I would now like to hand the conference over to Clive Cuthell, CFO and COO. Please go ahead.
Good morning, and thank you. I'm going to hand over to Andreas, our CEO, in a moment. Today we are using the Investor Presentation that was launched on the Australian Securities Exchange this morning. We will walk you through the pages in that deck, and we will take questions at the end. We will start probably at about page seven, where there are highlights of the year. And with that, I'll hand over to Andreas.
Good morning, ladies and gentlemen. My name is Andreas Schwer, CEO of Electro Optic Systems. You might recall that we joined the company in August 2022, and we are mentioning that the restructuring program, the resetting program of the company, we took out about three years. The year 2024 was the second consecutive year in this process, and it was focused on strategy refinement and portfolio optimization. So in the course of the last year, we have divested our non-core naval Satcom business, EM Solutions, and have earned about AUD 158 million of proceeds on 31st of January 2025. We've decided to focus the company now on two key pillars, two markets which are extremely promising, and two markets where we are very well positioned. One is the counter-drone market, where we are active with two key sectors.
One is the kinetic kill, cannon-based air defense, and one is the high-energy laser business. The second strategic pillar is space control, which we develop out of our long-lasting and existing space awareness and space intelligence business. With the reception of the proceeds from the EM Solutions divestment, the company was in a position to repay the remainder of the borrowings in January 2025. So after having repaid all the remaining debt, the company is now debt-free, and we have a cash balance of AUD 128 million, plus another AUD 40 million of cash security deposits at the end of January 2025. The markets overall are looking extremely promising. Everybody could read the press and the news. What is happening in Europe is bolstering our future expectations even more. We all expect that Europe will increase its defense investments from currently about 2% of GDP to more than 4% or 5% GDP.
So we expect that the budgets of the key Western European NATO countries will more or less double over the next three years, which is better than what we have expected. Further push, and again, this is independent of whether the Ukrainian war will come now to an end or not. If it comes to an end, it would mean that most likely Europe has to station more than 100,000 soldiers with new equipment, which is not available today, into Eastern Europe to secure the borderlines. All that is giving us a great perspective for the next coming years in our remote weapon station business, and now also in the high-energy laser weapon business, where we are close to contract signature in the next few months. I would like to hand over to Clive for the financial review on page number 85. Please can proceed.
Thanks, Andreas. So 2024 gave rise to the highest revenue that EOS has ever achieved, which was AUD 259 million, or up 17% on last year. As many of you will know, the result includes 12 months activity for the business EM Solutions, which we completed the sale of in January 2025, last month. So there's a full 12 months of the business that has been sold in the calendar 2024 result. And obviously, as we've said, the sale of that business has resulted in a significant cash input repayment of debt and positions us for future growth. The results for the continuing business are shown on the bottom left of page eight on the presentation. And happily, the gross margin increased from 45%-48% as we continue pricing discipline.
We'll go through the financials in a little bit of detail later on and touch on a few different aspects there, so with that, I will hand back to Andreas, who's going to continue on page nine.
So as I was mentioning before, expenditures are growing as a percentage of GDP and in absolute numbers. We expect a strong push for our product, even more as we have entered, some of you might remember, we've entered into a framework agreement with our key supplier Northrop Grumman for the cannon delivery, which allows us now to deliver quicker than probably most of our competitors in quite urgent delivery modes to most of our clients across the globe. That is giving us now a leading edge, and we hope to realize some of those opportunities in the course of the next few months. If you go to page number 10, you see how the warfare in Ukraine has intensified on the drone side, whereas the missile attacks go back or go down. The drone attacks are increasing month over month.
That is pushing the need for our products, and I come back in a few seconds and minutes again on the Ukraine opportunity. But this is a scenario, again, which is characterizing the warfare, not only in Ukraine, but also future conflicts. We are obviously going that way and asking for what type of counter-UAS products. Page number 12, product development. We have invested last year a significant amount of effort and money into the development of software by the inclusion of AI features into our product to allow us to have a further discriminator in the battlefield.
