Calnex Solutions (LSE:CLX) — Interim Results

0:00 Good afternoon, and welcome to the CALNEX SOLUTIONS PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Tommy Cook, CEO. Good afternoon, sir.

0:30 Thank you. Good afternoon, and good afternoon, everyone. Thanks very much for joining Ashley and I today, and we'll go through the results from h one f y twenty three. So before I do that and kinda hit the results, let me just take a few minutes to just go back over who CALN is and and what we do just for anyone that's that's new to us. So CALNEX develops test solutions for telecommunications industry. We primarily make test instrumentation. So it's it's instrument instrumentation that we that's used to verify performance of critical infrastructure within the telecoms industry. So we've been successful at selling to all the subsets within the telecoms industry over the years and been successful to establish a global market as well in in all corners of the world. And to date, we've sold product in 68 countries around the world and sold to just under 700 customer sites.

1:27 In terms of where we fit in the whole life cycle in telecoms, the the main area we focus on is what we call r and d design validation and conformance testing. So this is when our customers are developing new pieces of equipment that are gonna be used in in the new networks in the world. And they have to really put that new design through its pieces to make sure it meets the specification they are promoting to their customers, but also make sure that it complies to the various standards that are arranged before equipment can be deployed. So this is very much an area where it's a high it's it's a low volume but high value equipment. And and our equipment very much is used to enable their new revenue streams. If the design our customers, the r and d engineers can prove their design quickly Quickly, it means both at short time, but also robustly that they know it is well that the design will work correctly, then they can get it into manufacturing, which means you start a new revenue stream.

2:20 So fundamentally, our equipment allows our customers to generate new revenue streams in a timely manner. We also look at the high end maintenance market as well, not so much in terms of installation and first level maintenance, which today in telecoms networks is a lot about just simple back to back tests, simple continuity tests. It is more is more about once there is a problem that's something to do with the network, they need to look into the network to understand what's going on to allow them to understand how they can fix the problem. And that ties into the deep insight that we give the engineers, our customers back in the r and d phases as well in terms of giving that added value to to our customers. So our customer sets really fall into four broad categories.

3:07 First of all, you've got the equipment telecoms equipment vendors, the top left. So these are big names that you've heard of like Nokia, Ericsson, Juniper, Huawei, Cisco. So this is very much into the r and d design phase where, let's say, our r and d teams are using their our products to to qualify their new designs. And that represents roughly 55% of our business. Then we've got the network operators, bottom left. These are the BTs, AT and Ts, China mobiles of the world that build build big networks. They represent a smaller part of our business, more like 15%, but a key part from a from a value chain, from the point of view when they are doing testing of new equipment, which would be the equipment from the equipment vendors, the vendors want to ensure that they test it in the same way. So if they're using CALNEX equipment to prove it, then it encourages the vendors to buy CALNEX equipment to prove as well.

4:01 So they're about 11515% of our business. And then the the the third part of the telecoms chain is the component manufacturers. So these are your intels, qualcomm, broadcoms that make very sophisticated chipsets that they sell to the vendors to build into their products. They represent single digits of our business, more like usually 7% of of our business. Small part, but important part because again, it's really close, like, the whole food chain now that we sell to the component people as well as the vendors and the operators. And the final group, an interesting group are the enterprise hyperscale. So to us enterprise, we are talking about very large enterprises that run their own networks and all the hyperscale, the Google's, the Meta, the apples of this world that actually run the data centers. And we'll talk more about them, how these are an opportunity for us in the future. And today, that represents low 20% of our business, twenty two, twenty three percent of our business. So that's really the the the customer set that we sell to.

5:02 So let's talk about h one and how we're going in h one this year. Well, it's really been a robust financial half for us, and we are really pleased with how things have gone in the period. There's a lot of kind of macroeconomic effects happening at the moment from as you see, kind of the wider financial effects of inflation, etcetera. It doesn't seem to have affected this too badly. There's a a component shortage issue, which we'll talk about a bit more that we've managed to navigate our way through. So we are pleased that we've actually delivered a healthy set of results in that sort of environment with 38% growth in revenue and 34% growth in profit. And year on year, our cash balance has gone up and we've decided to increase our dividend this year by approximately 10% up to 0.31p as the interim dividend that will be paid in December.

5:50 We've also managed to protect our margins as you'll see when Ashley gives you the results. We've been able to put a a price increase in our products that the customer base has accepted and also managing costs internally to ensure that we've kept the margins up. And while there's short terms of issues that we talk about, we still feel that the long term growth drivers are in our business and are strong in our business, we feel confident as we look forward to the full year that we can continue and meet the guidance that's out in the market space. So if we kinda look at some of the highlights or the kinda key things that have been happening over the last six months, first of all, the kinda macroeconomic effects. You know, the biggest thing that's affected us as it's affecting every technology company out there is the shortage of components.

6:36 What I would say is it's getting better. It is definitely not bad. It's not solved, it's not better. It is getting better. So some of the the worst scenarios we had maybe six, nine months ago is where we for example, orders we get canceled at the last moment to us for components. That seems to have stopped. So there seems to be a level of predictability coming back in, although we're still getting pretty long lead times from component suppliers. So we feel that we're getting into a better place. It's still gonna be a problem. We do hope that through this next period, some of the excess backlog that we've been carrying through for the last few periods simply down to the fact that we can't get units to ship will start to reduce, but we still expect it'll there'll be an element of this by the time we get to the end of this financial year. But we do feel as if we're starting to see the light at the end of the tunnel, but nobody's expecting us to come out of it quickly. It'll still be a major focus for the operations team working with a contract manufacturer to manage the shortages.

