As Anticipated, Extended Timelines and Supply Chain Delays Disrupts Q1 Results, But Ondas Long-Term Opportunity Remains Massive - BUY
Ondas ONDS 0.00%↑ reported 1Q24 results that fell below consensus expectations, as extended timelines related to the Class 1 railroad network upgrade and supply chain disruption in their Autonomous business impacted sales in the quarter. While Management was disappointed with their 1st quarter performance, the Company sounded very upbeat on their outlook and growth accelerating in 2H24. Ondas has not provided quantitative 2024 guidance, but continues to expect to generate significant revenue growth for the full year. Shares traded down ~8% on these results.Â
While discouraged with Ondas results, as we highlighted in our initiation report we expected these large network upgrades and drone deployments will take time and anticipate revenues can be lumpy quarter-to-quarter. Although our biggest concern around additional capital needs remains present, our positive outlook on Ondas long term remains unchanged. We believe Ondas Networks and Ondas Autonomous are strongly positioned in two robust secular tech trends that are both still in the early innings of adoption. Although the company will need to raise cash, which could include spinning out the Autonomous business, we believe the stock accretion opportunity significantly outweighs future dilution. In turn, we remain buyers of Ondas with a 3 - 5Â year horizon.Â
Key Results vs Consensus Expectations
1Q24 Results
Revenue $0.6M MISS consensus $3.8M
Adj. EBITDA ($7.7M) MISS consensus ($6.1M)
Key 1Q24 Earnings Takeaways
Ondas reported 1Q24 revenues of $0.6M, which were down 75.9% Y/Y and came in well below consensus expectations ($3.8M). Ondas Network revenues were $0.3M, down 72.4% Y/Y. The decrease in Network revenue was primarily a result of extended timelines related to 900 MHz activity with the Class I railroads. While discouraged with the delay, Ondas still met meaningful milestones in the quarter. They progressed field activity in the 900 MHz network which has led to an initial system-wide order received by their distribution partner on behalf of a commuter railroad in the Southwest. In addition, they successfully completed backwards compatibility and live traffic operations with a Class 1 railroad, which the Company believes will lead to commercial volume orders. Lastly, Ondas announced a new $2.8M order for a new, on-locomotive radio in the 220 MHz frequency band, which signals an expansion of their addressable market in the North American rail market beyond 900 MHz. Although timing of ramped deployments is uncertain, Management highlighted deadlines for railroads to move off the legacy network are September 2025, with a buildout requirement deadline of April 2026. This gives us confidence that if delays continue throughout 2024, the company will be in position for a material ramp in 2025. Ondas Autonomous business generated $0.3M in sales, which was down 78.6%. Supply chain disruptions connected to the Gaza War, was the primary driver to the sales decline. That said, the company highlighted that their pipeline in US, Europe and Dubai continues to expand. They expect growth to resume in the second half as Optimus System inventory availability improves and Iron Drone production commences. Ondas remains upbeat about the Autonomous seeing strong growth on a Y/Y basis.Â
Due to the significant revenue shortfall, Ondas reported gross margins of -63.2%. However, inlight of the revenue decline, the Company managed to control opex costs and reported an adjusted EBITDA loss of $7.7M, which is an improvement from an adjusted EBITDA loss of $10.2M in 1Q23. Given near term deployment delays, the Company is expected to keep tight control on costs. Ondas ended the quarter with $14.6M in cash, which includes ~$8.2M in equity capital raised in the quarter. Ondas is currently evaluating their options to raise additional capital, and we believe we will get more detail about this at their Investor Day in 2Q24.
Ondas does not provide formal 2024 guidance, but continues to expect to generate significant revenue growth for the full year driven by growing customer activity in both business units with orders and backlog increasing in 2H24. Revenue visibility is expected to improve in H2 as Ondas Networks advances systems integration efforts with the Class I railroads in the 900 MHz rail network, Optimus System inventory availability improves and Iron-Drone commercial bookings and production advance.
5-Year Financial Outlook
Following 1Q24 results, we lowered our 2024 estimates due to timing delays, but expect these opportunities to still materialize in the years to come, leaving our 2025 - 2028 mostly unchanged. We now forecast 2024 sales growing 27.5% Y/Y to $20.0M, which is down from our original estimate of $31.1M. Beyond 2024, we expect accelerating new railroad and commercial drone deployments to drive at least 25%+ annual revenue growth for the next several years, exceeding ~$110M in revenues in 2028. However, we believe revenues on a quarterly basis will be lumpy given there is some uncertainty around the timing of these large railroad and commercial drone deployments. We do want to highlight current consensus estimates imply revenues growing ~220% Y/Y to $79.1M in 2025, which we believe is a bit aggressive. Although the TAM Ondas is addressing in both markets is massive, we believe there is risk of these estimates coming down as deployments likely take time to ramp.Â
Due to the tough Q1 we now expect gross margins to improve 310 bps in 2024 to 43.8% driven by scale efficiencies in 2H. We continue to believe the company will benefit from further scale efficiencies in the years to come as the business scales, and exceed gross margins of 60% by 2028. We expect Ondas to report a larger than expected adjusted EBITDA loss of $23.6M in 2024. As revenues scale up in the following years, we believe Ondas can exceed 15% adjusted EBITDA margins or $17.4M in adjusted EBITDA by 2028. Improving profitability will also translate into improving free cash flow, but we do expect the company needs ~$30M in additional capital to fund our current growth trajectory.
Below is an overview of our 5 year outlook with a full financial model here.
Source: Industrial Tech Analyst
Investment Thesis
We believe Ondas Networks and Ondas Autonomous are strongly positioned in two robust secular tech trends that are both still in the early innings of adoption. First, Class 1 North American rail operators are in the beginning of a major network upgrade cycle. We believe Ondas Network’s FullMAX platform will be an attractive solution to drive more intelligence to the edge for rail operators, and allow the company to capture a meaningful portion of this estimated $1.3B upgrade opportunity. Second, we believe the commercial drone industry is growing into a multi-billion dollar annual market opportunity as significant advancements in automation and AI are driving adoption across a growing number of verticals. We believe Ondas Autonomous recently awarded airworthiness Type Certification for their Optimus System makes them an early leader in the quickly emerging commercial drone industry. We anticipate the combination of a robust railroad upgrade cycle and accelerated commercial drone deployments can drive 25%+ annual revenue growth over the next 5 years. Although Ondas may need to raise additional capital to fund this aggressive growth, we believe the stock accretion opportunity over the next 3 - 5 years outweighs the possibility of future dilution. Our robust outlook drives our bullish stance on Ondas shares and price target of $2.91, which equates to ~280% upside at current levels. We lowered our price target from $4.52, due to higher share count post equity raise, lower net cash balance and lower estimates.Â
As shown in our table below we use a 5 year DCF model to value Ondas shares. Our price target is driven by a terminal EBITDA multiple of 25x, which is in-line with our high growth industrial tech comp group.
Source: Industrial Tech Analyst
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