Calnex Solutions (LSE:CLX) — Results for the six months ended 30 September 2021

0:01 Good afternoon, ladies and gentlemen, and welcome to the CALNEX SOLUTIONS PLC results for the six months ended 09/30/2021 investor presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged to be submitted any time via the q and a tab situated in the right hand corner of your screen. Just click q and a, scroll to the bottom, type your question, and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via our investor meet company dashboard, and you'll be notified once they're ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Tommy Cook, CEO, and Ashley Grennan, CFO of SOLUTIONS PLC. Good afternoon. Thank you, and good afternoon, everyone. And thanks for coming along to hear the interim results from from CALNEX for the first half of FY twenty two.

0:54 Before I get started, I'll give you let me just tell you a little bit about myself and my colleague Ashley who's here with me today. My name is Tommy Cook. I'm the CEO

1:03 and founder of CALNEX. I founded CALNEX in back in 2006 after spending twenty three years working in the telecoms test sector. And at that time, I've seen an opportunity for a new type of test equipment, and that's when I set up CALNEX. So I'll pass over to Ashley and let her introduce herself to you. Thanks, Tommy. Hi, everyone. My name is Ashley Greenan. I'm a big four train CA. I qualified with Deloitte and followed that by five years at KPMG and their transaction services teams in The UK and Australia. And then since then, I've worked in various group financials across a number of industries, including the testing and engineering sectors in both private equity owned and PLC PLC businesses. And before coming to CALNEX, I'm the CFO of our private equity owned multi site engineering business headquartered here in Scotland.

1:50 Okay. Thanks, Ashley. So before we go into the results, let me for some of you may not be so familiar with CALNEX, let's just have a a quick overview of who CALNEX are, and then we'll go into the actual results. So CALNEX designs, produces, and markets test instrumentation for the telecommunications industry. We're in particular focused on the network synchronization and network emulation sectors of that space. Our solutions are used to validate the performance of critical infrastructure either through the design phases or once it's actually deployed in in the networks around the world. We're at the forefront of the sectors that we work in, and it very much is a global market. Today, we have shipped products to over 600 customer sites in 68 countries around the world.

2:35 And we've been successful in all the major subsectors within the telecom space. That's with the vendors making the equipment, the operators that build and operate the the networks, and the component suppliers that, make this, components and subassemblies to get built into the equipment. We also have been successful with some of the large enterprises that build their own networks and increasingly with the hyperscale companies that are building the data centers around the world. So where does test and measurement fit in in telecoms? Well, it fits in just about everywhere. It doesn't matter if you're starting to design on new PC equipment, you're doing verifying your design, you're manufacturing new equipment or equipment, or you're building networks or maintaining networks. You need different types of test solutions in all these stages.

3:22 The ones that we focus on are highlighted there on the screen. The r and d design validation and conformance test is a key area for us. So this is where R and D engineers are building new pieces of equipment

3:34 to to be, deployed in the network, and they need to go through and make sure the design's accurate and is doing everything they expected it to do. And, of course, if they're claiming conformance to any of the international standards, they need to run tests to ensure that they actually do conform to these standards. And very much in this that space, we are an enabler to our customers. We are enabling them to get their product to to market and create new revenue streams themselves quickly. And it's not just quickly as in fast. It needs to be robust as well. They need to make sure they've got good design margin, that once it goes into manufacturing, they're not gonna have a yield problem, and they're gonna have to make sure that it actually meets the international standards, and it is gonna work in all the various topologies that the equipment will be put in once it goes out into the field.

4:20 Because if it doesn't, then obviously, they're gonna have customer satisfaction issues. So very much we enable them, and having the right product at the right time enables them to get their product quick to market quickly. The one area that we focus on is maintenance test. Now these days, installations are straightforward from a test point of view in that they'll connect up, run some fairly straightforward tests, and if it seems to work, they'll leave it. And even first level maintenance is much the same. They'll come along and swap cards or or pieces of equipment out to see whether that fixed the problem. If it does, all good. But if it doesn't, it means there's something more complex going wrong in the network, something about the topology or the setup at that point in the network that's stopping the equipment working. And that's the bit that we focus on because they are the engineers then need equipment that gives them deep insight, and that ties into what we do back in the r and d phase, which gives them deep insight to the equipment during that r and d stage.

