Earnings Call Transcript - ONDS Q1 2021

Operator, Operator

Good day, and welcome to the Ondas Network First Quarter's 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note today's event is being recorded. I will now turn it over to Eric Brock, CEO. Please go ahead, sir.

Eric Brock, CEO

Thank you, operator, and good morning, and welcome to our first-quarter investor call. This is an exciting day for Ondas. In addition to sharing our earnings release, we've also announced the acquisition of American Robotics. This is a deal combining two leading mission-critical industrial data platforms. Of course, I'm talking about Ondas' mission-critical FullMAX wireless network and American Robotics' world-class drone system. This is a home run. It's a great deal for customers, employees, and, importantly, a huge win for our investors. I'm thrilled to be sharing this news with you, and we'll be sure to dedicate enough time on this call to properly introduce American Robotics to the investor community. Of course, we will also spend time covering Q1 results and giving you an update on where we stand on our critical business development activity. I'm joined today by Stewart Kantor, our president, and our CFO. In addition, we're joined by American Robotics' CEO, Reese Moser, and CTO, Vijay Somandepalli. Mr. Vijay, along with their teams, have built an incredible technology platform, and they are here to share details of their business. Before we get going on the quarter and the outlook, I want to take a few minutes to share a couple of thoughts on American Robotics. AR is leading the charge in the commercial drone sector. They bring both a first-in-class and a best-in-class complete drone-in-a-box platform called the Scout System. Scout is the type of solution that is coveted by our critical infrastructure customers. The platform fits like a glove with our mission-critical FullMAX wireless platform both from a customer marketing and distribution standpoint as well as from a wireless connectivity perspective. The drone needs connectivity, the significant marketing synergies and technical wireless platform integration provide even more valuable turnkey data and edge computing solutions for our customers. This is a bold move for Ondas, and that's exactly what Ondas and American Robotics need to do to create value in the mission-critical data markets we are serving. It's precisely what our customers and shareholders expect from us. We are leading the charge in defining and delivering these data solutions for the critical industrial, public safety, and government markets we address. Now, let's outline the agenda for today. We're going to start first with the financial review from Stewart. I will then give a business outlook focusing on the key areas of business development, which means I'm going to be highlighting where we are with Siemens, the Rails, and AURA. And then, we're going to turn our attention back to providing information regarding American Robotics and the announced acquisition today. And we will leave time for Q&A. Things are clicking for Ondas. As Stewart will describe in detail, we generated both record revenue and bookings in the first quarter, demonstrating clear progress on our plan. We continue to drive towards platform adoption in our critical Rail and Drone markets with both the Class 1 Rails in AURA, and we're broadening our ecosystem, particularly towards Siemens' partnership, which is expanding through new product development agreements, and we see more of that to come. Stewart, I will now hand the call over to you to provide more details on Q1 and the financial outlook.

Stewart Kantor, President

Great. Thank you, Eric, and welcome everyone. I want to begin by highlighting that we made excellent progress on all of our key business initiatives in the first quarter, including achieving both record revenues and bookings. We booked approximately $2.4 million in new orders and generated $1.2 million in revenue with revenue growth of 480% over Q1 2020. Our growth came primarily from joint development programs with Siemens Mobility, our partner in the North American Rail market, and AURA, our partner which is deploying a nationwide drone and unmanned aircraft navigation network. Our financial results have shown substantial improvement year-over-year and reflect excellent progress towards scaling both the Rail and Drone communications markets. Our operating expenses were $3.4 million, an increase of approximately $1.1 million over Q1 2020. The increase in operating expenses was primarily the result of $1.3 million in non-cash stock-based compensation. We expect bookings and revenues to continue to grow substantially in the coming quarters, driven primarily by our sales activity from Siemens and AURA. Revenue and profitability will fluctuate quarter-to-quarter because our major commercial orders and new system deployments don't happen on a fixed timeline. Therefore, as we've mentioned in previous calls, we don't intend to provide full-year financial guidance. For Q2 2021, we expect revenue to be between $1.1 million and $1.5 million, and that revenue will come from our backlog as well as new sales orders from Siemens, the Class 1 Railroads, and AURA. Eric will tell you more about this in the next section in greater detail. Our cash operating expenses, which exclude non-cash expenses such as stock-based compensation, are expected to be between $2.5 million and $3 million in the second quarter. We believe we're positioned to see bookings and revenues grow on a quarterly basis throughout the year. We continue to have a strong balance sheet with $24 million in cash at the end of the first quarter. And relative to the large revenue opportunities in our customer pipeline, we have a modest cash burn. Given all these factors, we feel we're in a great position moving forward. And now, Eric will provide more details on the customer activity and growth outlook for 2021.