7:35 And at times, we're pulling the r and d team in where we have to go and buy alternative components to make sure these are competitive alternative components are a true drop in replacement and or if we need to do minor changes to the software or whatever that we're doing then to make sure we can keep meet our customers' needs. The other thing that's happening is inflation across the world is happening. We're seeing wage inflation, and we have been hiring. But through the hiring, we've seen that it's not quite as bad as the headlines have been putting out there. We have been successful at hiring people. We are we are having to pay slightly more than we would have paid a year ago to get the same people in, but it's not it's definitely manageable, and it's it's definitely we feel it's within the plans that we've we have for increasing salaries as we go into f y twenty twenty four.

8:23 So, again, we feel that it's manageable at the situation where we are at the moment. As I mentioned, we have been able to put a pricing a list price increase into the market as well, so that's going to balance and to ensure we maintain margins. At the start of this period, we acquired iTrinity, a company based in Stevenage. We'll talk a little more later on about what they do for us. But really the focus through this period as we explained in our last broadcast in May was about really the integration, bringing them into the fold, making sure they're well settled in, the team are are brought in, but also to build out the team because

8:56 we felt that really we needed more people in our r and d team, both engineers, verification engineers as well to basically have a more systematic approach to product verification. And importantly, what we wanted to do through this first period was really build out the route to market and understand how to really maximize the potential of this product. So really, the challenge this period was to understand how we're gonna get a broader footprint to the market and a a broader customer base. So we've actually signed new contracts with distributors in The US that are starting to work now. We've actually increased we've brought two business development members into the Stevenage team. One's already here. The second will start in January, and that's really to have a a stronger bandwidth to basically support our channel partners and to obviously support customers out there as well. So everything going to plan there. We said this year, we were setting realistic expectations, looking for more growth next year because we wanted to make sure we got the integration right, we got the sales channel right before we started pushing hard to to see what we can achieve with this product.

10:02 The data center opportunity continues to be something that's a a key opportunity to and a strategic focus going forward. We you'll see when we come to our product sites, we've got a new product coming out that's better aligned to the needs of the data center market called Sentry. But we've also been continuing to build relationships with the hyperscale customers. I think we've talked about before, these guys are can be a bit tricky to work with at times. You need to really build relationships with them, get them the insight and it's a long process but it can be a valuable process if it works. And so we're continuing to do that and and making good progress at getting them understanding their needs and using our expertise to show how we can add value and we can help them understand how they can enhance the effectiveness of our data center by bringing in accurate time across that. So again, we're pleased with the progress that we've made there.

10:54 And last by no means least in the in the in the telecoms world as we reported, there's a lot a lot of new standards activities going on, in particular, the ORAN which has created a new set of standards that's trying trying to break, down the network into kind of smaller blocks allowing more companies to come in and create greater competition. More companies mean more companies need to do more testing, which is good for us. And so we've continued to work that opportunity and we're seeing good progress. What we've also seen is that in the standards world, which has always been a key part of our business, in the early days when I started the company, was the guy that went to the standards. For a few years, we've had another well Kent face in that world, Tim Frost, who was our lead standards person. Now he came to the point that he retired this year, and we've we've hired a new person, Stefano Ruffini based in Italy. And Stefano is really well known in the standards community. He leads he chairs one of the key groups within the ITUT.

11:54 But really, it's a good time as often we were sorry to lose time, but quite often when these things happen, it's a chance to review what you're doing with in in in that area, and we've realized that from the standards activities, there's a lot happening in a lot of standards bodies that we need to have a better visibility. Not that we're necessarily involved in all these things all the time, but a a visibility and awareness so that if suddenly they start talking about conformance testing and areas that affect us, that we are aware of that and then can get involved in both direct the the conformance along along the lines that'll make it easier for us to engage with, but also just see that opportunity earlier as much as anything. So Stefan has been with us a few months. He's already started to show his value in the organization, and we're gonna build that team out more as as he gets settled in and receive what we need to do to keep really good connections with the industry, which is key for our whole fundamentals of our business model.

12:48 So at that point, I'm gonna hand over to Ashley and she's gonna give you a bit more detail on the financials. Ashley. Thanks, Tommy. So before I take you through the next slide, I thought it would just be useful to briefly remind you of our revenue model. So CALNEX generates revenues through the sale of bundled hardware and software, as well as software support and extended warranty programs. A typical customer will purchase one of our hardware products with a number of software options included at the time, and this is invoiced as one bundled sale to the to that customer. They can then come back for upgrades or additional options that are added to to the existing hardware that they've already purchased through the provision of a license key. And we sell these as standalone software sales or upgrades.

13:36 Bundled hardware and software sales pricing can differ for each order as it depends on the hardware product being purchased and the numerous software option choices each hardware product can offer. And each customer purchases different combinations of software options for each hardware product depending on their need. As a result of this variability, the average price per product can vary from order to order as you might expect. So that revenue is recognized on dispatch if it's a hardware item or delivery of the software license key if it's standalone software. And that makes up about approximately 90% of our total revenues. And you'll see that from the graph on the income statement coming up shortly. Each of our products comes with a standard warranty period, which can be extended for an extra fee. And we also sell software support prep programs, and that makes up the other 10% of our revenues. And that revenue is recognized over the life of the product that's purchased because sometimes it can span for a number of years.

14:35 And as you'll see from what Tommy showed you on the previous slides there, our customers are some of the largest in the industry. And over the last three year rolling period to March 22, if you're looking at our latest annual report for the last year end, our top 10 customers contributed 50% of our total revenues. And in addition to that, the average length of relationship we have with those customers is ten years, which just helps to demonstrate the repeat nature of the business that we do with with them. So we see customers coming back to order from us frequently as they might want to either add those new software options or upgrades that I was just talking about, or they might want to buy multiple bits of kit for for multiple sites. They might want to grow their their testing requirements, or they might want to move on to some of our newer products and functionalities we release them to the market.