5:19 As I mentioned, there are basically four sets of customers that we have, shown on this slide. If I start top left, we've got the equipment vendors. So these people like Nokia, Ericsson, Cisco, Huawei, they actually build the equipment, build the switches, the routers, the base stations to get sold to the operators to build the network. And we very much sell to the r and d groups. So it's at r and d stage that I talked about as they are developing new pieces of equipment, and they need to test their new equipment to make sure it's working. And that group roughly represents around 55% of our business. The second group in the bottom left is the network operators. So that's BT, AT and T, China Mobile, people that build and operate networks around the world. Now obviously, we sell them our maintenance testers that they use to maintain the networks.

6:06 But actually, especially for the large operators, they have proof of concept labs where if they're interested in, purchasing new equipment to get deployed, they'll actually bring it into the proof of concept lab first and evaluate it before they actually deploy it in the network. And again, they do a very similar testing to what happens back in the vendors and their verification stage, so they'd actually buy our R and D testers. They don't buy a lot, it's not a big market, but it's a very important market from a food chain point of view because if you are a Juniper or a Nokia taking your new piece of equipment to AT and T, you really wanna know exactly how they're gonna test it and make sure you've tested it fast before they do to make sure you don't end up having any unfortunate events in front of your major customers.

6:52 The last group is the bottom left from a telecoms point of view, and that's the component manufacturers. So that's your intels, Qualcomm's, Broadcom's of this world. They make very sophisticated chipsets or subassemblies. They sell them to the vendors and then they get built into their equipment. They represent around five or 6% of sorry, about six to 8% of our business, 7% of our business. So quite a small part of the business, but very important again because they'll go and demonstrate their equipment to the vendors, and it's good that they're using our test equipment to prove performance, prove prove their performance at that time. So we try and cover the whole food chain. And then the last set, top right, there is a growing part of our business currently in the low 20%, and this is the big enterprises that build their own networks and more of the the hyper scale people are building the the big data networks, the Facebooks, the Googles of this world that are building these large data centers and operate them. In the future, we've got things like edge computing as well.

7:53 So these are an interesting opportunity for us as well and something we'll talk about a little later as well.

8:01 So really the try what's causing opportunity for us is new developments. You know, the test measurement was driven by new stuff. In terms of when new things are developed, then obviously, have new challenges improving the performance, making sure it's working, and they need to invest in that. So as the as the industry moves, the faster it moves, the more it generates new topologies, new types of equipment, new interfaces, new frame formats that creates opportunity for the test world. And the two waves that we are really attached to at the moment is the build out of the mobile network, often referred to as the five g, but for me, g is often presented as if it's a sport technology to the consumer world. But to me, it's really the the euphemism for the evolution or the continuous evolution of the mobile network to meet the needs of the smart cities of the future. Everybody wants more connectivity, whether it's more speed, more devices connected, more geographical coverage.

8:57 It's just more of everything. And that's really what the the telecoms industry is driving to actually give that connectivity to everybody that needs it and is creating a lot of opportunity. The other part is the is the the appearance of cloud computing and the high speed data high speed Ethernet world. Very much as you you know, there's more and more discussion of people get off equipment and services getting pushed into the into the clouds, and there's these huge data centers that are being built at the moment. They're also talking about edge computing as a way of actually distributing that, And that's creating a lot of change in the in the in the industry. They drive to very high rates, which is bringing new very high speed interfaces. All these things are creating opportunity for CALNEX.

9:47 So that's who we are as a kind of general overview. Let's have a look at h one in f y twenty two. Well, it's been a really good period for us. Both we've exceeded our revenue and profit before tax targets that we set at the beginning of the period. Our revenue, did 9,300,000, which was 20% growth on the half year of the previous year. We generated 2,300,000 of adjusted PBT, and we generated additional cash that our closing cash is now up to 13,600,000. We also said when we were, we went through the IPO process that we'd start to pay a dividend in f y twenty two, and we've followed through that by announcing our first maiden interim dividend, a 0.28 p per share.