AI will help us to better be able to detect and classify objects, drones, and even have an improved tracking capability, whereas one layer above the C2, the command and control, will allow us to operate in mesh networks to communicate in between the weapon stations and to allow those weapon stations in the future to have a kind of protective umbrella around them to protect the vehicles and the soldiers from attacks from the sky. Page number 13, our most recent product development, the R500, has been unveiled last week at the world's largest defense exhibition in Abu Dhabi. The R500 is the first and only next-generation weapon station on the market. It includes all those kinds of features I was just mentioning, and it includes a significantly increased firepower and much larger ammunition capacity and missile and rocket carriage capability.
The R500 has been developed by requirements coming from a couple of our clients. The product development will come to an end towards the end of 2025. We expect the first prototype shootings and demonstrations by the end of the year to both clients, and we are with one of our existing customers in a quite advanced discussion on a very significant contract for this R500, so the R500, again, will be the first of its kind, next-generation weapon station, and once that's on the market, we will do mid-life upgrades over the next years also on our other weapon stations, allowing us to be in the leading position in terms of innovation on the long run. Page number 14 and 15, I don't want to spend too much time.
You can see here that we have been very active in marketing our products at all the major defense and trade shows around the world. We've participated in a very large number of customer live-firing demonstrations. The most recent one was happening in January the last month, where we were also the only company among the very notable international competition. We have been the only company shooting down 100% of the drones. The next best in class was another company with 25% of shot-down drones. So also here, we marked the benchmark and giving us further confidence that the future positioning of the company in the counter-drone market is looking really very promising. Let's go to page number 16. In 2025, the actual calendar year 2025, we will focus all of our efforts in building up our order books. We have a significant order pipeline ahead of us.
On page number 16, you can see the kind of order size, the opportunity size of those contracts which are very close to us. We call it advanced. You can see it's a cross-order for product line, R400, R800, and high-energy laser weapon business, which comes into play now. And if you look further down the pipeline, where we are also in other cases negotiating, it's a wide range of products with a wide range of customers globally distributed with a very significant number. So we are very optimistic in terms of order book development. Last year, the order book development was disappointing. It was not disappointing because of any potential loss of a contract that did not happen. All of the contracts which we were expecting to sign had been postponed by the client into 2025. So all of that opportunity should be realized this year.
That's the reason why we are optimistic. We didn't lose a single contract. Page 17, Market Development Ukraine. You might recall that we have quite a significant number of systems operating successfully in Ukraine. Currently, it's about 190 systems. You can see on all the social media channels how our systems are operating, how successful they are shooting down drones and loitering ammunition. There are different configurations donated by various customers and clients. You all might remember that we have signed conditional contracts in 2023 with a total value of AUD 180 million. Those were depending on successful customer demonstrations. Those demonstrations have been done. The customer has formally released our product to the local market, and we are waiting now just for the release of budgets to allow the clients to sign those contracts.
Those budgets could be Ukrainian local budgets from the kind of ordinary household, but could be also donations in cash from Western European countries. All that, obviously, we expect to happen over the next months to come, depending on the political evolution there. Let's move on to page number 18, contract backlog. And I hand over to Clive to give you some further details on those figures.
Thanks, Andreas. So as Andreas said, the contract backlog of AUD 136 million at December 2024 is a bit lower than we had hoped for. And some things that we were hoping to sign in 2024 are now expected in 2025. Some of the big movements that have impacted the backlog, clearly, the EM Solutions contracted order book, which was AUD 171 million at December, was sold in January 2025. And the funds realized, they'll be used in a few different ways, and that resulted in us having no borrowings at the end of January. The Middle East contract, we've had a big contract in the Middle East for a few years that has now been largely completed with deliveries in 2024. We have a very strong relationship with that customer, and we are co-designing a new R500 product with them, Andreas mentioned earlier.
The main focus with that customer is collecting the final 10% retention payment, which is $32 million. And as we've indicated previously, we would like to receive that during the middle of this calendar year. And of course, the opportunity for follow-on orders remains. Also, in Ukraine, which Andreas has touched on a little bit previously, we do have two conditional contracts for Ukraine that are not included in the secured backlog on the left. These did move forward during 2024 with demonstrations being completed. And the main question there is Ukrainian budget availability for purchasing directly from us. So in Ukraine, the government is choosing day by day between buying ammunition, buying different kinds of equipment, and spending on other priorities. What we would say is that the geopolitical situation does not give us significant cause for concern, as Andreas mentioned earlier.