15:27 Repeat revenue demand is a metric we measure across our whole customer base as well as that that that top 10. And again, if you're looking in our annual report, the three year for '22, sorry. The three year rolling profile showed that repeat revenues generated were an average 79% of total revenues. And our that that metric has continued while our revenue generating customer base has also grown. So our our revenue generated customer base was a 139 in FY eighteen, and it is now 233 as at March 22. And that repeat trend has continued into this half year as well. So just moving on to the performance in the period, just give you a flavor of of how our revenues have been split.

16:16 So we experienced growth across all our geographies in this half year. Our rest of world region saw strong revenue and order performance with Europe in particular contributing to the robust growth in the period. North Asia saw healthy growth in revenues and orders compared to the prior half despite the challenging backdrop of The US China geopolitical tensions which remain in the region. And The Americas revenues also experienced strong growth in the period. Revenue from the hyperscale order we booked in FY twenty two is recognized through this region and the growth is bolstered by these revenues. Shipments for this order will span over H1 and H2 as was planned. We also experienced healthy growth growth, sorry, across our product lines.

17:02 Lab sync growth has been driven by the PAM4 release as well as underlying growth existing platforms. Network sync, which includes our Sentinel and Centric products, has performed very well as a result of the diversification of the customer base within this product line, which now includes the the data center opportunities that Tom was just talking about. And cloud and IT saw good organic growth from our SME product sales, as well as incremental growth from our newly acquired product, the ME one. So just onto the income statement itself. Revenue as you've just heard in the first half of the year was 12,700,000. That's a 38% growth on last year's revenues of 9.3. And that's the drivers behind that very much the regional and the product line performance as I've just mentioned.

17:51 And additionally, we did see an incremental beneficial foreign exchange effect to the total group revenues as a result of the strengthening of the

17:59 U. S. Dollar over sterling in the period. 80% of our revenues are U. S. Generated and approximately a third of the revenue growth on the previous half year came from these positive currency movements. Sterling has started to strengthen against the dollar in recent weeks. We don't anticipate this currency benefit to be extrapolated for the full year. In addition, we closed the period with a much higher backlog order backlog than we would usually carry as we continue to manage the component supply chain delays. And had it not been for the supply delays, we would have been able to unwind this order book backlog a lot quicker. We're starting as Tommy says, we're starting to see signs of the supply chain delays easing and expect that order backlog to begin to unwind over h two.

18:47 Gross margin in half was 76% as you can see from the table, and that's in line with the prior year margin. And just as a reminder, that gross margin is net of commissions payable to our channel partners, and it can also fluctuate one to two percentage points either way just depending on the mix of our products and the mix of hardware and software bundle shipped just because of the the high value, low volume model that we have. Somi was talking about before as well, we saw rise in cost as a result of increases in component prices and general inflation over the period. However, our discussions around increasing pricing with our with our distributors and our customers will help us maintain those margins going forward.

19:33 So just moving down to underlying EBITDA just now before then talk about the cost components within that. This so this is just as a reminder, this is EBITDA start stated after charging r r and d amortization to that line. And that is because our r and d amortization is such a large component of the p and l. We pull this out as an alternative KPI just to aid understanding of our P and L and its drivers. So underlying EBITDA grew by a million against the last half year and that was driven by the strong revenue performance on the top line. The margin was 27%, which is also in line with the prior year. And despite inflationary increases and external cost pressures, we've been able to continue our planned investment in our teams and infrastructure to support the growth of the business whilst also maintaining those profit margins.

20:23 So the largest component of underlying EBITDA costs is as you can see is administrative administration costs. Those admin costs in this table here exclude depreciation and and amortization just for just because they're they're split out further down the table. They totaled 4,700,000 in the half year, and that was an increase of 1,400,000 on the prior half. And those increases include those planned investments that I was just talking about around the management, the sales and support teams across the business, which are very much in line with our growth strategy. We also saw an expected increase in travel costs as COVID nineteen restrictions have been lifted across the majority of our regions.

21:08 And we also have a small, again, expected incremental increase in overheads relating to the Stevenage site after our acquisition of I of iTrinogy in April. There's a slight offset a partial offset in savings from foreign exchange translation costs as well. This is a couple of things to pull out from the trans from the acquisition in in admin costs. You've got point one of one off legal and professional fees point 1,000,000, sorry, of legal and professional fees for the AgTrans Energy acquisition sitting in those admin costs just now. And then another point will 1,000,000 relating to the accounting for the I trinity earn out, which will which will span over this year and and into next year.

21:54 The majority of our overhead costs are sterling based with our exception with exception of our overseas sales teams. And as a result, the group's overhead cost base has been has been affected slightly by FX movements because of the of the overseas element, but it hasn't been as material as the effect as the beneficial effects to the revenues. And as you'll know, we capitalized 100% of our R and D costs and amortized these to the P and L over five years. So amortization of R and D costs is shown separately here. And in the period, it was 1,600,000 of a charge and that's versus a cash cost of 2,300,000, which you'll see on the cash flow in next slide. The increase on the prior period is due to the continued ramp up in R and D headcount to support our growth strategy and our project plans.

22:47 Profit before tax was GBP 3,100,000 as you can see and margin for that was 24% compared to 25% last year. And that margin differential on the prior year is driven by the increase in intangibles amortization and that's about GBP 100,000 for this half year. And we brought on a new intellectual property intangible onto the balance sheet as part of the iTrinity acquisition and that balance sheet number was 1,300,000 that was added. And we expect that PBT margin to align back to market guidance by the end of the year as the order backlog starts to unwind into h two. The effective tax rate was 21%, which is very much in line with where we thought it would be. What we have aligned our effective tax rate calculations with the planned increases in The UK corporation tax rates from 19 to 25%.

23:42 And we've measured we've measured that calculation in line with how our deferred tax assets and liabilities dropped through from our timing difference perspective. Our earnings per share saw good growth with increasing increases across both our EPS metrics, and that's coming from the very strong performance in the period as well.