10:34 Now if we kinda look where that growth in our business is coming from, you can see it by the three main regions of the world or how we divide the world up that is coming from two in particular. So we have on the left Americas, we have on the right North Asia which we call North Asia really China, Japan, Korea, and Taiwan, and then the rest of the world is in the middle one. And but the biggest chunks in there are Europe and and India. And you can see that The Americas, we had a great period, we grew 22%. And the rest of the world driven mainly by India and and, EMEA, that it was 33%. And in China, was pretty flat year on year. But that's actually what we expected, so we're actually pretty much in what we thought would happen in that period. I think with the geo geopolitical tensions there are plus the general component shortage around the world plus in in China, they've got there's more challenges with components where there are certain components they can't get access to anymore.

11:37 We expected a softer period in in China, and that's what's happened this period. So that's pretty much in line with what we expected, but we have exceeded our targets in the other two regions which is great. So at that point, I'm going to hand over to Ashley and she'll give you a bit more detail on some of the numbers. Thanks, Tommy. I'm going to take you through the detail on the income statement and cash flow on the next two slides. But before I go on to those, I thought it would be useful to briefly remind you of our revenue model. CALNEX generates revenues through the sale of bundled hardware and software, as well as software support and extended warranty programs. Bundled hardware and software sales pricing can differ for each order as it depends on the hardware product being purchased and then and the numerous software option choices that each hardware product can offer. So each customer can purchase different combinations of software options for each hardware product depending on their need.

12:36 Once a customer has purchased a hardware product with software options, they can come back for upgrades and additional options that are added to the existing hardware through the provision of a license key. And we sell these standalone software options or or upgrades as as standalone transactions. And as a result of this variability, the average price per product can vary from transaction to transaction and order to order. This revenue is recognized either on dispatch of the hardware item or delivery of the software license key if it's a standalone software and makes up the majority of our revenue. On average over the last few years, approximately 90% of our revenues were generated by bun these bundles and hardware software sales.

13:25 And I'll show you a graph in a second where you can see that that coming through. And that changes can continued into this year.

13:33 Each of our products come with a standard warranty period, which can be extended for an extra fee. And we also sell software support programs, and that makes up the other 10% of our revenues. And that revenue is recognized over the life of the product, so because it can span over more than one year. Our top 10 customers are some of the largest in the industry. And over the last three year rule ruling period to March 21, the top 10 customers contributed to just over half of total revenues. In addition, the average length of relationship we have with our top 10 customers is nine years, which demonstrates the repeat nature of the business we do with them. And we see customers come back to order from us frequently as they may want to either buy multiple bits of the same kit for multiple sites, add new kit as they grow their labs and testing requirements.

14:21 They may want to add new software options or upgrades, like I said before, to the existing hardware, or they may want to move on to newer products and functionalities that relates to the market. And that repeat revenue demand is a metric we measure across our whole customer base as well as the top 10. As you may remember from the full year results roadshow in f y twenty one, the three year ruling profile showed repeat revenues generated were on average 80% of total revenues, whilst the total revenue generating customer base grew from a 139 in FY eighteen to a 192 in FY twenty one. And that repeat trend has continued into this half year. So just on to the income statement. We've included a profit bridge in this slide to help show the main movements between this half year and h one last year, as there's a step change in our cost base for f y twenty two post IPO as a result of our investment to support the the growth of the business.

15:22 And the h one period last year was just before the IPO. I'll refer to the bridge as we walk through the main income statement items in case it helps. So as Tommy said, we achieved revenues of 9,300,000 in the first half of this year, 20% growth on the prior year first half's revenue of 7,700,000. And this, as Tommy said previously, represented a significant positive variance on targets set at the beginning of the year, the financial year. And order intake and revenue were also had also increased across all three product lines. We went into the second half of this year with a healthy backlog and a good order pipeline, and we're expecting to meet the current market guidance for the full year results.

16:08 Gross profit, just as a reminder, that's net of commissions to our channel partners, grew 17% on the prior year, and that's driven largely by the revenue performance. Gross the gross margin percentage is is 76% in this half year compared to 78% at the same point last year, and that's largely driven by product mix. In a normal year, we can see fluctuations in margin by by one to 2% each week depending on the product mix, order and and shipping mix as well in the period. And on the profit bridge, you can see the first two blocks show the impact on the gross profit from the volume and margin variances between the two half years, just showing that net £1,000,000 improvement in gross profit in in this year driven by as you can see predominantly by the increase in the in the actual revenue volumes.

