Good afternoon, everyone, and welcome to Elsight's presentation of our financial results for the first quarter of the second quarter of 2025 and the first half. My name is Susan Becker, and I'll be your host for today's session. First, I'd like to extend a warm welcome to the board members joining us today. David Furstenberg is with us today. And following the presentation by our CEO, Yoav Amitai, we will open the floor for a Q&A session where Yoav will address your questions. You're welcome to put your questions at the Q&A on the bottom. And anybody who does not receive an answer to their question will get their questions answered by email following the presentation. And you're also welcome to register for our newsletter. Please go to our IR page, or you can write us to ir@elsight.com.
Now, before we begin, I'd like to remind you that today's presentation may include forward-looking statements. These statements are based on our current expectations, assumptions, and projections, and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For a detailed discussion of the risks and uncertainties associated with our business, please refer to our most recent financial reports and disclosures available on our website. Please also note that we undertake no obligation to publicly update any forward-looking statements unless required by law, and now I just want to remind you to click on the Q&A button at the bottom of your screen, and we will address as many questions as permitted at the end of the session, and now, without any further ado, I'll hand the baton over to our CEO, Yoav Amitai, to begin today's presentation. Yoav, over to you.
Thank you, Susan. Hi, everyone. Thank you for joining us for this webinar to summarize the second half and, in general, speaking about our capital raise that we have done recently and all the other updates that we have. I think overall, as I always also said in our previous webinar, and we're trying to do those on every quarter, we're in a super exciting time in the company. We had a great first quarter in this year. The second quarter was even better. We are seeing these trends moving forward based on what we're seeing in the market and our pipeline and everything. I'll try to cover all of it today. Starting from the beginning, for those of you that are with us for the first time, Elsight is in the highly reliable communication space.
What we do basically is highly reliable wireless communication, mainly for on-the-move application. Something like four and a half, five years ago, we started to focus the business in uncrewed systems, which include drones, ground robotics, sometimes maritime robotics, and so on. Starting in commercial market, doing different types of missions and use cases there, like last-mile logistics, the drone deliveries, inspection, public and private security, agriculture, and so on and so forth. Something like two years ago, we started to be pulled into the defense market, and today we're playing in both of these markets, the commercial and the defense market. Each one of those has a different go-to-market strategy, different kinds of customers, but the good thing about it is the Halo, which is our product. I'll talk about it later. It's kind of one size fits all.
So we are using the same unit for those applications, which does not require us to do any additional developments or anything like that. It's just both of them using the same platforms that we're utilizing. In terms of our place in the market, we're mainly going after what's called BVLOS in this market, Beyond Visual Line of Sight, which sits both for the distance between the operator and the platform and the asset, but also sits in how many different platforms a single operator can operate. So it's enough that you have two drones that you're operating with a single operator, even if it's only 100 meters away. That's already BVLOS. And just to give you an example of what are the types of the markets or where we're playing within the market.
In terms of where we sit and all the excitement we have because of the results that we'll walk through during this presentation, it's all coming from very strong tailwinds starting in the geopolitical environment, then tails into defense budgets and also other trends that are currently happening, which help us grow the total addressable market by a couple of orders of magnitude for us, also grow our pipeline, and also growing our top and bottom line, as you saw in the numbers in the last four seasons that we put out. And I will talk about it over the course of this presentation.
In the first half of the year, we signed multiple contracts that are super strong from our perspective that just put us in a different bucket of, instead of only talking about the tens or hundreds of thousands of dollars of contracts, we're now in the millions of dollars of contract per contract or per customers. Those contracts have one-time fee as well as, sorry, as well as long-term recurrent fee. We'll talk about the business model of ours and how it works. We're talking about super high-margin business, which on average 75%, 78% gross margin. Again, we'll get to the business model in there.
Looking on where we are today in cash flow positive position, having a lot of cash access based on the first half of the year, we are seeing how in the second half we will become in the profitable bucket and start to actually generate earnings and not only cross this break-even point, but actually starting to create high profits as the business. Looking at our pipeline, it's the first time we're sharing with the market our pipeline, which currently sits in $151 million. We'll talk about what are the different buckets in this pipeline, how we convert them, and what we expect it to look like moving forward. In terms of production capacity, today we have $70 million in production capacity per annum.
Part of the updates that we gave is how we're going to increase it from $70 million-$150 million in capacity in the second half of the year just to be prepared for the coming contractor that will come, also to diversify more our contractor, our contract manufacturers that are doing the system for us, and also be in the local market or in the target markets, like we said in the fourth slide, that that's going to be in a NATO country in Europe to do a local manufacturing there, again, based on opportunity. So looking on the high level, if I'm looking today between the commercial and defense market, on the short, medium term, we do expect most of the revenue to come from defense because of those geopolitical environments that we'll talk about.
Over time, we are expecting and based on our analysis that over time, the commercial market will become bigger than the defense market. The same inflection point that we're currently seeing in the defense will happen also in commercial. We need to make sure that we're continuing investing in this market, having our market share there, having our presence there with our design-win customers to make sure that when this inflection will happen, that will be the next stepping stone for us as a business, and we will benefit from both markets. That's how we see the picture today. Sorry, at the end of the presentation, I'll also talk about some of the initiatives we're going to have as part of this capital raise and what we're going to do there. Before that, a little bit of charts just to show the numbers.
