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Data the Key to Space Infrastructure Play
ASX investors are very well-used to the SaaS, or “software as a service” business model, under which customers pay to use software hosted on a remote computer – in the “cloud” – rather than buying a software licence and installing it on their physical computers.
Under the SaaS model, customers subscribe to a software product that’s continually updated. The software company gets a reliable stream of recurring revenue, and the customer gains flexibility and always-up-to-date software. It is a largely win-win model in which costs to subscribe are comparatively low, customers are very “sticky” if the product meets their needs, and the software providers build up strong recurring revenue and high gross margins.
A fascinating twist on this business model is the Luxembourg-based Kleos Space S.A. (ASX: KSS), which joined the ASX in August 2018. Kleos plans to launch and operate a network of nano-satellite clusters that orbit the Earth collecting data, which will be transmitted down to Kleos servers, and processed through the company’s proprietary algorithms. Kleos is able to geo-locate signals, transmissions and frequencies: the company says it can potentially analyse information from almost any radio transmission on Earth, knowing from where it was transmitted and when. This data is then sold to government agencies, intelligence services, security, maritime companies and commercial customers via the company’s data-as-a-service (DaaS) model.
Kleos is initially targeting the global maritime information market, which it says is a US$1.4 billion ($1.8 billion) market. The data it collects is global activity-based intelligence and geolocation data, that is radio frequency data, geospatial intelligence (GEOINT) and signals intelligence data (SIGINT) data.
Kleos Satellites observe the Earth, recording the radio frequency (RF) spectrum. On the ground, the Kleos algorithms find and locate activity in the “noise,” whether that activity is by legitimate and illegitimate actors. Activity data products are packaged and sold globally, on a subscription basis, to government agencies, the intelligence community, end-users, or any entities interested in locating threats, assets, targets, or emergency beacons/vessels in distress. Kleos says its satellites enhance the detection of illegal activity, including piracy, drug and people smuggling, illegal fishing and border and security challenges. Commercially, industries such as oil and gas, fishing and cruising are potential customers.
The first cluster of four nano-satellites, known as the scouting mission satellites, was launched in November 2020 on India’s Space Research Organization’s (ISROs) Polar Satellite Launch Vehicle (PSLV) C49 from Chennai, India. These satellites are still in their in-orbit commissioning phase, which is preparing them to collect data over crucial areas of interest such as Strait of Hormuz, South China Sea, East/West Africa, Southern Sea of Japan, and the northern Australian coast. Kleos says this commissioning phase is near completion; that will be followed by software commissioning, before the data products begin to generate revenue.
The second and third clusters are scheduled for June 2021 and late-2021 (December) launches respectively, on SpaceX’s Falcon 9 rocket platform, out of Florida. After the third launch, Kleos will have 20 low-earth orbit (LEO) nano-satellites in place, and at work.
It grabs the attention of space fans, but Andy Bowyer, chief executive of Kleos Space, is keen to stress that – although it’s part of the name – space is not the defining part of the business. “You have to put space to one side – forget about space. It’s the enabler. We happen to be in space because that’s where we need to put our satellites, but that’s like saying that we operate computers to do our job,” says Bowyer.
“We’re not a space company. Our business model is that we’re a defence intelligence, defence surveillance, reconnaissance company selling data into the defence security sector. The defence security sector doesn’t give two hoots whether we’re getting that data from space, drones or balloons. The satellites are just the infrastructure – we buy satellites, we launch them into space, and we operate them. Space is just the enabler.”
As the satellites are progressively commissioned, says Bowyer, the perception of Kleos as a space company will dissipate. “By the end of this year, we’ll have finished the space-only phase, and then we’re just a data-as-a-service company. It’s not quite software-as-a-service, which ASX investors are very familiar with, but it’s got exactly the same scalable tricks.
“We’ve got a heavy-lift investment up front, and then we’ve got to build a subscriber base. But every subscriber we add-on just comes onto the bottom line because it doesn’t add to our CapEx (capital expenditure) or OpEx (operating expenditure) costs. It’s an education process, just having that conversation with investors around the business and the way we operate.
“We’re copying the best-in-class SaaS companies, how they’re going about their business, anything that’s working in terms of our product development, how we get people in at an early small stage, but then make everything an upgrade, so we increase revenues per subscriber, and we’re playing with all those tricks. Once we start selling data products, and we start to build that per-subscriber revenue base, we can start to be judged on those SaaS metrics – how many subscribers, what’s our annual recurring revenue (ARR) per subscriber, what’s our churn rates, how are we increasing our subscriber base, what new marketplaces are we entering, how is our e-commerce channel performing, where people can enter via the website and start subscribing to data. All of that.”
Ultimately, Bowyer envisages a sales mix that is 50:50 direct data sales and sales to data analytics companies for their end-customers.
With 20 satellites in place, he says Kleos will see “everywhere, every 10 minutes.” Currently, that capability is mostly focused on a maritime environment, so, 70% of the globe. Ultimately, our cluster four will focus on land as well and open up different markets for us. The addressable geospatial data market is US$549 billion ($713 billion). It’s pretty global, but there are areas of interest which are commercially interesting. Everybody wants to know what’s happening around China, and everybody wants to know what’s happening around the poles – particularly the Arctic, because it’s melting and opening up routes, that’s creating challenges. And so, how do we observe what’s happening in those areas? There’s a lot of illegal fishing around Latin and South America that we’re working on. We have customers in Peru and Chile and Argentina that are very concerned about what’s happening in that area.’
Although revenue was nil in 2020, it is starting to flow in 2021: German broker First Berlin estimates FY21 (calendar 2021) revenue will be €10.8 million ($16.8 million at current exchange rates), rising to €22.5 million ($35.1 million) in 2021. From that, First Berlin expects earnings per share (EPS) of 1 euro cent in 2021, increasing to 3 euro cents in 2022.
Kleos listed in August 2018 after raising $11 million through the issue of 55 million CDIs (CHESS Depositary Instruments) at 20 Australian cents a CDI. The stock now trades at 72.5 cents, for a market capitalisation of $117 million. First Berlin has a price target on KSS of $1.15, while the one analyst contributing to Stock Doctor’s analysts’ consensus valuation reckons KSS is worth $1.83.