17:00 Profit before tax, and this that's shown here as adjusted profit before tax here to take into account the adjustment for IPO exceptional costs in FY '21. There's no exceptional costs in this current year. And so that was 2,300,000 in the period, which as you can see is flat on the prior year. But as we said in the announcement today, and as I I said about revenues, it's a material increase on initial management expectations at the beginning of this financial year. And as I also mentioned previously, one of the key drivers behind the variance to the prior period is driven by our planned step change in our cost base for f y twenty two, which was built into our forecast from the start. And that's driven by both a ramp up in the teams to meet and prepare for future growth.

17:48 So that's across the the all teams. But in the admin cost that would be sales teams, predominantly in The US and and India, and in our in our our our management of the the operations team is to bolster that that that operations capability. And that just helps us meet and prepare for future growth. And then, of course, there's the change in costs that come just with life as a listed entity as well. So just on that, admin costs, and that's that's excluding depreciation and amortization at this point. And adjusting for the exceptional costs last year, we're 3,200,000 in this current half compared to 2,300,000 in in in the previous year, and you can see that in the bridge as well.

18:33 And as I said, this increase in admin costs could be split into two main categories. That's the increase in organ organizational growth and the staff cost that comes with that that as we build the teams and higher professional fees and share incentive scheme costs just as as a a fact of life of being on listed on AIM. We also we initially expected travel costs to increase in the year in in this first half as a result of COVID restrictions being eased, but we've not seen that increase materialize just yet as travel restrictions were predominantly still in place through the the period in in the regions that that we work in. So costs are very much in line with this year. We we could expect these costs to start to ramp up as restrictions ease.

19:20 Amortization of r and d costs increased by 200,000 in this half compared to the prior year. And again, that's as a result of increases in our r and d headcount as we ramp up for growth. And I'll talk about the r and d cash spend on the next slide in a second. And just to as a reminder, r and d spend for us is capitalized and amortized over five years to the p and l. Tax charge is 500,000 in the year, and that's in line with last year. The effective tax rate for this year is 22%, and it's driven by a combination of things. As as you'll know, The UK corporation tax rate is due to rise to 25% from April 2023, which is f y twenty four for for Us financial year wise.

20:07 So measuring your tax charge, you've got to take that into account when you've when you've got your we've got quite large deferred tax liabilities because of our amortization profile. You've got to take that into account as you roll off those deferred tax liabilities at the higher rate. You've got to measure them at the the rate that they're going to be. And that's like that's offset partially by the availability of r and d tax credits for us. So so we split our r and d tax credit exposure across two schemes, the the large company scheme because some of our projects are are are covered by grants and the small and medium sized entity tax credit scheme, which sure you can take for some of the projects as well. So we expect this this effective tax rate to be aligned to the effective tax rate for the full year.

20:57 Earnings per share was 2.05p in the period, and diluted EPS was 1.99p. And that compared to 3.02 and 2.42p respectively in the prior year. The calculation for or the the components of of the calculation for the for EPS are not like for like across the two half years purely because of the IPO in the middle. So what looks like a reduction in earnings per share has to take into account the the change in the weighted average number of shares and issued pre and post IPO. We issued 27,500,000 shares on IPO and 50,000,000 of them were were share options. So so that only comes into play in this current year's EPS and not last year's. So you've you've got to take that into account when comparing.

21:48 There are also 3,100,000 share options issued since the listing, which further increases the weighted average diluted share capital at the end of the period. So we'd expect this calculation to level out in future periods to aid the like for like comparisons, albeit with small increases in share capital in line with share issues and exercises or share options in the future. So just onto the cash flow.

22:14 Sorry. Just change the slide. As you can see from the next slide, the group generated 900,000 cash in the half year, and that's in line with cash generation in the prior year half, albeit for for different different reasons. Net cash generated from operations was 3,100,000 compared to 2,900,000 in the prior year half. And working capital movement shifts into the cash outflow of 700,000. And that's mainly driven by increases in our trade debtors balances, which is a natural flow of working capital as we grow the business and our increase in revenues and shipping to customers grows. That that then puts the the trade debtors into a cash outflow position in in a growth profile.