If the hostilities continue, we expect demand to continue, and if hostilities cease, we expect the necessary security guarantees to be provided by others, will create demand for the equipment. Finally, there's a range of many other opportunities that we are working on, and some of these are detailed or summarized on page 16, and page 34 through 37 in the appendix includes, we've included quite a bit of detail on some of the notable opportunities in each of the categories in our pipeline, so finally, I would say that we are still very much focused. As you might expect, the order book is the biggest focus in the company, and we are working hard, and we would expect to grow the order book as we go through the following periods.
That has led to some investment and spending both in sales force and in marketing with trade shows, demonstrations, and other forms of engagement with customers. Finally, our order book of better than AUD 100 million is expected to roll into revenue in calendar 2025. I'll come back to that in a second. If I keep going through the financial updates onto page 20, this is the detailed results for continuing operations that I mentioned earlier. These results on the left exclude the 12-month results for EM Solutions, which was sold at the end of January 2025. As you can see, revenue up, gross margin up by 2% or 8%. Also note finance costs of AUD 25 million in calendar 2024.
We would expect that to come down an awful lot during calendar 2025, given that all of our borrowings were repaid at the end of January. Finally, just touch on the bottom right. We've been focused over the last few years on diversifying the revenue base. And you can see that the split of revenue on the right-hand side of the chart at the bottom of page 20, that the revenue from continuing operations has continued to diversify pleasingly. The US revenue, which is from the Americas revenue, which is shown in black, is now approaching 10% of the group. And that's following a number of management changes that were made during the Europe and US business. If I go over page 21, it shows the status of higher EBITDA. We did get the benefit of an AUD 11.6 million foreign exchange gain during the year.
As normal, we have not included the benefit of that gain in the underlying EBITDA metrics that we quote. If I turn over to the divisional results shown on page 22 in the usual form, so it's shown the defense, space and the EM Solutions discontinued business results here. Defense revenue is up with some investment in sales and marketing, which has impacted EBITDA. Space pleasingly grew quite strongly from just under AUD 7 million to just under AUD 11 million revenue. That includes the benefit of revenue from government customer funding to develop product and capability. And that's consistent with our approach to capital discipline. Maybe finally, I would add that in defense, we're seeing some benefit locally from our activities in North America, and that's contributed to the increase in revenue there.
Over on page 23, that shows the cash flow in the required statutory format, which is the cash flow for 2024 for both the continuing and the discontinued operations. The cash flow in 2023 was especially strong as we had a large benefit from a reduction in working capital that took place, and that gave rise to a very strong operating cash flow that we got in 2023. We also benefited from cash receipts in advance during 2023 and spending in 2024, which is exactly how we want to structure our projects. So the operating cash flow was AUD 30 million negative in calendar 2024. The investing cash flows, which were actually positive, included AUD 15 million of cash receipts for the release of cash security deposits after we completed some operational milestones and delivered some products to the domestic customer in Australia. And that released some guarantees and bonds.
Obviously, we spent money in operating cash flow and got some guarantees back, which benefited the investment line, as I just said. In the financing line, which is AUD 9 million positive, that includes the AUD 35 million from the equity raise in the first half of 2024. It also has going the other way a debt repayment of AUD 21 million that took place in April 2024. After the end of the year, in January 2025, we repaid just over AUD 60 million to our funding providers to repay all borrowings on the EM Solutions. The numbers here at the end of 2024 do not include the benefit of the sale transaction that happened at the end of the year around January 2025. As we've announced previously, at the end of January, following the sale of EM Solutions and the repayment of all borrowings, we had AUD 120 million in unrestricted cash.
In addition to that, after the end of the year, we also had just under $50 million in cash and security deposits that we would expect to see come back to the business over the next one, two, three years. So finally, on the financials over on page 24, the debt and cash position is shown. As mentioned, the company has enjoyed support from a long-standing equity investor, Washington H. Soul Pattinson, over a number of years. And the debt owing to Washington H. Soul Pattinson was repaid in full at the end of January 2025. And as I've said previously, we had significant cash balance equal to free cash and secured cash and security bonds. The outlook for the calendar 2025, so the slide's come along, but I'll briefly cover it now. The outlook for 2025 is a revenue for 2024 was $176 million.