24:04 So just on to the cash flow. As you can see from this next slide, although the group saw an overall GBP 900,000 cash outflow in the half year on the bottom line of the cash flow, this total cash flow figure includes the net GBP 2,300,000 effect of the acquisition of iTrinity, which just demonstrates the strong underlying cash generation in the period. So cash generated before acquisitions was GBP 1,300,000 in the period, and that compares to GBP 900,000 in the prior period, and that reflects the strong P and L performance in this period. Net cash from operating activities was GBP 4,200,000. Main thing to highlight there was working capital movements, where an outflow of 1,300,000 in the half, and that's predominantly as a result of the timing and the volume of shipping and invoicing to customers.

24:55 We had a large shipment month in September,

24:57 which then drove an increase in debtors for the half. But we're already seeing the cash coming in from our customers for these shipments because our customers are very, very good peers. Other just moving down this cash flow summary table, just another couple of things to pull out before talking to the acquisition. Cash spent on r and d activities of I've talked about a minute ago. That's the capitalized element there. And that's, again, as I mentioned, amortized over five years to to the p and l. And then the the dividend cash outflows, that that represents the dividend that we paid in August. That was our first ever final dividend, which you can see is coming came in just under GBP 500,000. And then just moving down to the last part of the cash flow, just a quick summary of the iTrinergy acquisition.

25:49 So we completed this deal on the 04/12/2022, and that was on a cash free, debt free basis for an initial consideration of GBP 2,500,000, and that was fully funded from group free cash. And the net cash effect of the transaction was 2,300,000, just taking into account an element of cash that was left over on the balance sheet on acquisition. And we acquired two entities, iTrinity Limited together with its wholly owned subsidiary, iTrinity Inc. And as I mentioned previously, and there's more detail on this in the in the RNS. But it at at the fair value adjustment that's been calculated for the intellectual property that's been brought on as part of that acquisition is 1,300,000. That's a new addition to the balance sheet.

26:33 And then another new addition to the balance sheet is 1,600,000 of goodwill leftover as part of that calculation, which represents that accelerated R and D development and type of timeline and cost and sales channel synergies that we expect to come from the the company at the combination of the two entities together. And then just moving down to the bottom of the cash flow here. So closing cash at the end of the half, and that includes cash that we keep on fixed term deposits as well, was 4,400,000. That just gives us a robust cash balance to take us into the second half. So in summary, before I hand back to Tommy, a strong P and L and cash performance for the first half of this year, the growth across all regions and product lines with some additional benefit gained from FX movements.

27:24 We continue to manage the supply chain delays with higher than normal order backlog. And looking forward into h two, we expect that order backlog to start to unwind. And together with our pipeline of orders, we expect continued strong performance for h two. Back over to you, Tom. Okay. Thank you very much, Ashley. So let's just take a few minutes and have a look at some of the kind of more strategic or the wider aspects affecting the business. So first of all, the market. I've picked up three quotes here I've taken from the trade press. The first is not so positive. You can see that actually it's suggesting the whole telecoms market in six month period, first six months of the year has actually not grown as quickly as was hoped, 3% rather than 7%. But actually, by the second quarter, the bit that we actually focus on, which is the build out of the mobile infrastructure, is continuing to grow very strongly.

28:15 And I think you've probably seen if you've looked at any of the releases from other test vendors in in the sector, they've also kind of put a word of caution out there. I think it'd be folly to assume that the the macroeconomic effects are happening in the world at the moment, the inflationary effects, energy prices that we can be completely immune to these. So it makes sense that we're we're all keeping an eye on what's happening on the ground and where the earth is happening. We feel that, you know, that our kinda in particular companies,

28:43 are companies that are customers that are made some cuts. We haven't seen any impact directly on the programs that actually drive our business, but we're always keeping an eye on that. And I think this the key thing for me is that underneath all this, the fundamental drivers that are driving the telecoms market has not changed. The need's still there. The desire to grow out still there. So where there may be some minor bumps in the road, it feels to me like there are minor bumps in the road and it's just a, you know, a a fact of life these things will happen. But we kind of we do believe at the moment we are in a good strong position and we obviously looked at from a business point of view on a strong position that we can read through anything that happens to come in the near term. The medium long term outlook still looks strong for us.

29:28 The data center market is exactly the same. It's continuing to grow. Again, there's been well publicized reductions in head counts and people like Meta and some of the other big players. I think it's too early to see what's happening there. From what we can see at a distance and it is at arm's length distance, it doesn't seem to be affecting the parts that we have, which is the infrastructure build out. But again, the know, if

29:51 you look at the demand, the need for cloud computing, it's definitely there. There are more companies getting into that sector. So I think that there's a fundamental shift that's happening. So we feel that the overall market remains strong for us. There's always bumps in the road, but the fundamental drivers remain strong and we should be confident we can continue to drive forward with our fundamental strategy. If you look at our product program, it's it's pretty much the same as you've seen before. And there's two new things that we wanna talk a wee bit about there. I guess before I do, we will continue to release as we do in all our programs. We have a continuous release process of adding new functionality, new capability aligned to customer request and or things that are appearing in standards and recommendations that we offer capability for.

30:38 The two new ones are the the Sentry product that you'll see in the middle under the network sync and also the NE one on the right hand side, which is the product we we acquired from the acquisition of I trinity.

30:50 So in terms of the Sentry product, they're actually from a technology point of view. There's a huge amount of leverage of the technology of the Sentinel into that product. Because fundamentally, they're trying to do the same sort of test in in the telecoms world, which centuries in that it's out in the field literally walking about outside doing testing, whereas obviously in a data center, you're inside the building and all often they want the equipment built into a rack. So we've changed the form factor so it's more aligned to what is actually needed. But it's more than just a new set of clothings. Again,

31:24 because different sets of customers have different requirements in terms of the number of ports they want, the configuration of different interfaces, the telecoms guys want things slightly different to the data center. So it makes a lot of sense to create a a different variant of the product that clearly is aligned to what the data center people want and we can foster these positive discussions in terms of what they need in the future and we've got a platform that actually aligns and can go to where our customers need to go in the future.