Eric Brock, CEO

Thank you, Stewart. And as you can see, we've made a lot of progress in Q1. Of course, as I like to remind my team, we have more work to do. While the big news today is, of course, the American Robotics acquisition, Q2 remains busy and milestone heavy as we set up for a strong year. We expect to see significant business development progress throughout the second quarter with the Class 1 Rails, Siemens, and AURA. Starting with the Rails, we continue to highlight that we have multiple networks in our line of sight beyond the 900 megahertz. That includes a 150 megahertz voice and data networks as well as a 450 megahertz network with the Rails connect on locomotive systems, while the 900 megahertz network is obviously a huge deal and where we will start commercial deployments. I want to make clear that we expect to demonstrate activity on these other systems and outside of North American rail as we move through 2021. And we will be supported as we do by our ecosystem partners, including Siemens. Let's turn to that all-important 900 megahertz networks; we continue to drive towards adoption on that large nationwide system, where our customer has greenfield spectrum to put to work. As we previously shared, we've worked principally with the wireless group under the AAR umbrella to establish FullMAX as the new 900 megahertz network platform, and that effort is now evolving and expanding. This Wireless Comms Committee or WCC has now elevated Ondas to the senior operating committees of the rails in order to formally ratify the establishment of the MC-IoT Rail lab in Sunnyvale. We expect purchase orders related to this decision this quarter, and the critical takeaway is that the users of the network—those in charge of field area operations for functions such as train controls, switching, crossing safety, and other applications including drones—are now engaged with their networking peers to plan for the new network. This approval would be a very important strategic development in further validating this large opportunity for Ondas. We continue to expect commercial deployments on the 900 megahertz networks to begin in the second half of 2021. We're not able to share detailed guidance on the timing of these appointments. When we know, we will share that with you, but we are making progress. Moving to Siemens, our strategic partnership here continues to pay dividends for both parties. Ondas' platform creates systems upgrade opportunities for Siemens, with the potential for them to drive additional revenues from the critical train systems they provide the Class 1. We are seeing Siemens build traction and raise awareness with the field operating groups I referred to earlier across the board with all of the Class 1 Rails. And again, these business operating units that use the network for critical training system operations are now becoming aware of the increased bandwidth and all the benefits that entails. So, let's turn to Siemens and Siemens' ordering activity. We call that the initial 900 megahertz ATCS product development is complete and is now being qualified for sale. We expect Siemens to place orders for ATCS in the second half. In addition, we noted on the last call that Siemens initiated a new product development program with us during Q1. That revenue-generating program is underway and expected to be completed by the end of the year. I want to remind you that this new product with Siemens is for a separate application on a different frequency band away from the 900 megahertz network. This product will also be marketed globally by Siemens. This is clear evidence of the broader rail opportunities that we have been highlighting. We expect to secure additional development programs with Siemens during the year with our FullMAX software-defined platform being embedded in additional critical train systems globally. Let's turn to AURA. Our work with AURA has continued to move forward in 2021 with AURA achieving their own key development milestones. In January, AURA received an FCC waiver for their air-to-ground radio spectrum license in the 450 megahertz band. This waiver allows for the drone navigation network they are planning. As Stewart mentioned, we're now completing work on the optimization of the FullMAX platform to create transitional network equipment for AURA's UAS applications. This work has included extensive aerial testing, and we are very pleased with the results to date. This will allow Ondas and AURA to provide testing and demonstration networks for AURA's UAS customers. We will realize product sales for this AURA-optimized equipment soon. In parallel, Ondas and AURA are scoping the development program, technical roadmap, and expanded partnership structures for a significant FAA commercial aviation program related to this nationwide command and control or C2 UAS network. We expect a big ecosystem play here with additional partners to emerge, and we look forward to sharing more details on the expanding