I note that the analyst consensus estimate for revenue is coming in at around about AUD 160 million for calendar 2025. The company is obviously comfortable with that. Otherwise, we would include announcements of it to the contrary. We've also said that we expect to win some orders over the course of the year to help us get to that level of analyst consensus. And there will be a bias of the result towards the second half of the year. That is, the result is expected to be stronger in the second half than it is in the first half. That's all I was going to cover on the outlook. And with that, I will hand back to Andreas, who's, I think, now on page 26.
Yeah, thank you, Clive. Page 26, our growth strategy is based on two pillars. Obviously, our remote deployment counter-drone pillar with cannon-based air defense is growing over the next few years thanks to a very stable growing market, as we discussed before. This is happening with or without peace in Ukraine because of the sheer demand in new systems and the increase of soldiers and equipment in the battlefield. Based on that one, we will have a very solid growth. On top of that, with the commercialization of our high-energy laser weaponry business, we expect that one to match in terms of revenue creation capability. The first contract to be signed in the first half of this year with the Western European defense client. This contract was supposed to be signed already last year. It lapsed into 2025 because of our position as a sole source provider there.
The Ministry of Finance of our client has requested to do a financial audit on our offer, which is coming to an end beginning of March this year, so we're optimistic to be able to sign this contract over the next few months. A second opportunity is coming. That one has been delayed slightly because of a change in specification to a higher power level. That contract, we hope to sign in the course of the second half of this year, and we are working with three other countries on other laser contracts, so this is something which is giving us lots of hope to play in another league of revenue as one laser system sells at a significantly higher price than a couple of weapon stations.
On top of that, space control on the medium and long term, we play a very, very essential role as we are the one and only player outside the US being able to offer a full set of space control counter-satellite measures. So capabilities like designing sensors, like disabling sensors from ground in space, is something which is quite unique outside the United States of America. So page 27 summarizes all that. High-Energy Laser Weapon and space control, our key strategic market evolutions in the future where there's very limited competition and where our products are well placed because we are ITAR-free. We don't have US content in our product. And US, we concentrate on the non-US market with those types of products. Page 28, what do we want to do with the proceeds out of the divestment of EM Solutions? As Clive was mentioning, we pay down the remaining debt.
The company is debt-free now, and with the remaining funds, we want to invest now in our key growth areas in the counter-drone business, and here, specifically in companies or organically in the area of artificial intelligence and the software development, we want to further improve our classification, detection, and tracking capability where AI will play a very essential role. That's an area where we have some opportunities ahead of us. Active discussions are ongoing, and we hope to have some good deal for announcement in the course of this year. The second area of investment is the high-energy laser weapon business, where we want, among other things, to invest into a demonstrated unit to be able to showcase our 100-kilowatt-class laser weapons to further clients around the world. Those are the key areas of investment where we want to place our money.
Again, we will focus on our product portfolio and our strategy. We will not start to open up new businesses left and right in order to get the horsepower on the street and to execute what we are promising here. Page 29, in summary, the outlook is very promising. We will focus this year absolutely on order book build-up. We have done all the pre-work, which had to be done, and the good news is that we didn't lose a single major opportunity last year. All those major campaigns and opportunities have been shifted on client request into 2025, and we are on all those opportunities very well placed, and if you want to have further details on what opportunities are we talking about, you will see in the annex to this presentation on page 34 to page 37, all the various details, the various opportunities which we are chasing.
And again, we are quite optimistic to make some of them happening soon in order to build up the order book and to execute as promised or even better. I think that's the end of our presentation. The floor is now to you, ladies and gentlemen, to raise questions.
Thank you. If you wish to ask a question, please press Star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Star 2. If you are on a speakerphone, please pick up the handset to ask your question. Today's first question comes from Owen Humphries at Canaccord Genuity. Please go ahead.
Okay, Tim. Two questions for me. One is just around this is a year of investment for your business and pipeline development. Be very clear about that. Just on your OpEx and CapEx running, I call it 90 million per annum on a kind of steady-state basis. Can you just talk about how much of that is allocated to non-revenue-generating initiatives or growth investments? How much are you guys investing this year in building that pipeline?
