, this is Luke on for Mike. Just wanted to touch on the $2.6 million order—are you going to be able to quantify how many units or how many drones this order was for?

No, we’re not, and I’ll say it’s proprietary information for now. However, when we get into next year, we will provide a sense of unit sales. But for now, I don’t want to connect our pricing strategies to the public forum, given the various solutions we provide to our customers.

Okay, yeah, I totally get that. Is there any way you’d be able to quantify how many you've sold in total in the Dubai region?

I don't want to share that right now.

Okay. Fair enough. Any sort of outlook in this region for 2024?

So, in the region, starting with the public safety, there have been public comments from customers indicating their intent to acquire systems in '24 for more by 2025. We’ve seen similar statements from a customer in Abu Dhabi, and of course, as we are expanding partnerships in other markets such as Saudi Arabia, India, and Morocco, we believe the fleet opportunities in those markets are significant.

Got it. Thanks for that. And then just pivoting here, could you provide what total employee headcount is up to now and what the split is between the networks and autonomous systems?

Yes. The number I don’t have handy, but let's say we’re probably around 95 or so, and it’s about half-and-half. I’ll get you a more specific number; I just haven’t looked at that as of late.

Yeah, that works for now. Thanks for taking the questions, guys, and congrats on the results.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Eric Brock for any closing remarks. Please go ahead, sir.

Okay. Thank you, operator. I’m going to close the call by just thanking you again for attending. As always, we have a lot of work ahead and we're going to get right back at it. So I look forward to keeping you informed on our progress. We will talk soon, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.