23:02 Cash used in investing activities is predominantly cash spent on r and d activities. So as you can see, cash spend on r and d in the period was 1,900,000, and that's 400,000 higher than the last half year. And that, again, as I said on the p and l, that's as a result of our ramp up in the r and d teams to support growth. Cash spend this year, let's have here, sorry, is 20% of revenues compared to 19% of revenues last year. And in a period of ramp up, we plan for this to be approximately 25% of revenues when we plan at the start of the year, which aligns to the to the the guidance that that that has that that the company has. That's the metric is lower at the moment just because our revenues are higher than what we expected at the start of the year.

23:51 Cash spend on financing activities is very small this year. It's mainly for lease costs in the half year, and that's compared to a cash spend of 600,000 in the previous year, but a lot of that related to either pre IPO fees or debt repayments on on a loan that we we paid off as part of the IPO funds. There's currently no debt on the balance sheet and that leads to no borrowing borrowings related cash flows in the current period. And as Tommy said, closing cash was 13,600,000, and that leaves us in a very strong balance sheet position leading into the second half. And just lastly, again, as Tommy mentioned, we will be paying off a maiden interim dividend of 0.28p per share, and that will be paid out on the December 17. Back over to you, Tom. Okay. Thanks, Ashley.

24:39 So let's have a look at what else has been happening on the ground and strategically. I guess through the year, we have actually, as Ashley mentioned, we have accelerated our hiring program to put more people in region as well as in the the development and support and and business operations teams here in The UK, and we're continuing to grow the groups around the world. You know, if you've ever been involved in a young company that's growing fast, it's a it's a requirement in every department. There's a continuous evolution of processes to deal with the growth. But every so often, there's a need to make a bigger change, and one of these changes is coming in our manufacturing operations. So we've hired a new VP of operations really to look at the way we manufacture our products and and take it forward so that we can we have sustainable growth going forward or we're in a better position to have sustainable growth moving forward. So there's a major change coming here, but that's something that's happening in the background and and obviously is making sure that we continue to grow, we can continue to to deliver product as customers expect.

25:44 We went, we did we got our accreditation from investors and people this year, and this is something we're quite proud of, because we actually received a gold standard at first time of asking, which apparently very few companies managed to get gold, for the first time. So that's something we are really pleased about. We do a lot of work to make sure people enjoy being here, enjoy working here and work hard for us and and to have that external body recognize that us as a good employer was something we're very proud to achieve this year. And of course, as we start to move out of the pandemic, it doesn't seem to be over yet, but we kind of hopefully are in the end phase. We've started to move towards a hybrid working model where we do want our teams to come in two or three days a week, but then they can choose to work from home if they so desire or come into the office again trying to get the best of both situations of having office based work to get team dynamics good, but also having the ability to get on and concentrate at home that a lot of people find and also being able to balance work, life balance better as well.

26:50 If you look at our products, there's been quite a lot happening. As I should say, across all the product lines of our growth this year, has been really reassuring. And it's really our base businesses that's been growing. But on top of that, there's a few layers that have been really reassuring as well. We've had some in the first half with two major releases, one on the the Paragon platform and the LabSync program and one on the Sentinel program. And these have been really well received by customers. And we again, we would hope to see growth moving forward from these. And in the second half of the year, the cloud and IT product line, we will introduce a virtual version of our SNE network emulator. Again, we expect that to get some good customer engagement and hopefully grow the product line. The other thing that's happened this year is there's been new applications starting to appear, which again look interesting, creating some growth and hopefully, depending how the industry works out, a lot of growth moving forward. This is ORAN initiative, and there's also in terms of in data centers, in terms of using timing in data centers, and we are applying them. So I just wanted to take a few minutes out to to look at both these things in slight more detail and take a case study to express, you know, why it makes a difference to us and why we have been able to make business there.

28:08 So in the data centers, what they're realizing is that having all the servers in these data centers, if you imagine a huge warehouse is full of tens of thousands of servers, and if they're all accurately timed to one another, it allows them to get throughput much higher. If you have a chance afterwards, you'll see at the bottom where it says learn more here, there's actually a YouTube video behind that that we came across that was made by a guy. He's quite quacky the way he presents it, but he actually is very informative and explains why it's really important to the data centers to have accurate time. So we are finding that the data center people are interested in our Sentinel, which is a field product because you can think of a data center like a mini network, and they're using it to test time across the whole data center to make sure that each of the servers are as accurately timed as they expect. So we've had some success there. We're looking to build relationships with other data center, operating companies to actually see if we can expand that market for us.