AURA relationship and program roadmap and timeline soon. Now, let's turn back to American Robotics. I want to start by saying that this is an incredible company with massive talent and vision. Importantly, AR is an American drone company located just outside of Boston, a region many people consider to be a robotics and drone capital of the world. American Robotics stands out as a leader in this community. Recently, Vijay and the team have solved the biggest problem in UAS, and that is commercializing a complete, fully-automated drone system—a drone-in-a-box specialized for industrial use cases. This is called the Scout System. The Scout System enables the operation of drones beyond visual line of sight, with FAA approval. With no on-the-ground human operations, Scout is the first and only truly scalable drone platform on the market. Of course, the drone is the ultimate MC-IoT weapon for Ondas. It's a mobile data-gathering solution that we believe this groundbreaking Scout System will be coveted by our industrial customers. At Ondas, we love huge addressable markets, we love huge stamps, and we love platform businesses. This is exactly what we have here with American Robotics and their patented Scout System. PricewaterhouseCoopers sized the UAS markets addressed by AR at $100 billion or more, and it's seeing huge opportunity. American Robotics also brings a high-margin, high-return on capital business, also known as a robot-as-a-service business model. We believe this model is great for customers and it can lead to very attractive returns for Ondas investors. Reese is going to share more on that robot-as-a-service business model and the value of bringing a turnkey platform to the market and how their very important first-mover advantage via the FAA approval will allow American Robotics and Ondas to define the commercial drone market in the years ahead. Ondas and AR couldn't be a better fit to drive market penetration of the Scout System. The synergies between Ondas and American Robotics are significant. The combination of Ondas' wireless connectivity with AR's commercial drone-in-a-box system is powerful. Again, the drone is the ultimate mobile data-gathering device at the edge of a mission-critical network. The value to our customers to gather information at a frequency they have never before been able to access is huge, and we believe the pent-up demand is significant. Today, railroads, utilities, oil and gas field operators, in addition to the critical industrial public safety and government markets are spending significant CapEx and OpEx dollars on drones. The drone provides valuable data services, and the budgets are in place and growing. So, the marketing synergies with Ondas and AR are very real and valuable, as are the technical. The value of a reliable, secure, FullMAX wireless network reinforces the value of the Scout drone platform and vice versa. Customers are going to love this. Ondas and AR attack the same end-markets, and Ondas' networking capability will expand the market for American Robotics' Scout drones. The drone is most scalable and valuable when attached to a reliable, secure, mission-critical wireless network. For Ondas, the benefit is clear: broader customer solutions combined with an even greater ability to lay claim to the drone command and control navigation radio market. That C2 market starts with AURA, and it extends to the private networks. For example, drones can be an application for the rails and other industrial government customers for Ondas. Of course, the C2 market extends to American Robotics in the local beyond visual line of sight markets the Scout System is defining. Ondas can now take a leadership position in the critical navigation link, which is needed to address FAA requirements for the deployment of drones flying beyond visual line of sight, at scale. American Robotics puts us squarely in a huge market for smaller drones that conduct shorter missions beyond visual line of sight at lower altitudes. AR also overlaps with private industrial networks where customers operate both small and large drones often at low altitudes. We expect to see immediate interest from our customers. They are already engaging Ondas, asking us to solve the drone radio network challenges. In addition to the local and private wide area network applications, we're tackling the high-end drone missions with AURA. While the American Robotics Scout System is the crown jewel in a terrific standalone platform, the acquisition brings the added value of Ondas' format software-defined network being positioned as a navigation backbone or the nervous system for all industrial drone applications. Infrastructure solutions for drones is a big opportunity, and you will see Ondas play an important role in bringing the picks and shovels to the drone economy. I want to now hand the call to American Robotics CEO, Reese Moser, so he can provide more information on American Robotics and this best-in-class Scout System.