Thanks, Owen. So yes, our OpEx is running just over AUD 90 million. That includes staff. A big portion of that is people, but it also includes marketing and some other spending. A chunk of that is obviously spent on delivering the products, but we are spending significantly more at the moment than we've spent in previous years on market development, sales, and marketing activities. The total spend within that is a little over AUD 10 million, I would say, on direct on market spend. That includes people, marketing budget, travel, and trade spend. So it's a little bit over 10. And then.
What was the last year?
Yeah. It was a little bit under 10 in 2024.
Okay. So, slight year on year, really.
And it was a lot lower than that in previous years. So we're putting significant investment into that.
And then just can you talk through, and I guess the other CapEx is all growth, isn't it, really?
Yes, that's what I'm calling the CapEx. So we are focusing on CapEx, is to make sure that product development, as far as we can do it, is funded by customers and governments. So, pleasingly, during the year, we had some success with that, where the Australian government funded AUD 14 million that we announced during the year for new equipment and new capability, which is helping us in some of our product development and some of our strategic initiatives in space. So we do find that we can invest a little bit more than just the CapEx of our own money that we put in the product development. But that's right. The CapEx that we do spend is all growth and growth.
I understand there's lots of moving parts this year in building the pipeline, but is the expectation and the mantra within the company to be free cash flow positive in 2026 and 2027?
Yes, Owen. In a nutshell, we've been driving this business for cash flow for a couple of years now. It does remain a little bit lumpy. As you know, it was exceptionally strong in 2023. The operating cash flow was negative 30 in 2024. And that's partly due to the lumpiness. But as we grow the order book and diversify the sales base, we would expect to be cash flow positive going forward. So in 2026 and 2027, absolutely.
I'm guessing that assumes that revenue is greater than 180 going forward from 2026 onwards.
Yes, that's right. The break-even point is a little bit over 180, and in order to look at that cash result, we would look for revenue to be higher than that as a result of the investments that we're making in the pipeline.
Therefore, the cash low point for the business is around 110-120?
We would look for a fairly strong cash flow. But yes, the gross margin on a couple of hundred million sales would be approaching just under AUD 100 million. And then we'd expect to even get that positive at that level.
Thanks, guys.
Thank you. And once again, if you wish to ask a question, please press Star 1 on your telephone and wait for your name to be announced. Our next question today comes from Dave Storms at Stonegate. Please go ahead.
Morning, and thanks for taking my questions. Just a couple on some of your new offerings. I want to start with the high-energy laser weapons. I was hoping you could maybe help us quantify the price per shot efficiencies with the high-energy laser weapons versus some of the more traditional kinetic options. And I was also hoping to ask if that technology is subject to something similar to Moore's Law.
So I didn't understand the second part of the question. Could you please repeat the second question?
Yeah, just with that technology, if it's subject to something similar to Moore's Law, where every X amount of time, it becomes Y more efficient as opposed to manufacturing ammunition or something like that.
The cost per shot of a laser weapon is around about $1-$10, depending on the power level and the level of engagement. The duration of engagement, the typical duration is about 1-3 seconds. Let's assume 100 kilowatts over 3 seconds. We can calculate the kind of power you need. And the cost of energy is quite known. So that's the kind of cost per shot. And this $1-$10 has to be compared with the other types of factors, which is, in the best case, a cannon-based air defense system, where the cost per shot is around about $100-$150. The next one up the string is then the rocket-based air defense with a rocket system or rocket costing between $15,000 and $20,000. And then above that one, the guided missiles between $300,000 and $1,000,000.
The laser weapon is extremely effective. Obviously, it comes with a higher purchasing price, but the operating cost is very low. That's why we believe in this technology.
Just in terms of the application of Moore's Law to laser power levels, I think the market for laser weapons continues to develop. Obviously, it started at lower power levels, and there are higher powered laser technologies that are on the market. We've been in the space of designing products at the 50-100 kilowatt level. The market and product development globally continues. There are some products being developed and used, particularly in North America, at higher power levels of 300-500 kilowatts. I think what we'd say is that it's not all about the absolute power level. Different power levels provide different levels of portability, different levels of cost, and these have different applications on the battlefield. For example, 50 kilowatts and 100 kilowatts are used on class one and two drones, depending on the accuracy level.