So we already recognized $4.8 million. Just know that everything is U.S. dollars. Already recognized $4.8 million in revenue in the first half of the year. Like you can see, we still have a backlog of orders to be delivered in 2025 of $16.25 million. So that's the revenue that we are currently having. If we will stop selling today, that's the revenue we'll have for the year before recurrent revenue. Obviously, we're not stop selling, and we do expect this number to grow in 2025, as well as making the order book or starting to build the backlog for 2026 and beyond and making those numbers much, much higher.
In terms of the operating cash flow, like I said, it's the first time for us that we have the first half of the year, which is cash flow positive, with nice, call it $6 million cash access that we have generated. On the cash receipts, because of how our business model works and the fact that we're getting 40% down payment from a lot of those contracts that you see on the top here, a lot of 40% of it was already paid. So that's why you see the cash receipt pretty high with $9.2 million in the first half of the year. And looking at all those measures, we are currently experiencing a very big surge in demand and the top line and also pipeline growth when we're moving forward.
Maybe to take you through why now and why all of it is happening, and I want to talk about three main trends that we're currently seeing in the market. The first trend, and here we put defense budget out of GDP for NATO countries, which we all know about three weeks ago, NATO countries announced that they're going to increase their defense budget from 2% GDP to 5% GDP by 2035. We already see start of this growth. You can see the comparison between 2014 and 2024 estimates of where this budget sits, and we do expect this budget to go up. And that's only NATO countries. Obviously, we are seeing all over the world is how much governments today are investing in defense in general. So that's one trend.
The more interesting trend for us, being a big part of the uncrewed system market, is how much of those big budgets that are growing are allocating into uncrewed systems, and we're seeing it again all over the world. Just to give you two examples for this massive change that we're doing, we're seeing this shift. First, in the U.S., for what they call the big, beautiful build of additional $140 billion to their defense budget, 10% of it is going to uncrewed systems, which is massive. In the U.K., another example from the U.K., they just came up a month and a half ago with what they call the 20-40-40 doctrine, which essentially means that 80% of the army equipment budget is going to be allocated for different types of uncrewed systems. Germany and Poland also have the Drone Wall Initiative, and the list goes on and on.
So one trend is the growing defense budget, and the other trend is how much of those budgets are allocated into uncrewed systems, which play very well into our strategy and our total addressable market that is growing. And as a result, we're able to go to more places to increase our pipeline and also show the increase in our sales and revenue in general. The third one that we're seeing, again, like I said, we're talking both about the commercial market and defense market. So the third trend we're seeing is about the commercial market and seeing regulatory approval starting to move. That's a process we are part of this market for the last four or five years. We are seeing it moving slowly.
Now it seems to be a little bit of acceleration there, with just an example from mid-June, about a month ago, that Trump executive orders the FAA, the Civil Aviation Authority in the U.S., to accelerate the processes to integrate drones into the U.S. airspace, commercial airspace, for different types of missions from public safety to inspection to last-mile deliveries, everything that I mentioned before. We have a lot of customers in this space. When I'm saying a lot, just to give you a number on the first half of the year, we had new orders from 74 different customers, some of them in defense, some of them in commercial. So we do expect to have a lot of benefits for us once this commercial market will start to go higher.
I would say that this market. I'm not expecting this market to happen, to go through this inflection point in the next 12, 18, 24 months, but we're definitely starting to see an increase in the orders there and the quantity of what our customers are doing in this space. So it's definitely an interesting space that we are part of. A little bit about our product and what we're essentially solving, again, for those of you that are new to our story. So I'll start with the challenge. When we're talking about remote-operated or autonomous or remote-controlled platforms, and those can be drones for whatever mission, those can be ground robotics, those can be maritime robotics. Communication is a critical element within those systems.
The reason being is because if you want to monitor them or control them or to change mission, or you have platforms that are traveling around and no one knows what it does, that's a big issue, and communication, wireless communication, let alone wireless communication on the move, that's a critical problem that doesn't have yet the ultimate solution. I'm not saying that we're the ultimate solution, but I want to take you through how we are disrupting this market with our approach, which is a big change of what is the usual solutions that are in the market, but in the bottom line, the need is for reliable, high-bandwidth, secure communication. That's what everyone wants. Our solution is a hardware-software solution, sorry, that combines hardware in the edge with software runs on it and also software in the backend.
Our approach is saying that there is no ultimate solution and there are multiple types of solutions. All of them are great from point-to-point radio, like between two points, satellite communication, cellular communication, private and public, and so on and so forth. All of these are great for different use cases, but none of these are perfect for the entire broad needs of the market. Our approach is saying that why would you choose from each one of these if you can take our product and combine the benefits of all of these together into one secure big pipeline of data in a low-latency solution? That's basically what we do. This is how the system looks like, what you see in the picture and what I'm holding here in my hand. That's what actually sits on the drone.
We designed it in a way that it will be modular so you can change different types of communication if you want to put it, for example, 2G, 3G, 5G, LTE, if you want to connect different types of satellite communication terminals from SpaceX, Starlink, sorry, to Viasat, Iridium if you want to connect your radios from DTC, Silvus, Persistent Systems, you name it. Basically, this system is network aggregation. So what we do, we take all those different networks, we break the data into many pieces, and each one of those pieces is going through a different channel. I'll pause here for a second, assuming that some of you have not watched our video. That will be a two-minute video that will explain the technology much better than I, and we'll move on from there.