Reese Moser, Co-Founder and CEO of American Robotics

Thank you, Eric. Good morning, everybody. Great to meet you all in this new chapter of American Robotics and Ondas. My name is Reese Moser, and I'm the Co-Founder and CEO of American Robotics. American Robotics is a developer of fully automated industrial drone systems. As Eric mentioned at the beginning of his presentation, in January, we became the first company approved by the FAA to operate fully automated drones with no humans on site. The most important thing to understand about American Robotics and the commercial drone industry is the problem. As the drone that we talked about for a long time now, there's been a lot of success with drones in the military sector, and there's been a lot of success with drones in the consumer sector. But in the middle of this very large opportunity for commercial drones, we are still barely scratching the surface. The reason for that is that for the vast majority of commercial drone applications, using a manually operated drone is simply not practical. It takes way too much time and is not an economical solution because when you look at these industries and these use cases, whether it's oil and gas or agriculture, railways, or stockpile monitoring, you have to operate this drone and collect data and analyze data multiple times a day, every day for it to have value. Having a person stand out there in the field with a remote control simply doesn't make sense. On top of that, default FAA regulations prohibit this kind of automated operation. Currently, anytime a drone is flying, a human must be present on the ground with that drone, typically with eyes on at all times, obviously prohibiting the ability to operate in this way. We have solved this problem with the Scout System. The Scout System is a truly automated platform. It comprises a number of software and hardware systems that are proprietary to American Robotics, developed from the ground up to work together to create this completely hands-off experience and really change the dynamic of what it means to use a drone in the commercial sector. It includes the drone, our automated base station, our detect and avoid sensors, and the software to tie that all together both at the backend and at the front end. Everything has been automated. Flight is just one component of what it takes to use a drone for business purposes. At the end of the day, what our product delivers is data, not the drone itself. We have automated mission planning, precision landing, charging, data processing, data storage, data transmission, and physical storage. All of that together, and now you can install these systems in your field, and they will live there indefinitely, conducting 10 to 20 missions per day every day, processing that data at the edge and transferring it back to the customer. This again changes the dynamic of what it means to use a drone and the economics as well. As it's been mentioned a few times now, American Robotics became the first company approved by the FAA for fully automated drone operations in January of this year. This is the most important approval that has occurred yet in the commercial drone space. Currently, we are the only company that has this approval, which means at the moment American Robotics has exclusive access to markets requiring this degree of automation, which by our estimation incorporates about 90% of all commercial drone markets. To recap, our system can fly beyond the line of sight with no real observer or human on the ground at any time. That means before, during, or after flights, at no point does a person have to be co-located with this drone, which completely changes the dynamics and economics of what drones can do for commercial businesses. The number of markets and the number of use cases for this type of technology is incredibly broad. 90% of all commercial applications require this level of automation for drones to be scalable solutions. We divide this into overarching categories: industrial markets, agricultural markets, and defense markets, including use cases like oil and gas, solar, nuclear, railways, utilities, stockpile yards, and row crops. The common theme among all of them is the ability to monitor assets on a frequent basis. Whether you have 500 well pads or 10,000 acres of farmland, our system can digitize the physical world allowing customers to monitor those assets remotely and increase the efficiencies of their businesses. The final piece of the puzzle is once you achieve this type of automation, you can now combine it with the robot-as-a-service model. We have removed the most expensive cost of operating and traveling, which was the pilot. With that removed from the equation, we can focus on the service that the system provides. Instead of customers purchasing this hardware, it is provided in terms of an annual subscription. This lowers the annual cost of data acquisition for our customers and provides American Robotics with recurring software-like margins.