29:09 The second one I want to talk about was ORAN. Now most of the standards bodies in telecoms, if not all of them, are always initiated by the operators. The operators like standards because they want interoperability. They want the ability to buy equipment from multiple vendors and build a network with equipment from multiple vendors so they don't get locked into one supplier that they can choose to get competition. And in their view, they actually get more innovation across the industry as well if there's more people competing to come out with something different. And so the the RAN network, is the radio access network, you can think of it as the network close to the the the base stations, the mobile base stations that you see, was dominated by three of the large players and still is dominated by three of the large players, Nokia, Ericsson, and and Huawei.

29:57 And so a number of the operators got together and created this initiative called Open RAN to try and split the network up into smaller chunks that other company like multiple companies could choose to do a part of the the the RAN network rather

30:10 than them to do the whole thing. And this was really to encourage more competition and innovation. And this in the last period, this has definitely brought a lot of new people to our door because they're obviously starting to implement the requirements in in ORAN. Some of these require timing. Some of them require a network emulator as well. And so it's it's it's getting more opportunities in our existing customer base, but it's also getting some new customers to to us. And some quite surprising ones, in this one example here, one of the tier one server, server manufacturers, actually is we've had good business over the last eighteen months from them. So in their servers, they're actually implementing or showing that you can deploy ORAN type infrastructure in a cloud environment.

30:56 You know, one of the interesting things that happened lately was when Facebook had a well publicized outage on the data centers for, I think it was half a day that went down, a number of mobile operators around the world find that they couldn't offer data service to their customers because they're actually hosted inside these data centers. So you can see that these data centers are not just about sitting there holding photographs and things you might look at one day. They're actually being actively used to host these software defined networks. So the things are coming together and we are actually seeing these companies that are building servers coming and asking to buy test equipment. So these are the same test solutions that we're selling to other people, but new customers are coming to our door as well and an interesting opportunity as it goes forward for us.

31:45 So our strategy remains unchanged. This is as I talked about earlier, there are two main, drivers in the industry, the the build out of the mobile net, infrastructure, often labeled the five g, and also the cloud computing. These are the things that are creating huge amounts of interest, lots of innovation across the industry in terms of new interfaces, new frame structures, new equipment. Therefore, there's need for new testers as well, and that's what will continue to drive us. We also, as you know, the past, we've done some acquisitions and we continue to look for other opportunities to acquire companies. Test and measurement is not an industry that has tens of thousands of companies in it. There's not even hundreds, but there are tens of companies. And we keep close contact with a lot of people looking for the right product that allows us to do one of two things. Either get a new set of customers that we don't sell anything to today, or take it allows to sell more to the customers that we do sell to today. So it's another piece of equipment that we can go and take more money off the table. And that ultimately is aimed in our growth strategy. We need to get more things that we can sell to people. Whether we do it ourselves or whether we do it by an acquisition, we are open to both and if the right thing comes along at the right time, then we will move forward and do that.

33:01 So to summarize the situation for the last half, it's been very good for us. We've had a really good half. There's a lot of signs in there that give us confidence going forward. You know, the demand for telecoms test equipment continues to grow from our core suppliers, our core customers. We're seeing some new applications coming along. We're moving the products into new applications as well, which gives us confidence moving forward. There is the cloud around everybody at the moment, the global shortage of semiconductor, products, and that looks like it's going to

33:32 continue at least for another six months, nine months, perhaps, hopefully no longer than that. Today, we've managed to navigate that without impacting any of our ability to ship product to customer. We tend to sit with because we have low volume, high complexity, we tend to have a reasonable high level inventory, which has helped us in this situation, but it's a continuous challenge trying to get equipment. But so far that between our contract manufacturer and our r and d team who sometimes have to go and look for replacement parts, We've managed to keep everything moving, and we continue to monitor that closely going forward until the shortage is cleared across the industry or across the world. But because of this background and growth that we've seen, the strong figures we've seen in recent time, then we go into this next period with with very high confidence that we can achieve our results that we forecast for the rest of the year.