31:51 So this product, we've just literally launched it in the last few weeks And next year, we'll be pushing it and and we'll continue to engage with the high hyperscale customers, but really use it as a platform to try and engage with a lot of the tier two data center companies out out there to understand what their need is in the terms of timing and whether there's an opportunity with these tier two people as well as with the tier one players. And then we've acquired the NE one product from iTrinity earlier in the year. And just to recap, you know, we have multiple network emulators. And through the period, we've been able to really sharpen up our sales collateral information to really position these products strong, you know, clearly beside one another. The product we had at the bottom in the past, we're really in that people building infrastructure.

32:39 So these are people that are making switches and routers that will then be used to build networks. And when you speak to these customers, they

32:47 want to know which interfaces do you support? Do you support one gig? Do support 25 gigs? Do support a 100 gigs? What sort of bandwidth can you stress test each of these interfaces to? What sort of combinations of packet sizes can you test? So they've got very specific needs. Whereas the I trinity products more of a testing applications. It's people that are running applications across the infrastructure. So these could be your banking app that you use to do your banking. It could be gaming apps. It could be financial apps. Any sort of app where they really care about customer experience. I think the gaming one's always one we use because it's the kind of easiest to get your head around. If you're sitting playing a game or if you're young and you're sitting playing a game and you're playing against people in New York and Tokyo and you feel that you keep losing because they got better network performance, then you're getting There's one there's only one thing you do and that's leaving, go and find another game to play. So these guys obviously need to prove that doesn't matter where you're sitting in the world, what you're doing, doesn't matter what's happening with the network. And again, they don't know what the network is being used to run your application on. You haven't a clue which speed interfaces, how far it's going, how many routers and switches it's going through. So they want a kind of more conceptual view of what's happening off the network, what the kind of distance between places, what the latency is, the bandwidth that's being used. So the way it's presented to the customer and used is very different, and that's what that product's doing. It's very much aimed at a completely different set of customers. It's aimed at people are building applications to run-in

34:17 cloud networks as opposed to the infrastructure people who are effectively building infrastructure that cloud computing will be built on top of. And so we've really kind of through this first period focused on how do we get that, how do we get to these new customers because there are different set of people that we've been dealing with before. Have we got the right sales partners? Have we got the right collateral to support them? Because it's not only ensuring that the customers are clear in which product they're after, but our sales partners are absolutely clear as well and they don't take confuse the customers. And we've had a lot of good positive progress in that this period and we feel, as I mentioned, that we have we've hired more people into the business development team. We've signed contracts with new partners in The US. As we go forward into next year, we're in a stronger position to really push this product to the market.

35:04 We've also kind of picked out a couple of tests of kind of case studies here to really explain to you how we build a customer base and build our opportunity. Ashley talked about how when we sell a product like we're showing on the left hand side, a lab sync product, we continually work with that team to sell upgrades, additional units. But also there can be other dimensions of opportunity. So once you're in here as we showed here, we're one of our tier one customers that we've used for many years or worked with for many years and supplied with a product of many years. Through that engagement and close customer engagement, we actually find that a team that was working with them, another group of engineers actually needed a network emulation product. So we're able to go in and work with them, get a get a Introduction.

35:58 Sorry. An introduction to the other team and actually then by selling the product, showing the value, get another sale. But then also we find that our customers get asked by their customers once they deploy the equipment, how should they test it once it's deployed. And so again, by having strong relationships with equipment manufacturers, then they often will actually recommend to the the equipment to the network operators. You perhaps wanna look at CALNEX. At the end of the day, we need to go in and convince them that that's the product they need, but we get recommendations. So there's multiple dimensions that we can expand the market by going sideways as well as going forward. The second one on the right hand side is another example where we were able to do that where we worked with a software development company that were developing a product for a kind of cloud type application and they needed an network emulator.

36:47 We're able to successfully sell them on a an SNE. We spent time working with them to make sure they knew how to get the maximum potential out of their SNE and obviously, hopefully, buy follow on units. But through that, we realized that they actually were planning to introduce their equipment and and claim standards conformance to the ORAN standards that are right there or recommendations. Through these discussions, came clear that they actually were going to wanted to claim conformance to the synchronization elements of these standards. And so we actually helped them how to figure out how to do that because it's not straightforward. And actually through that discussion realized that they actually needed to buy a lab sync product to prove to actually prove performance of the synchronization part of the product. So again, you can see by that customer intimacy, spending time with your customers, it actually delivers value in many dimensions down the road. And that's really what our our business is built on is building success with customers and continue working with them to get follow on business.

37:45 So our strategy is still the same as what I've told you the last few times. It's a three pronged strategy here, a three pillar strategy to continue to focus on the growth engine that's the build out of the mobile network or five g as it's sometimes referred to, and continue to look for opportunities in there driving the products we have there. We're always looking for other dimensions where we can either come up with new products or new aspects to our products or new or new sets of customers within that sector. We also continue to focus in the build out of the cloud computing both on the infrastructure side, working with the data center companies to provide that timing capability to the data center infrastructure. But now with the NE one, working with companies that are actually moving their applications into the cloud and providing applications that are gonna run-in cloud computing in the future. And hopefully, that needs expand, we can expand the business.

38:36 And we continue to look for m and a opportunities, whether it's partnerships or acquisitions. Nothing's changed. Again, as I've described before, there are not thousands of companies out there that we would look at, but there are a number of them. We've brought a new person on board that we've worked with in the past. He used to work with Spyland. He was our relationship manager. He took time out for personal reasons. He wanted to come back in, and we've been working with him. He's really tried to create a more systematic approach to looking at other companies out there that we can potentially continually look for the company that's got the right culture, the right position, the right product, and right opportunity to enhance what we are doing to get new business. New business being a new set of customers or something in addition to sell to the people that we are at the moment.