Eric Brock, CEO

Let me wrap it up before we move on to Q&A. Ondas continues to position itself for huge growth in our large open-ended markets. We have momentum and we're executing on our critical initiatives driving platform adoption. It starts with the Rails and Siemens and AURA networks. We are establishing our mission-critical IoT platform as the default next-generation mission-critical network. Now we integrate American Robotics. American Robotics' drone-in-a-box Scout platform is best-in-class, and it will be in high demand in our end-markets and beyond. This also positions Ondas as a leading player in all C2 markets with drones of all sizes and applications ranging from very large to small and for altitudes ranging from high to low and for flight missions spanning local to regional to long durations. The drone age is here, and Ondas will be a key player driving innovation, infrastructure end-to-end solutions as well as market penetration. So, operator, let's move to Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Today's first question comes from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore, Analyst

All right. Thanks. Yes. Congratulations on the acquisition and quarter here. Just starting with a couple of questions on the acquisition and these may be kind of basic. But, what do you sort of charge per month, like what's the ARPU on a specific drone? And then maybe just, what is your ROI pitch to customers like, what kind of ROI can you prove?

Eric Brock, CEO

All right, I'm going to ask Reese to answer the question. I think we're going to be a little sensitive on the price points at this moment, and we will be providing a lot more information regardless regarding this. And as we should note, the acquisition is expected to close in August. So, we've got a couple of months here, but we will be providing more details. But, Reese, can you share some perspective on this for Mike?

Reese Moser, Co-Founder and CEO of American Robotics

Yes, absolutely. As Eric mentioned, we're not disclosing specific pricing at this time, but we do look forward to sharing that publicly soon. I can say that when you look at the pricing as a result of this robot-as-a-service model, we are able to deliver the highest quality data at the lowest cost. Our system, because the human is removed from that operation, can run continuously, resulting in a marginal increase in costs all day, every day. That allows for an entirely new category of data that has never before been feasible to collect. We're talking about sub-centimeter resolution multiple times a day, which unlocks a new category of data analytics that was previously impossible.

Eric Brock, CEO

Yes, let me just add a couple of things, Mike. To think conceptually about how it works: When American Robotics deploys a Scout System in the field, they're typically going to get a long-term contract from the customer, say, five years. The idea is that, in the initial year, that subscription agreement covers the cost to deploy the system, and then you achieve extremely high margins in years two, three, four, and five.

Mike Latimore, Analyst

Okay, makes sense. And then just to be clear, on the data that you're gathering, is this largely video imagery data that you're collecting? And I’m guessing it pulls in a lot of data. Is there some AI in the background that sorts and analyzes the data and sends back the most important stuff?

Eric Brock, CEO

Yes, absolutely. It's been a focus of ours to create and deliver a full stack complete solution, which is again one of the reasons why we've partnered with Ondas. Not just delivering raw data to the customer, but actual analytics and actionable information is part of our product stack itself and there are multiple steps to that. So, actually going back to the first part of your question, what type of data do we collect? That depends on the market and the use case. Our system is largely payload agnostic. In agriculture, that includes RGB multispectral. In industrial markets, it is typically RGB and thermal. There are other types of sensors on the horizon, such as methane sensors, for example. Typically, we're talking about collecting a very large amount of image data, on the order of 20 gigabytes a day. That is offloaded to the base station and the base station, this functions as an edge computing center, which is a key step to making this work. Those images are processed and analyzed at the edge, and the finished product is uploaded to the cloud through our front-end software called ScoutView. From that point, you can apply additional AI to analyze that data.