The drone market is expanding as industries develop use cases to take advantage of drones' flexibility, mission agility, and cost benefits. But maintaining communication between drone and operator is an enormous challenge, especially over long distances. In fact, it's virtually impossible to control drones beyond the visual line of sight. RF is limited in range and reliability, satellite communication is costly and limited in bandwidth, and using just one SIM card lacks the redundancy and coverage required for safe BVLOS operations. That's why we created Halo, our next-generation communication platform, providing superior always-on connectivity and solving the BVLOS challenge once and for all. Halo bonds multiple communication links from different carriers, combining ultra-low latency with high bandwidth, enabling seamless transmission of data. The Sixth Sense algorithm encrypts the data, splits the data into packets, prioritizes, and transmits it through a secure network tunnel.
Halo automatically detects failed communication channels, instantly transmitting the data on an alternate link without the disconnect caused by traditional failover. Halo aggregates 4G LTE, 5G, local RF, satellite communications, and mesh to provide the ultimate connectivity solution. With BVLOS architecture tailored to unmanned operations, Halo enables simultaneous operation of numerous drones from the same control center using Elsight's cloud management platform. Additional flight-related features include mapping and route planning, native MAVLink support, and ASTM-compliant broadcast and network remote ID capabilities. Join the dozens of global partners already using Halo to propel their BVLOS operations forward. Elsight, a new era of connectivity.
As I said, basically what we're doing, we're combining all of those networks together. So if later on we'll have a question about competition, I would say that we're mainly competing against ourselves because we're coming with a new idea, kind of a disrupting technology, and all the others are competitors for us, but they are not seeing us as competitors necessarily, and vice versa, because sometimes if there is a drone that's using whatever communication piece, we will come there and say, "Why don't you add our layer of smart comms, which will make your system basically much more productive and in higher performance?" And that's basically what we do.
So taking those trends that I said before of what's currently happening in the market with us being in the right place, in the right time, with the right product, and today, after this first half of the year, actually it's something that started around eight, 10 months ago, that having a lot of case studies in hand of how we are actually changing the real life in the battlefield or in the commercial space on those two markets, that's just putting us in a super interesting position, an exciting point in time of taking over this opportunity, being more aggressive, go to more markets, making sure that we are taking advantage of this time window that we have to grow this business much bigger than what it is today.
Even after we did this massive growth in the first half of the year, and we do expect this trend to continue over the next quarters and the next years to come. Speaking a little bit about our business model and what we're doing there, but I want to start before that with our go-to-market strategy. Our overall go-to-market strategy is what Intel called it in the '70s, design win strategy, which essentially means that we want our customers, which are the drone manufacturers, the prime contractors, the system integrators, and so on, we want them to take our units and to integrate it into their solution.
Then they will use our APIs, they will use our cloud service to get a lot of data, they will use our different tools that we are providing them with. We will increase the stickiness of the product within their systems, not because we're doing it for the hell of it, because we're providing them more and more solutions, more and more features basically they can utilize. By them using many of our features, that will become a very hard decision, close to impossible decision for them to replace it with a competition that will come sometimes in the future, and that's the concept.
So when we're saying that we have 74 active design win in the first half of the year, that basically means that all of these are design win customers, or we call them partners because we're really partners with them rather than customers of ours, and each one of those represents a tip of an iceberg because as long as they are selling their units, their drones, their robots, their whatever, we are benefiting from that by having more, basically, let's call it, it's not a sales channel, but they are increasing the demand that's coming to us. So that's the whole idea of the go-to-market.
By the way, that's the same in defense and commercial market. The strategies or the tactics are different in the sales and marketing, but overall strategy is exactly the same between those two points, and we want to get as fast as possible to the place where they will heavily integrate our systems to their system, and again, by doing that, that's basically where the sales effort has stopped, and from there it will just be to, I'm saying, sit next to the fax machine and wait for orders, but you can be comfortable that we don't have a fax machine in the office, but just as a phrase, so going back to the business model, it's all start with the unit economy, the unit sales of hardware sales. Those are going for thousands of dollars, again, all the U.S. dollars.
Speaking of margins, we sell those in around 78% gross margins that are current average, and it's average because we have different flavors of the product, but that's the average of 78% gross margin, and it doesn't matter if we're talking about big contracts or we're talking about small ones. We're not in a race to the bottom, sorry, and again, I think it's also something that can speak to our position within the competition, but that's where we add in terms of our margins. Attached to that, like I said, every unit is connected to our cloud service, and cloud service is not necessarily on our infrastructure. That can also be on the customer data center, as you can expect. Government clients don't want everything to be on our cloud. They will have it on their government cloud or their data centers, and that's where it sits.
Those are also a big portion of our recurring revenue. Like I said, every unit we're selling, we have the long tail of the sale of the recurring revenue that they will have to pay on a per annum, per unit basis for every unit as long as they want to use those drones that they're using. In terms of gross margins there, and that's, by the way, just to give you order of magnitude, that's in hundreds of dollars per annum that we're charging for that. In the gross margin, if you compare it to other software gross margins, that's fairly low at 71%. The reason is because we build a massive infrastructure based on AWS, Amazon Web Services all over the world, which basically we have the cost, the fixed cost, and as we add more and more systems into this cost, the margins there are going higher.
Just to give you reference, for those of you who don't know our previous numbers, this number in the first quarter was 52%, 52%-55% on average. Now it sits in 71%, and again, we are seeing these trends moving forward. Instead of steady state, once we get to full scale, this gross margin will go much higher and will be around the 85%-90% gross margin on this AllSight cloud element. The last piece, those two, if I'm putting a line here, so those two pieces of the business model are mandatory for every client that wants to use our system, and it doesn't matter which market it is, what region, and what is the use case, they all pay for that. The additional one is the data usage.