34:26 And at that point, I'm gonna open it up for some questions. That's fantastic. Tommy, Ashley, thank you indeed for the presentation. Ladies and gentlemen, do you please continue to submit your questions using the q and a tab situated in the right hand corner of the screen. But just while the team take a few moments to review those investor questions submitted already, I'd like to remind you that recording of the presentation, along with a copy of the slides and the published q and a, can be accessed via your investor dashboard on the investment company platform. I'd also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide your feedback in order the company can better understand your views and expectations.

35:02 And, Tommy, Ashley, before we move on to some questions we've received during the event itself, we did have a a couple of presubmitted questions. If I may, I'll just read those out. The first one reads as follows. How many engineers do you employ specifically to create new products or enhance the existing lineup? Yeah. Pretty much most of our r and d team are doing that. We have a support team, a small team that provides support in the engineering team. The majority of them, about 90% of the engineers are all working on enhancements. And as as you know, our products are more platforms. We like to refer to them as platforms that we use for multiple years and keep adding more and more functionality on top of that. So the vast majority of the engineers are actually working in that type of environment all the time, bringing either new capability, small increments of capability onto what's there at the moment when changes happen in the standards.

35:51 Sometimes you have to add a new measurement or some minor change or some bigger changes as we've introduced, like support of the 400 gig interface, which is a fairly major project for us. But everything's really about, the engineers are all working on on products that will hopefully enhance the product going forward that will encourage people to buy more either upgrades or new products.

36:12 Fantastic. Thank you, Toei. The next question reads, how many patents have you registered over the last two years? Do you expect to patent more IP in the next two years? We haven't done a lot lately in the patent front. We've we have done some patents. We've got a number. But actually, when we started doing the neo, we actually actively decided not to patent it, which may seem strange, but, you know, our base is very wide, and really we get competitive advantage by being quicker than everybody else and being there faster. And one of the skills in terms of the very high accuracy timing is how you calibrate the instrument. Everything's a problem when you're trying to measure to a nanosecond of time. To give you a feel for what that means, a nanosecond, if you remember when you were at school or university, they told you that light went infinitely fast. Well, kinda doesn't.

37:00 It goes that far in a nanosecond. So suddenly when you're trying to measure to that or make equipment accurately measure to these, every path, every component's a problem and how you characterize it, how you understand the delay through each path, how you then compensate for it, how you make sure it doesn't vary every time you switch it on, is really where a lot of the IP is in in that product. And we felt

37:23 if we put it in a patent, it was probably impossible for us to police it to know whether anybody was copying it because it's more about the technique of how to build it than it is on functionality. So we get, we believe we get, we stay in front not through IP patents approach but by IP from the point of view that being first you know, tracking the network, understanding what the future requirements are gonna be required, and doing that quicker than anyone else.

37:54 That's great. Thank you, Tommy. The next question we've got here is, I understand the core of your technology is the exceptionally accurate time measurement and the automation of testing processes that require this. Could you please outline what are the natural adjacent market areas, I. The new business areas?

38:10 What new business areas does your existing expertise leave you well placed to enter? So really the telecom space was the first to really hook onto the value of accurate time across networks, and they've been working on it. And in some ways, if you look back, because we were fortunate when I started CALNEX back in o six, I kind of stumbled across this application, and it's really taken the telecoms world about ten years to really get it to work well and understand how to build high accuracy networks that, deliver accurate time. And, you know, for a number of years, we've seen other sectors that have looked at it and thought that could be useful.

38:46 Things like the data world, or the data center world, the financial world, the power industry, automotive industry are now thinking perhaps time as a as an accurate part of your infrastructure as a useful thing to have. And so we're starting to see more and more people look at these, and there's been quite a change in the last couple of years where they've gone from thinking that could be useful to we need that. I was at a conference in Brighton just two weeks ago, and there was a number of people from the the data center world, from the financial world, from the the power

39:18 industry says they need time. So in the, you know, in the financial world, high frequency trading, how do you know that a a trade happened when you expected it to happen? Because it's time stamped. What's the accuracy? Time's a relative term and therefore, need to deliver high accuracy time to make sure that everything's aligned to the the regulations that are happening there. The power industry needs time because power's coming from many different sources, and the syncrophies just need to be aligned to be able to measure power distribution across the network, and of course, you get the telecoms people. So we see but it's fundamentally the same technology that's being used to transfer time, that that method of transferring, just quite different applications. So some of these

39:59 are starting to come alive for us. It all depends what level of accuracy they need. If you need accurate time to two seconds, then you don't spend a lot of money on test equipment. If you need accurate time to a few nanoseconds, you need to spend a lot of money on test equipment. And there's a spectrum there in terms of what accuracy you need for the application. We'll actually ultimately decide whether it's an opportunity for us or not.