Mike Latimore, Analyst

Okay, great. And then just on the core business here, can you talk a little about the timing of this lab, took some orders from the lab trial? I think this quarter. Is the success of that critical to the eventual commercial orders you get in the second half, or are there a couple of rails that might sort of buy regardless of that lab?

Eric Brock, CEO

There is going to be rail activity regardless of the lab; however, the lab is important and it's a place where all the rails come to collaborate on that shared system we've talked about. It is an important step, and as I highlighted earlier, it validates the market opportunity even further because we're emerging not just with the Wireless Comms Committee, but we're now interacting and engaging with those senior operating committees—those folks who are going to use the network.

Reese Moser, Co-Founder and CEO of American Robotics

Hey, Eric, maybe I can jump in. Although they work collectively, they also obviously, the rails work independently, and so the number of applications continues to grow concurrently. So, I think the lab is critical, but there’s also lots of activity going on individually with the rails.

Operator, Operator

Today's next question comes from William Morrison of National Securities. Please go ahead.

William Morrison, Analyst

Hi, Eric. Hi, Reese. A couple of questions—sorry, if you hear any construction going on in the background, we have some hammering here.

Reese Moser, Co-Founder and CEO of American Robotics

No problem.

William Morrison, Analyst

A couple of questions, Reese. Do you have—does this cloud link also have a WiMAX radio, or do you have a radio in there? And if so, are you going to migrate this to the Ondas WiMAX radio or software? Also, do you operate with any AI cloud platform like C3.ai or Palantir? How's that work?

**Reese Moser, Co-Founder and CEO of American Robotics **

Yes, that's a great question. The question is, how do we get the data to the cloud? The short answer is yes, we integrate with FullMAX to help to get the information to the cloud. But if cellular connectivity is available in the site that we're operating in, which is sometimes the case, we can also use that method.

William Morrison, Analyst

Okay. And then when you get into the cloud, does it interoperate with different AI platforms, or is it your platform in the cloud?

Reese Moser, Co-Founder and CEO of American Robotics

It is our platform in the cloud, but the system is developed in such a way that we have the opportunity to integrate with other software as well, whether that's a third party or something developed by the customer that we work with.

William Morrison, Analyst

And on the drone itself, is there any compute resources like Intel NUC or anything like that?

Reese Moser, Co-Founder and CEO of American Robotics

On the drone itself, the compute and intelligence focuses mainly on mission planning and intelligent flight dynamics, such as precision landing. The data itself, from a customer perspective, is stored in raw format and then offloaded to the base for processing after the flight.

William Morrison, Analyst

Can you provide an idea of what your pipeline looks like and when you expect to start ramping in orders?

Reese Moser, Co-Founder and CEO of American Robotics

Yes, absolutely. In coordination with our R&D efforts over the past five years, we've been building up a deep customer pipeline in anticipation of our recent FAA approval. Now that we've achieved that milestone back in January of this year, we're looking ahead to deployments with a number of Fortune 500 companies across the U.S. and across multiple sectors, including energy, agriculture, and rail. Our immediate focus now turns to building out our team and inventory to support this interest with initial target deployments in Q3 and Q4 of this year.

Operator, Operator

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn it back to the management team for any final remarks.

Eric Brock, CEO

Excellent. Thank you, operator. I'd like to close by reminding our investors that Ondas is bringing tremendous value to the critical industrial and government markets we're targeting. We're focused on delivering big networks for important end-markets, and we're proving this with the Rails and AURA, and the flywheel is working. Today's announcement with American Robotics is proof of our commitment to bring valuable and complete next-generation solutions to these markets. Adding the industrial market's best drone platforms via American Robotics' Scout System is a huge win for our customers and investors. So, to close, I want to thank you again for joining the call. I also want to express gratitude on behalf of the entire team at Ondas for your support. We began the year with terrific momentum, and we look forward to sharing updates on our key initiatives over the course of the year. Thanks again for joining us this morning.

Operator, Operator

This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.