Like I said, we're utilizing public networks like the Telstra and Optus or Verizon AT&T of the world, and we saw that it's a big challenge for our customers to go and do contracts with all of those different vendors. So today we're offering it as a bundle, basically, one-stop shop, one invoice, you can get not only our devices and our cloud service, but also the actual data usage, which kind of becomes a mobile network, virtual mobile network operator for those of you familiar with this business model. Today, our gross margins there are on average of 51%. The quantity of it or the amount of it is changing because it's a per-use, so it really depends on the use case of the customer, but that's basically how we saw our margins there and how we price our product there.
Moving forward to the pipeline, and I'm skipping some of the slides that we have in the deck. Feel free to ask if you have specific questions about them. Just want to be focused on the most important parts, so like I said, I'm showing a pipeline of $150 million U.S. dollars in different stages of the pipeline, starting from the bottom of all logs. Those are orders that we already have actual advance payment for them, and then I want to draw a line in the middle of the pipeline between the qualification and the evaluation in progress. The reason I'm drawing a line here is because what we're doing, we're trying very early in the sales process to get the customer to show us that they have skin in the game by having some small orders.
And a small order can be a couple of thousands of dollars or tens of thousands of dollars, not more than that. We just want to make sure that we're speaking with the right person, we have the right champion there, meaning that they know to touch budgets, they know to drive decisions, they know to open us as a vendor in the big corporate, that that process can take long. So all of the customers that are in these buckets, and that includes existing customers and new customers, all of these already have had some level of purchase from Elsight, which means that the conversion on this part of the pipeline is much higher than the top of the pipeline, obviously or not.
We are expecting this pipeline to convert, and some of it will take more time, some of it will take less, but we definitely expect this part of the pipeline to convert because there we have a much higher confidence, let's call it, of where we're at in terms of customers and where it is in the sales cycle stages. The top two buckets of the pipeline are a little different. Starting in the top of the funnel, the identified opportunity, what we call here, those are programs that we know that exist. We already have first touch point with the customer. We haven't heard yet from the customer what is the evaluation process, what is the timeline, how the program is going to look like, but we did start to have the first engagement with the customer.
The qualification, those are customers that went through what we call the discovery call, and we understand what are their processes, what is the timeline they're expecting, what is the evaluation process that we're going to go through, and how we're going to do that, and that's helped us to push the sales through the bottom of the funnel and push it down towards actually revenue and sales. This is the overall pipeline that I wanted to share with you and how the picture looks like. In terms of just taking a use case or case study of how our typical process looks like, it's always start with small orders for this, what we call Smart Start, which is eventually proof of value kit that they can take, integrate with our drones, robots, whatever, start to do evaluation.
Then it's growing into the tens of thousands, sometimes hundreds of thousands of dollars, and from there it's growing into the millions and then multi-millions of dollars, like happens to us in this first half of the year with customers that have the first order, the first small orders grew into hundreds of thousands of dollars, then into millions, and with our capabilities on board, they, our partners, were able to go to their customers, which will be the government entities, the defense entities, or the commercial entities, and go and sell to more entities like that based on our capabilities that we provide them with and based on the tools that we're providing them with. So this is how we're seeing the pipeline growth or how we see, sorry, the different type of pipelines numbers that we have.
And obviously, we are expecting over time to see those numbers converting, and also the number, the top line are growing as we add basically more initiatives and go to broader markets. And to talk about that, I want to talk a little bit about where we see our biggest opportunities. Today, for those of you who don't know, we have all our operation is done from Israel. Sales, marketing, development, everything is done here. Part of the initiatives we have as part of this capital raise of what we're going to do, like I said in the beginning, being much more aggressive in our go-to-market, have localization in target markets where we see the biggest opportunity basically.
To start with, we are seeing the North America, U.S., mainly U.S. and European market, and that's a different part of Europe that we have the biggest opportunities, both from low-hanging fruit, low-hanging fruits perspective, but also those fruits are very big because of all the trends that I mentioned to you in the beginning. As I said, we do see the vast majority of our revenue in the next 18-24 months to come from defense. This is where most of our focus is. Having said that, we also open it for commercial and making sure that we have the ground for commercial and we have the customer base and prospect base. Once this market will go into this inflection point that will happen, we will be there to be the biggest or one of the biggest beneficiaries from that.
There are different opportunities in the U.S. and in Europe. What we're expecting to do is to open local offices in those regions, starting with sales and support initiatives and growing from there as we win more programs, making our pipeline bigger and adding, basically, and iterate on that. I would say that those initiatives should do two things for us. That's on the short, medium range. The first thing is looking on our pipeline, having people with boots on the ground, that will help us to accelerate those pipeline conversions because we will be closer to the customer physically, culturally, by language, by any type of any measure basically, which will help us to convert this pipeline.
In addition to that, the fact that we are closer to those kind of customers or partners or prospects, that will also help us understand what other opportunities we have in the market, whether they are net new or taking existing one and broaden it to more type of solution we can have there. Just to give you an example for a mega corporate that we're dealing with, taking Northrop Grumman, we announced to the market that we were chosen to their, what they call, FedTech Accelerator Program, which is a 12-week program that we're basically introduced with the different programs that they have internally within Northrop Grumman. We're only in the beginning or we are actually in the middle of this program. We still have pitch day and we still will have a mentor that will take us through those programs.