39:22 And underpinning all that is to continue to carefully manage our our our cost structure, manage inflationary pressures we're seeing out there, and manage, obviously, the supply chain issues so that we can continue to have a healthy financial plan and meet our customer needs. So bringing all that together and closing off, we look forward to the end of this year with confidence. We've come into this. We've had a good first half. We're pleased with what we achieved. We're going into the second half. We're continuing strong order book. It's it continues to be stronger than we'd want it to be because of the component shortage, and we do hope to see that starting to unwind through h two. How much it unwinds? Well, it really comes down to how much we can get the components and get our lead times down. But it's starting to go the right way.

40:08 We we do believe that the underlying growth engines in the in the industry are still the same as they are. There may be bumps in the road in the near term, and we'll keep an eye and and manage that, but we feel we're in a strong position, good relationships, good spare customers that we can manage through these situations. And we continue to look for opportunities to expand our business, and we'll continue with our hiring program as we've said out in this year and and next year to build the team and to scale up for, hopefully, build the business moving forward. At that point, I think we move to the q and a session. Tommy, Ashley, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just using the q and a tab, which is situated on the top right hand corner of your screen. But just while the company take a few moments to review the questions that have been submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard.

41:05 Tommy, Ashley, could I just ask you to read out the questions and give response to it as appropriate to do so? And then I'll pick up from you both at the end. Okay. Thank you. I'll I'll start off. So just to start with Tom's question. So how have you managed the high inflationary environment? Have you managed to increase pricing to your customers? I hope that was answered by by what we talked about. I think you put that question in quite early into the presentation. But just to just to go back on on on what we said in the presentation, we we worked very closely with our with our main distributors, Byron, and in discussion with our customers to raise those to raise our prices at the start of this half year.

41:51 And so it was done very much in in discussion with with everybody concerned. So and that that effect has started to come through. But with the with the sort of the relationship from our order to revenue flows, we'll start to see that come through a lot more into into h '2 and beyond. So that will help maintain our margins. And then sorry. Another one. Sorry. And then Steven's question is is all your manufacturing subcontracted. Do you have any financial interest in your subcontractors? And how is the relationship maintained and priced? So answer to the first question is yes. We have a outsourced manufacturer for our product and for all our products excluding the any one, the outsourced manufacturer arrangement is in Kilseith, which is forty minutes away from our main municipal site.

42:48 For anyone, we've kept the existing contracted manufacturer arrangements that iTrinity had, and that's a that's a nice first manufacturer based in Bristol. So every everything's subcontracted. We don't have any financial interest in in any of our subcontractors. And the relationship is very much so the main main subcontractor we have, we've had since the beginning of CALNEX. The relationship is a very close one. It's a it's a daily interaction with our with our outsource manufacturer and daily conversations on demand plans and future forecasts, etcetera. And pricing is very much very much discussed like that as well. So so pricing pricing is any price rises that are coming from from our outsource manufacturers will be discussed on a on a very regular basis and will will be will be negotiated between the two teams.

43:50 Okay. I can pick up a couple here, Ashley. So there's a couple that I kinda related guy asked who's your closest competitors? And Freddie asked, I guess our biggest our biggest competitor for the hyperscale data center products is the hyperscalers themselves. If so, any feedback on the success? Let me just jump back to the slide on the products because it's easier when that's up front to just talk about this. When you look at our competition, it's actually different for each of the product families. So if you look at the the lab sync product and the Paragon Neo, the high accuracy product, we are very dominant in that market. There really isn't anybody close to us. We do have a competitor in China who have managed to keep in China and they haven't really been successful at selling outside China.

44:36 They really compete against the Paragon X, is almost our previous generation platform that we still sell and get a lot of repeat purchases for. But in terms of the high accuracy in the Paragon Neo, they haven't matched that. They have talked about 25 gigabits as one interface, but not really talked about the other interfaces. And then our market, people tend to flag fairly early when they've got new functionality coming. So we feel we're still in a very strong position there, and we continue to support other interfaces and potentially high speed interfaces going forward. So we're in a very dominant position there. If you look at the Sentinel product in terms of that maintenance product, again, I would say we have no competition on all our competitors say they compete against us. So what am I talking about? What I'm really saying is that there is a lot of installation testers which are really more about multipurpose toolkits that can do all sorts of technology but with limited capability.

45:29 So people that have that tend to tell the customers, no. No. No. You don't need a specialist tester. You've got enough in this general purpose toolkit. And in the sales process, we need to explain to them why they need a specialist toolkit for doing synchronization. And we've been successful with a number of customers there. As we move forward and the complexity of the and the kind of topologies of mobile networks with more and more radio heads, both the large macro cell base stations you see at the side of the road and what they call small cells, which you can imagine is like a WiFi router that sticks on the side of a building. There's a lot more opportunity for interference and that whole concept of needing something specialist to manage this, we hope will actually be valuable and allow us to expand our footprint.

46:15 When you go into the the kind of cloud and IT network emulation situation, there are a number of emulators out there. We are the only company that have a full range of emulators. Whether you're working in this pure software domain, you're working in high complexity domain, or you're working in high accuracy domain, we've got a different emulator that can actually meet your need. So we have a very strong competitive offering that we can tune the product to exactly what the customers need. And then lastly, Sentry, Freddie asked about the hyper scalers, they do it themselves. You're absolutely right, Freddie. They like doing things themselves. That's a bit of a challenge for these boys. They kinda do like to do things and it's almost like one of these things where if the market and the opportunities weave too big, they'll just do it themselves.