The only comment I'd make there really is that it's, Dave, it's not all about the growth and the absolute power level. There's a range of different factors to consider on that. I don't know if we've answered your question or not, but that's the comment we made.
That's been incredibly helpful. Thank you. Just trying to quantify some of that, and then my second question is based on the software. As you're bringing more AI-enhanced products to market, are you seeing any challenges in the sales process comparing to selling those AI-enhanced products versus maybe a user-operated product?
The AI algorithms are part of our integrated software package embedded in the sensor units to help us identify and classify objects over very long ranges. Obviously, this is done in a kind of way where the man is still in the loop. That means the system is suggesting whether it is a swarm of drones or whether it's a swarm of birds and able to track that even if the contrast between the drones and the background, let's assume it's cloudy sky, is very poor.
The man is in the loop, but there are also now new attempts triggered by some of our clients, very prominent NATO clients, asking us to develop systems which can act in a quite autonomous way, driven by the fact that in the battlefield, the soldiers, the personnel within the tanks is very busy with their kind of ground-to-ground task and cannot, at the same time, check the space, and there's airspace above them to see whether there's one or even more hostile targets. That is something which the system needs to do by itself, and in more and more cases, the kind of threat by loitering ammunition, so kamikaze type of drones, is not leaving any kind of decision time for the soldiers. Some of our clients have asked us now to investigate completely autonomous systems where man is no more in the loop.
That is a development activity which we expect to finish over the next 18-24 months. But yes, we believe that this will come because of the demand of the battlefield.
That's great. Thank you. And if I could just sneak one more in. On your gross margins, it's great to see them continuing to grow year over year. Is 48% a fair run rate, or could there be further margin expansion following the time to market the future?
Thank you. The way we look at gross margin is that we would expect to achieve gross margins of 40%-50% on more sales for very large multi-year sales for hundreds of units. Clearly, we will look to secure that work, and sometimes we will accept a margin that's at the lower end of that range. Other times, once we've secured a base load, we would look for higher margins on smaller orders. The other thing that can often feed into pricing and margins is the urgency with which the product is required. We've done a lot of work on pricing control and discipline in the group to make sure that we're charging the right prices in the right scenario.
And we do think that over time, particularly with some of our premium counter-drone products, that there is room for positive margin development, although that may take a little bit of time and it might be a little bit lumpy. Does that help, Dave?
That's very helpful. Thank you for the time and taking my questions.
All right. Thank you.
Our next question today comes from Anthony Box from Anthony Box Super Pty Ltd. Please go ahead.
Hello. Thank you. Just wondering about a loan repayment. Did we forego some interest and why? Thank you.
Thanks, Anthony. So the loan repayment that we made included a significant penalty for early repayment. So the amount of, I guess, principal that was due was AUD 52 million, just over AUD 52. And we repaid about AUD 61 million, including an approximate AUD 9 million penalty for early repayment. The reason we paid that is because we were obliged. We had no choice but to pay that. Make-whole penalties like this are a fairly market standard term for the borrowing that was put in place in October 2022. So having made an early repayment, we had no choice but to pay the penalty. We also had no choice but to make the repayment as the sale of the EM Solutions business meant that we were obligated to make that early repayment. So it was the result of the financial package that was put in place in October 2022.
I'll need to do some more homework. Thank you. I'm not sure what to expect.
That's right. Anthony, thanks for that. Yeah.
Thank you. There are no further questions at this time. So I'll now hand back to Dr. Schwer for closing remarks.
Yes, so, ladies and gentlemen, thank you very much for your interest in EOS. EOS has performed in 2024 at a record level in terms of revenue. We are confident to make the growth continuing over the next coming years. We are aware of the need in terms of order book improvement. We are focusing all of our efforts on that one. We have now a completely renovated, state-of-the-art and the most innovative product range on the weapon station side. We are the market leader and have benchmark products in the country with cannon-based air defense, and we are at the stepping stone of the commercialization of the high-energy laser weapons. It is one of the very, very few leaders and companies being able to deliver those systems ITAR-free outside the US. That is giving us lots of confidence. We count on your loyalty. We hope that we stay together.
We, again, want to thank you for your interest in the US and for your time spending with us here during this call. Thanks again to everybody. Bye-bye.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.