But just to give you an example, this is a company that has multiple programs siloed. None of these are connected to each other. And just for us to discover and to know everything that is happening there, only that can take a long time and we need to be very close for them, very close to them to accelerate that. So that's just an example. And just to give you a hint, this is not something that is in our pipeline because we put much more tangible opportunities in the pipeline. So the entire pipeline is not including Northrop Grumman as an example. We're talking about more tangible opportunities, but that's just how those local boots on the ground will help us to accelerate and to grow also the top line and to accelerate the revenue on the bottom line by converting those sales.
In terms of our scalable capabilities and what we can do there, I'll start with the fact that all our IP today is in the software. We do have; that's a proprietary hardware of ours. I always say for those of you who are new to those webinars or to us, to Elsight, I always said that Elsight is a software company that happens to have hardware. The reason is because we never found a hardware that will be good enough to our partners and to us or our needs. So we had to go and develop hardware. But all the IP, most of the patents, all our efforts are developed or focused on the software level. Obviously, we do have a lot of hardware iteration, but the software is the head of the system.
The reason I'm mentioning it is because one of our objectives when we went out with this piece of hardware was to make it as simple as possible. I mean, we don't really care if someone will do reverse engineering on the hardware and will go out with exactly the same kind of hardware. That will be a shame, but it won't be a big hit for our IP or for our production or anything like that. The reason we went in this direction is because we wanted every electronic manufacturer to be able to manufacture it for us. So basically, it's more of an integration of off-the-shelf components. We don't have any chip that we design on the chip level, on the ASIC level. We just integrate different off-the-shelf components into a system that is our proprietary system.
I'm telling you all of that just to show how easy and fast we can scale our production capacity if we will need to do that by using another contract manufacturer. So today we have three different contract manufacturers. We are not using the entire capacity of those contract manufacturers. The reason we have three of them is mainly for redundancy to make sure that we are okay. If something happened to one of them, we still have the other two to handle it and vice versa. We did announce to the market that we're going to open a new contract manufacturer in Europe, in NATO country, for multiple reasons. One is to increase the capacity to $150 million annually manufacturing line. Second is to be, again, closer with the manufacturing. Sometimes we're seeing programs that require local manufacturing. So that's what we do.
Third is to show that we are able to take our manufacturing lines and to put it elsewhere and to start manufacturing there as a mitigation for future problems that we might have, anything from U.S. tariffs, which currently we don't see any challenge with it, but just for future risks that might come, we will be able to mitigate them, and in general, to have local manufacturing, many defense clients want it to be like that, and they get different reimbursement on local manufacturing and so on. Obviously, de-risking our having all the contract manufacturing in the same region and start to spread it and to have a much more sustainable and resilient supply chain.
The bottom line, which I want to say, is that all of these processes of opening new contract manufacturers, which for us is mainly qualification, quality assurance processes, and so on, all of these are super light in investment that we need to do in CapEx investment. We're not building our own manufacturing line. We're not expecting to invest millions of dollars. It does have some level of investment, but it's super low investment. It's, like I said, very attached to the different processes and qualifications that we need to take our contractors through, but not more than that. Speaking about IP protection, I saw there is a question about that, so I want to answer it upfront and also to talk about it. On one hand, we have the obvious protection of IP and patents. We have 13 families of patents.
Like I said, most of it is on the software part of it for future ideas that we have, which that's great. But for us, for sure, in the defense market, that's not the best protection to have because in the end of the day, I'm not expecting big governments, whatever they are around the world, to say, "These guys have patents. We're not going to do what they do." Having said that, the real moat that we have around us, the way we are seeing it, is the accumulative experience that we accumulated over the time. So today, we have more than 400,000 flight and drive hours in real-life environments. That includes commercial and defense from border patrol to private and public security deliveries, actual battlefield experience, and so on and so forth. Sorry.
What we're doing with all of those hours, we're collecting a lot of data, taking this data lake backwards and developing on that the product in a better way, making our algorithm better and making the feature more feature-rich and so on and so forth. I think that's the real motive of us. If you want to compare it to other SaaS models, that is kind of a network effect that we have because today we're adding a lot of hours on a daily, hourly, secondly basis, actually. Even as I speak now, our systems are around the world doing work. We're collecting the data, taking this data back, and making our algorithm better. That's the real motive around the technology. I'll also add that if there is one thing that you cannot buy for money, it's time.
Having all this extensive experience, that's definitely one of our biggest advantages of what we have. Looking forward in product development, and I was talking a lot about the market and what we're doing today, but also want to talk a little bit about what we're expecting to have moving forward. Starting with what we're going to do is develop what we call Halo 2.0, which essentially will enable us more processing power in the edge to enable different AI edge applications to run there. We are going to build kind of an App Store, if you want to reference it, to our real life. Think about what Apple has on their phone with the App Store.
What we're going to do is we're going to develop kind of an App Store so we can develop applications for this, and third-party developers can also develop applications for that with the idea to increase the recurrent revenue per unit or what we call in the SaaS world, the ARPU, average revenue per unit. So I'm not expecting the price of the device on the hardware to be higher, but I do expect the recurrent revenue to go higher because we will add more and more services. It will also add to the stickiness of the product that I mentioned before and will position us in a much centric location within those platforms, and it doesn't matter if we're talking about aerial vehicle, ground vehicle, or over-surface maritime vehicle. It's all the same of building it.