47:02 And we did have one of them which I would name who we thought were an opportunity. They needed a very simplistic approach to what they were gonna do and we thought we'd sell and they end up deciding to do it themselves. But we didn't take the huff or anything, we basically said, okay, we'll work with you. We'll help you do it. We'll help you understand. We believe that our approach is too simplistic and they'll come back to us. It is about getting in, it's building relationships with these guys, showing the actual value you can deliver and why it's better. They trust you or trust an outsider to do it or rely on an outsider not necessarily trust them rather than do it themselves. So it can be a hard sell with these guys and when you want to move, you need to move fast and and you need to be flexible. So they're challenging guys to work with, but they obviously there's rewards to be had by being successful with them.

47:51 Do you have any other questions, Ashley? Can jump on. Yeah. Absolutely. So I would ask in an earlier r and s, it was said that you expect to be an h two waiting in terms of performance. Do you still expect that to be the case? And that that that is is yes. So we've always in in times when the supply chain was a bit more calm, the we always we always do have an underlying waiting up from an h two perspective, from an order perspective, just because of the just because of the customer seasonality is really. It's a it's a it's a kind of 55, 45 split h two to to h one usually. In in this current period and with the the order profiles that we have this year, yes, very very much so on h two meeting in line with what what we've essentially previously said. So that answers that one.

48:49 And Melville's asked, can you put any numbers on size of your order backlog in relation to order intake and execution? So we don't we don't publish our our number for backlog or or kind of order pipeline. But just to give you a bit of a sense of where we where we're sitting right now compared to what we would usually sit with. So our our our natural we always carry a natural backlog. Our backlog usually spans across about one and a half to two months worth of revenues. So we're sitting at a backlog that's a lot a lot higher than that. So more than double of that that that number. And that's all due due to the the supply chain delays and which we should hopefully see unwind over or start to unwind over h '2.

49:41 Yeah. A couple of questions, Melville. Again, I see you've got a second one in here. An interesting question. A key attraction of CALNEX are your obvious high standards, and I imagine corresponding strong company culture. Do you have a formal program for communicating in coming in these matters into new employees and importantly, to new acquisitions? Yeah. Absolutely. You know, and I think especially in these days where it's hard to get people, you know, we never forget that we've got a lot a lot of talented people in our organization and quite frankly, they could get a job anywhere tomorrow if they wanted to. They choose to stay, so it's our problem to or our challenge to make an environment that they wish to stay and be committed to us and you should never rely on the fact that it comes for free. So we very much, when people join, we we introduce them. We actually have quite an extensive induction process. Think there's like thirty, thirty five different training programs. We're actually gonna rationalize them a wee bit, but they all get a chat from me. I call it a chat. They probably think it's a lecture about how to behave and how to, you know, that at the end of the day, you know, if they enjoy working at CALNEX, it's not because of the name or the badge, it's because of the people they work with and that's the same for everybody around them. So we very much try to create an environment where people enjoy working in. They they feel motivated. They feel fulfilled. They feel they can be part of it. They understand what's happening, the dynamics, and and I think more than ever, it's important to continue to do that. And our HR manager, Claire, and myself are very passionate about making sure that we we hold that.

51:12 And it's the same when we do acquisitions very much when we look acquisitions. A big big question we speak in the early phases, can we work with these people? Are these the sort of group of people? Because not all companies can work with each other, and that's a fact of life, and it's something we look at in all acquisitions we've done and very much work with them and in day one, I was sitting down, making sure they understand that, you know, the the culture that we are looking to embrace and bring their ideas in, but obviously making sure they understand our culture and that is that you get the positives from both worlds. So it's something we we feel very strongly about and and I think as much as ever, it's important and we continue to do that and acquisitions very much, it's an element of that activity is to make sure we protect and enhance our position.

52:00 There was another question there. I've actually lost it. Have you got one, Ashley? You can jump on. Yeah. So Scott's just asked, do you envisage taking in on any more hires this year? I e, are there any gaps that still need filling in the organization? So the answer to that is yes. We do have a plan, and this is all part of our kind of plan at the start of the year to build out headcount to so at the moment, we're sitting with a 138 head or at the half year, a 138 heads. We're aiming to be mid 100 and fifties by the end of the the year, and that's very much to a a lot of that will be to bolster and to to grow the r and d teams as a as required. So it's not necessarily gaps in the organization, but but the need to kind of fill out our project teams to meet to meet the kind of project demands going forward. But that's all all planned at the start of the year.

52:56 I got a question for asking if you keep asking questions from the same people you do. Scott's got another question here with a with a limited pool of possible acquisitions. Do you think it's likely that future acquisitions will be outside The UK? That's a definite possibility, Scott. You know, we don't we've never actually restrict it. Although, two of three we've done have been in The UK. That's been more of a coincidence, let's say. We definitely look outside The UK. I think the culture thing, obviously, it's easier within a country, different countries, absolutely different cultures. But, yeah, when we are looking at companies, we're looking all over Western Europe and to North America, and we would, if we find the right one, be willing to acquire a company that was outside the The UK. A question here from Steven actually. He's got two parts, the second part's for you, I'll answer the first part.

53:46 Two very general questions. Is there a fallout in your business from the ban on Ericsson in China? Not particularly. I would say, you know, the whole China thing has been a bit interesting, even the kind of ban on Huawei around the world. What tends to happen is in the what we've seen because even before Huawei became got restrictions put on them, there was previous restrictions in ZTE, also a Chinese company. And although our business immediately dropped for them, everybody else tried to steal the market and actually increased the programs. And in some ways, what's happened with us is whereas Huawei is limited to what they can sell outside China, but then the western companies like Ericsson and Nokia are limited to what they can sell in China. So effectively, business just moves around and for us, you know, it does although you get kinda ripples on where the business is, it doesn't really change.

54:37 It hasn't gone away. It's just another one of our customers has taken that business. So it hasn't had a a material impact on us. It's just gonna change our footprint there. Actually, this was Steven's second part was for you. Don't you think you should be expensing all your r and d against revenue rather than largely capitalizing it and then amortizing it? This, by the way, is the Japanese opinion model. So so so a few things there. So the the useful life of our products out in the out in the marketplace is actually more than the five years that we amortize the cost to the p and l. So our our the useful the average useful life of our products is is ten years, if not more. So we so we choose a a very prudent position to amortize our our costs through to the to the p and l.