Once we have this foot in the door of having the hardware on board, then adding more software layer on it, it's become less complex. I'm not saying that it's easy, but it's becoming less complex and less challenging, and then we can open this door for new vendors to come in and to partner with us to develop their own application, and that will obviously also be driving our revenue stream by having our cut as part of what they're doing, exactly like those models of how those App Stores are looking like, so that's what we do. Just to give you some examples for features that we are already working on, from positioning, we see a big challenge with finding in a non-GNSS environment where there is no GPS or there is spoofing or jamming of GPS. How do you find the location of the drone?
That's a super interesting use case that we already have some POCs with customers. Video encoding, so how we can do the actual video encoding as part of what we're doing and so on and so forth. Those are just examples of features that we're going to do. So all of that, that's kind of evolution of where we are today and where we're going to, how is the evolution of the roadmap and the product is going to look like based on customers' needs and discussion that we have with customers, understanding of trends in the market, and so on. Another initiative, it's more of a revolutionary initiative and not evolutionary initiative, which is eventually in today's world, I'll start, I'll take it one step backwards. In today's AI world, everything is about data, reliable data and structured and unstructured data.
Those that have actual reliable data from actual fields deployment have a very strong asset like a gold mine in their hands. We have those 400,000 flight hours and drive hours that I said that we accumulated and still collecting on a daily basis, taking this data lake and developing on top of it more initiatives. I won't go into specifics here, but we actually already started to develop something that is going to go for a new market. It's adjacent market, not in the drone and not in the uncrewed space, but adjacent to that, but utilizing the data lake that we collected using our market access, let's call it, and our connection in this market. I would say that this initiative, when it will be the right time, we will announce it to the market and we'll talk about it.
I would say that it's going into a very mature market, which we believe we are going to disrupt this market with the new technology that we're going to come with, and we do expect it's not something that is going to take us three years to get there in our timelines, and when we are expecting it, we expect to have the first paying design partner customer within the next eight to 12 months, so this is the timeframe when we expect to have an alpha or a POC for this product, and from there, we can iterate. I would say that this can be, that alone can be a new kind of company going to a very big, massive, addressable market, and that will be a big part of the investment that we're going to do.
So before I open it to question, I just want to summarize all of it in saying that I think we showed the market that we are able to deliver, basically. We are executing well, and we have the strategy in place of how to take it and make it much broader with the different initiatives I said from sales and marketing, from R&D perspective and product development, and making sure we're doing it efficiently and making sure that we're executing because in the end of the day, it's all about execution. And I think even though we had a very, very strong first half year, I think we're literally just scratching the surface. For us internally in the company, I would say that we're super excited of where we're at and what is the opportunity that we have ahead of us.
Today, after completing this capital raise, mainly to go harder to the market, being more aggressive in the sales and marketing activities and product development activities, we are well equipped to take over this opportunity. I think it's a super interesting point in time to be part of the Elsight journey. With that, I will open the floor for questions, and Susan, you will take us through that.
Thank you, Yoav. First, I'd like to acknowledge our board member, Howard Digby, who had joined us much earlier in the call. The first question is, what is the gross profit rate and the net profit rate?
So, I mentioned over the presentation, I mean the gross profit on the product. I would say that currently we're running a super lean organization. So we also will be able to show net profits on the other side that will be higher because of the way we're acting, and that's how we will continue to be super-efficient in our investment and making sure that every dollar we're putting into whatever initiative we're doing, either sales and marketing or product development, will result on the other side in more than $1 or $1 or $2. That's how we play.
I called out the gross margins. Those that look on our reports and financial reports can understand how the bottom line will look like. Like I said, we do expect the second half to be already in profit to actually start to generate profits. That's, I think, what answered this question.
Thank you. Next question. Can the system be defeated by jammers, such as referring to DroneShield, DRO? Jammers are now endemic in Ukraine, and to defeat this, they use fiber optic fixed wire, which obviously limits range.
Yeah, so the last point is exactly right. We are not seeing fiber optics as competition for us just because those are more tactical for super low ranges and also very tactical when we need to not need to have line of sight, but you cannot do a lot of maneuvers if you have trees or buildings or so on if you have a fiber optic tail for the drone. Speaking about the first point, I think that's the reason, and not commenting on specific regions or specific technologies for EW, for electronic warfare, I would say that what we're doing basically is we are exactly overcoming those systems by utilizing the entire spectrum and the entire set of technologies.
When we see a jam in one spectrum or when the system senses that we have this kind of spoofing or jamming, that will automatically or actually concurrently use the entire spectrum to overcome that. I would add that today we are operating in many different very challenging EW environments, and we have great feedback from different customers around the world. So I think that's a big part of our win rate is exactly in this point of bringing the right solution and overcoming some of those EW threats or challenges.
Thank you. The next question. The company L3Harris also markets a BVLOS solution. They quote, "The first multi-use broad-purpose network of technologies that enables commercial UAS to fly much farther and safer BVLOS in national airspace, the L3Harris UAS network." How does Elsight solution differ from L3Harris?
So there are a lot of companies that are talking about frequency hopping and those SDR type of networks. L3Harris is one of these. Obviously, we're in touch with them and others. And this is one example out of many companies that are saying that this is what they do, and they actually do it. The way they're doing it is by utilizing their proprietary network. What we're doing differently is that we're saying we're not building any proprietary infrastructure. We will utilize whatever infrastructure you will have. That's included, by the way, L3Harris infrastructure. So if you have a radio that works on this network, we are able to use that, and we don't require any pre-integration to our product. So if you are Mr. Drone Developer, develop your own radio, we don't need to do any pre-integration with you.