55:30 The the the method or or the the reason the reason of or the the reason behind capitalizing that and and then amortizing it to to the p and l is to match that revenue generation with the costs associated with it. So so we feel that's a better match. Also, that's also why we we bring in this underlying EBITDA metric as well, just to bring that, bring bring a little bit of balance between what sort of pure EBITDA would give you as a metric to what what we call underlying EBITDA to bring that sort of r and d cost back into the conversation when talking to to KPI. So and also, we're pretty much beholding beholding to to the IFRS way of doing things as well.

56:16 So a bit about bit of a mix of different drivers there. There was another one I spotted as well. Another question for Tom. So if I have understood correctly, roughly a third of your revenue increase is due to the US dollar rise versus GBP. If that's correct and GBP recovers to a stable 1.2 per GBP, what would volume increase oh, sorry. What volume increase would you require to maintain steady state revenues? Is it is this exchange rate the biggest risk to revenue growth, or is demand a bigger risk? So answers to the first question is the way that we budgeted at the start of the year and the way that our plans are built at the start of the year is we so our budget rate takes into account or or we are not relying on any further FX gains, we don't see that FX gain that we have had this half to be extrapolated through to the to the the end of the year. So we we we don't we are already the plans that we have to meet the numbers at the end of the half don't include any sort of catch up for any risk for FX there. So our budget rates take that into take that into account. So our budget rates are higher than what the stable 1.2 is at the moment.

57:41 And exchange rate is isn't the biggest risk. It it so I would demand in a sort of general business model sense, demand for us is a is a is a much larger risk to to to exchange rate movements for the way that our business is is built if you're talking for holistic holistic risks. And my question, you have had feedback on Sentry from customers and any traction from other hyperscales? Not a lot of direct feedback from Sentry because we've just launched it now. You know, at the end of the day, we collect a lot of input from customers before we do any product. So we've just internally launched it a couple of weeks ago, which means we're just starting to promote it into the market and going to other people. So it has been viewed by a couple of customers. We've had pretty good feedback from the one or two that have actually seen it and want to engage with us. So really through the next period is when we get we'll start to get more wider feedback on that. And, yeah, we're speaking to all the hyperscalers at the moment at different levels of discussion. Some are quite early stage, quite some quite developed in terms of basically having regular meetings with them and discussions about what sort of technology they might need in the future. It's a kind of mixed packet packet there, but it is something that we're continuing to do, and we'll to do continually over the next period until we develop out this market opportunity for us.

59:11 Ready to ask to what extent is their operational gearing in the business? Do you expect bottom line growth to track or exceed revenue growth? So we should we should expect some operational gearing in future years from an administration cost. If you take an admin cost as a percentage of revenue at the moment, we're sitting at the commit 30%. We wouldn't expect so and we are we are still going through a period of ramp up. The the company is still growing at quite a quite a significant rate. So at the moment, the support staff that are required and the support structures that are required behind the business, And the costs will over the over the if you're looking at the kind of numbers for the next couple of years, there won't be any sort of material operational gearing coming out of coming up that out of that period. But as as as the company starts to kinda go into the kinda next next phase, you should see some operational gearing from that cost base. However, the r and d amortization model and the fact that we have we'll we'll have we'll continue to build our r and d teams to to meet future project needs.

1:00:28 Though you'll see less of us sort of sort of operational gearing effect on that number as as the as the teams grow to kinda meet meet revenue demands in the future years. So so we haven't built any of that any operational gearing in for for the next couple of years just due to the ramp up that we're currently going through. Okay. And maybe I'll take this last question, and then we'll wrap up. I guess from Jeffrey, he says with PTP as a four type upgrade, what other five g six solutions do you recommend to your customers? Well, I guess most of our customer are actually developing equipment so that we don't directly recommend. And I guess in terms of networks, we I don't know how to build a network. I don't know how to test it, but don't know how to build it. So, you know, again, we provide insight there. But I really in terms of some ways, the whole ORAN is is creating new requirements.

1:01:21 So our customers who are build building equipment, they're both building it to conform to the ORAN. There are some new customers who've had that are building to conform to the ORAN, actually even the original customers are doing ITT standards are also wanting to show that they they align to the ORAN standards as well. So the more of these sort of standards recommendations there are, inherently, it's better for us because it it it means there's more people involved and there's more customers looking to to do qualification, improve performance standards, which means they need to buy some test equipment, which is good. Tommy, Ashley, thank you very much for that. I think you've actually addressed all those questions from investors, and, of course, the company will review all the questions today and will publish those responses on the investor meet company platform. But just before redirecting investors provide you with their feedback, which I know is particularly important to you both, Tommy, could I just ask you for a few closing comments?

1:02:13 Sure. Well, thanks very much everyone for coming today. You know, when I look back through the period, in some ways, it's unremarkable and nothing that's, you know, nothing particularly exciting happened. It was business as usual and but maybe today, business as usual is exciting. You know, we we feel we made steady progress in all areas and all our programs. We've made steady progress. In all our geographies, we've made steady progress. The integration of the I trinity teams made good progress. So things are going well. You know, we think we're on a good position at the moment. We feel confident looking forward to the end of the year that we can hit the guidance that's that's in the market space. As I said, there may be still macro challenges whether it's a component, whether it's inflationary effects around the world that we all have to deal with and they may cause some minor bumps along the road, but we still feel that the market's strong that we're in. The drivers remain in place that are actually gonna create growth in the markets that we're in that will hopefully we can then deliver growth going forward on a sustainable value. So thanks very much for your time today.

1:03:17 Tommy, Ashley, thank you very much for updating investors today. Could I please ask investors not to close the session as you now be redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few minutes to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of CALNEX SOLUTIONS PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.