You just plug it to us, and what our algorithm will do, it will learn this new link and start to utilize it as it can based on quality of service. So it's latency, bandwidth, jitter, and other parameters that we're measuring on every new link that is connected to us. And over time, we're learning those links and making those ratios much better. So L3Harris is a good example for one of these companies that are providing great communication products for different purposes. But again, they're building a proprietary network. Our statement is that, why would you rely on a single proprietary network if you can utilize the entire spectrum of technologies and infrastructures?
Thank you. Next question. What is the percentage of income between Halo and AllSight?
So, I'll give it on the unit economics level. I would say that every unit that has been sold, every Halo unit sold, has the long tail of the AllSight's recurrent revenue that it has to have. I would say that today we are charging for the AllSight cloud or the recurrent revenue; we're charging around 20% per annum from the hardware cost, and playing with the numbers there, I think it's enough information to do the extrapolation. Obviously, I'm not going to talk about specific dollar amounts just because we have a lot of competition and we want to keep it like that, but I think that's enough information so you can iterate or extrapolate from there what is the split between AllSight and one-time or recurrent and one-time. I will add another point that those drones are usually in use between three to five years.
The lifetime value of a platform is between three to five years, very dependent on the use case, obviously. Some of them are much shorter, some of them are longer, but that's as a ballpark if you want to do different models and on how it can look like.
Thank you. Do you have any feedback about why Walmart did not proceed with DroneUp?
We don't have a specific comment on that. It's about commercialization, I guess. I would say that in general, this commercial market of drone deliveries, and we're in touch with some of the biggest players in this market. It's more about proving the concept of the unit economics that it can work rather than doing actual business. So the companies that are now in this business are investing a lot in growth out-of-pocket investment and not necessarily generate revenue.
I think once this point will be proved and it's obviously very clear how it will going to get there, then they will start talking about how they actually are making their products much more reliable and much more sustainable. And that's our time to get into those products. Walmart is still doing their initiative. They're growing it slowly, but growing it. And we're definitely looking on this market as, like I said, in general, the commercial market is a super interesting market.
Are you able to tell us who the third-party data storage providers you use?
Data storage, we are using, I'm not sure I understand the question, but if I understand it correctly, today most of our infrastructure is built on AWS, Amazon Web Services. We also utilize Azure, which is Microsoft, and GCP, Google Cloud Platform. We use all of them all over the world.
We want to be as close as possible to the operation because of latency measures. So if I understand correctly the question, this is where we store the data. If you're talking about the airtime, which we actually are selling, so we are using many of them. Today, we can offer SIM cards of network all over the globe, literally all over the globe, and customers are buying it all over the world based on contracts that we have with local providers and worldwide providers and so on. That's included, by the way, cellular and satellite. So that's what we're doing today. I hope I understand your question correctly and answer it.
Hi, Yoav. Well done on the first half and the recent capital raise. You mentioned now being well-funded to pursue organic and inorganic growth opportunities. Are you able to provide some additional color on the kind of strategic opportunities you are looking at or would be interested in looking at?
Yeah, of course. So I think on the organic growth, I spoke about it over this presentation of saying what are the different initiatives we're going to do in our current market and also in new market. I will take it even backwards.
I would say as a CEO, I always said since I became the CEO of Elsight four and a half, five years ago, I said that for me, a small company like ours needs to be laser-focused to know exactly where we're going to so we can create those spark aha moments to our clients and customers saying, "This is the solution I was looking for for a long time." Today, I think we're already proved that we can start broadening that and not only being this laser-focused, but starting to go into adjacent markets and starting to broaden it based on the success we have, not doing it too fast, by the way, but doing it in a very calculated way and growing the market and growing the direction we're going to.
Going back to the question, when we are looking on the market today, it's a super fragmented market. There are a lot of companies developing very interesting technologies in different parts of this ecosystem. I can say that we will not go, most probably we will not go to the vertical direction, meaning that going to be a drone company for us, it just will be a race to the bottom. It will be to compete with many of our customers. We don't see a lot of competitive advantage we can bring there. We can bring them. So that's not our direction. Direction is more of horizontal, seeing what other needs there are on those platforms, understanding that we have the foot in the door.
Now, as we will add more tools, let's call it, that will be easier upsells or cross-sells that we can do with our existing customers. It will either be new, interesting technologies, which are still small and will be interesting and will be aligned with our strategy, or entities that will give us access to new customers or new markets that we currently don't have access to, which will help us to accelerate our go-to-market strategies.
How quickly do you expect recurring revenue to become the majority driver? What gross margin do you anticipate on that recurring mix?
On the recurring, we anticipate, like I said, we anticipate that to get to around the 85%-90% gross margin level. That's what we expect it, sorry, to be once we're getting to scale.
In terms of the split of when we're expecting it to happen, I do expect over time that the vast majority of the weight will move from hardware to recurrent or to software, let's call it. The reason being is because every unit we're deploying has this recurrent fee attached to it. So as we deploy more and more units, we will see the growing recurrent revenue happening. I will comment on that. I would say that I think that in the short term, we will see more on the hardware just because we are currently accelerating our deployments. In the first half, as you can understand from our numbers, we deployed much more units than what we deployed in the entire previous year.
And we do expect the second half to be even stronger, more deployments, much more units to go out in the field, which will increase over time the recurrent revenue. But in the short term, I do think that most of the revenue will be in the hardware because of this reason of this acceleration. Once we will get into kind of the more steady-state growth, most of the revenue will come from the recurrent revenue.
Congratulations on the $60 million raise. With so much capital now at your disposal, how do you ensure spending remains disciplined and focused on driving sustainable revenue-generating growth rather than falling into the trap of wasteful scaling?
Yeah, that's a very good question. We ask ourselves this question many times in the last couple of weeks. The answer for that is pretty straightforward.
I would say that we as a business, and that includes everyone here on the call, obviously including the board, including we have here Dan, our CFO, and Oz, our Director of Finance, who sits very tight on the budget and making sure that every dollar we're investing goes to something that will generate ROI. On the other hand, I think Susan can testify on that on the marketing side, and here she is smiling. We are making sure that every dollar we're investing is the right dollar, and I must say that we're taking every dollar that we're receiving from investors. We're treating this on a dime level. We're treating it like it's our own funds, and I think we were able to show it over the years, being super lean where we can be lean, being super aggressive when we need to be aggressive.
And if there is one thing I can assure you here, and I have done it over the last couple of days, is that we will continue to be like that and not spending for the sake of, "Here we are deploying this capital into work." We will be super accurate of how we're going to invest this capital into revenue generation. As I said, all of us are also part of our compensation is based on actual profits and what is the profits that we're creating. So obviously, we're looking on this as well, and not only top-line growth, but actually how we continue these profit margins and how we keep those gross margins. So that's the best answer I can give. But I will say that keep us accountable for that in the following quarters and years.
I think we'll be able to show that we're doing it in a very thoughtful way.
Can your tech overcome EMPs? And if I understand that to be the electromagnetic pulse, a short burst of electromagnetic energy that can disrupt or damage electronic equipment.
Yeah. So I said in general what we cannot do. When we're talking about drones or robots, there are multiple ways to mitigate or to take out those kinds of threats. There are the EW, electronic warfare type of solutions. Those are frequency jamming, frequency spoofing, and so on and so forth. This is where we excel. That's where we have a very good solution. The other part are different kinds of kinetic solutions or takedown solutions like the one that is mentioned in this question. There are laser solutions like EOS.
There are kinetic solutions like different solutions in the market that actually crash another robot into the robot that they want to take down. Obviously, from our perspective, that's not what we do. We're not protecting the entire drone. We're making sure that if the drone is still alive and flying, it will be able to communicate. That's what we actually do. We are not dealing with protecting the entire assets just because it's not our business. And if you have a drone that someone shoots a laser beam and hits it, that will be very hard to overcome those laser beams, or if it, let alone another drone that crashes into your drone. That's not our business.
We have one more question. We're a minute before the hour. Should we take it, Yoav?
Yeah. Let's cover it then.
You mentioned limited competition due to your data aggregation approach. However, others exist in the market, perhaps not in drone applications that aggregate across networks. Examples include Peplink and MIMO Connect. What is Elsight's edge in the market?
So in general, this technology, and it's absolutely right, this question, it's what's called SD-WAN. That's if you want to give it a title or if you want to learn a little bit about this technology and how this technology works. What sets us apart is two main elements. First of all, we were able to take those algorithms and press them into a super light algorithm that requires super light processing power. And this is how we can come with what the industry called low SWaP, size, weight, and power consumption because of the efficiency of the algorithm, not because of hardware capabilities, but because of the efficiency of the software that can run on a super low system.
So that's one competitive advantage that we have. And we're today not aware of anyone else that can do it in an 84-gram system with an 8 by 8 centimeters size. That's one. The second part, one of the reasons why we go to this market, we started as a niche, but now growing, is that how you do multi-path, single, it's getting a little technical, sorry for that, but how do you do single UDP stream over multiple paths? And that's what most of the systems are not dealing with just because it's not a very common use case. And this is what happened in ground and aerial robotics in general. This is what they're looking for, and that's what we do. So that's why I'm not considering any of those, like the Peplink that was mentioned and others as a competition.
They do have a ground system that they put on the ground next to the operator, but we are just in a different market, going to a different direction. And by the way, they have great products. So yeah.
Thank you very much. And this is the end of our presentation. I want to remind you that you're welcome to write to us via ir@elsight.com or go to our website, elsight.com, and you'll find our investor page where you can sign up for our newsletter and stay informed. Thank you very much, everybody.
Just before my thank you, I would say a short note. Obviously, in the last couple of days, we had a lot of calls with existing shareholders and new shareholders.
From where we are seeing it, I must say to all of our investors, existing ones, new ones, and those to come, that like I said, we are doing everything we do and everything we're thinking about is how to make this company greater, bigger, and move faster for the benefits of our shareholders and the benefits of ourselves, basically. The only thing that we will benefit from is if this company will grow from the business. I always say, happy customers drive happy investors, and that's where we are focusing on making our customers and prospects happy so they can continue the business with us. By that, that will create happy investors by showing more results that will drive the share in the right direction. We understand it's all on us now. We have all the tools we need to do that.
We're looking forward to this challenge and this exciting time which we have ahead. So I want to thank all existing shareholders, all the new ones that will come. I think it's a super interesting point in time to be part of our journey. So thank you again. Like Susan said, we are welcoming any questions. If you have any more on ir@elsight.com, see you in the next webinar in the next quarter.