40:22 That's great. Thanks, Tommy. The the final pre submitted question we have here is I see you're recruiting extensively with only a low number of applications per advert on LinkedIn. Are skilled labor shortages holding you back? Is staff turning turnover holding you back? I wouldn't say we are trying to hire, and we can't quite get everybody we want. I wouldn't say it's holding us back, but it's not allowing us to go fast forward as quickly as we maybe want to do. So it is a very competitive market out there for labor. I think we've all heard that. We've we've got a license to hire overseas, so we have recently hired people from India and Turkey and and brought them to The UK. So we are managing to get people. It's taking quite a bit of effort. It's not holding us back. We haven't had much we've traditionally had a very low turnover of people, and that's pretty been pretty much the same this year. We haven't lost a lot of people. So we, you know, we plan to continue to hire, hopefully, hire another 10 people in the second half, and we would expect to continue to hire into FY twenty three as well.

41:25 That's great. Toby, fantastic. That's concluded the, presubmitted questions. If I may just ask you both just to click on that q and a tab, and and perhaps start at the top. Where appropriate to do so, if you could just read out the question and give you a response, that'd be fantastic. Thank you. Okay. You wanna go first, Ashley? Yeah. It's a a right. At the top, there's a finance one. So I'll I'll grab that one, and there's another another one I can comment on as well. So a Adrian c has asked a question for me on the cash flow statement. Why is tax not being subtracted to derive the net cash from operating activities and should we not start with profit after tax rather than profit before tax? So just just a a quick one on on that. You can start with either of the statutory basis makes you makes you start at profit before tax. But essentially, that top part of the cash flow is to take your p and l and get the timing right so that so that it reflects the cash flows coming from that p and l. So you'll have some non cash activities happening in your p and l like depreciation, and you'll have some timing like revenue being turned into actual cash coming in from invoices, which is dealt within the working capital area. So for us, tax is non cash at this moment in time. We don't actually pay cash out for tax because we have some protection at the moment from our r and d tax credits.

42:49 So we start a profit before tax because if you started at profit after tax, all you would do is add that back as a non cash item. So it's not actually cash flow relevant for us. But even so, a lot of the time when you have tax in the p and l, that's not your true tax that you pay to the to the tax man in the year just because of timing differences. So you've got to add it back and then add the p and l item back and then bring the cash flow item in later on. But if you're wondering why there's no tax at all on the cash flow, it's because we don't pay cash tax at the moment. So hopefully, answered that question. The the second question that I saw further down was there was actually sorry. There's actually two questions from Morgan d, so I thought I just can't answer them both.

43:37 Morgan's asked initially, are you able to give margin guidance or at least broad guidance? So just from the guidance that's out from our broker guidance, same cost guidance that's out there in the market at the moment, our gross margin guidance for this year and for next sitting at 75%. And that just just takes into account from what I've seen before, takes into account product mix and and shipping shipping mix as well. So so that that's that's the only guidance that we've got out there at the moment in terms of our margins. So hopefully that helps. And then your second question was, how to how do you plan to manage your cost base going forward? As you expect increased investment, does that mean OpEx will increase faster than revenue?

44:22 Not not quite. This is a strange period for for the two comparative the comparative period for us because it's post IPO versus pre IPO. There is that step change that comes with listed entity type costs. So we wouldn't expect to see such a step change again. Although our headcount will be growing, the the cost that the cost base should increase incrementally from now on, not at the same rate as as what we planned for our revenue growth. So it should it shouldn't shouldn't grow as as fast as revenues if our if our plans numbers work out. Okay. Over to you, Ty. There's a couple here I can pick up, Ashley. Do you operate a SaaS model or software as a service model?

45:09 No. We don't actually sell very much at the moment. You can actually buy some of our products on that configuration if you want. You can either have a perpetual license or a timed license as we refer to it. So it's you you buy it in three months chunks. What we've tended to find up until now, especially in the R and D domain, our customers are really buying it from their capital budgets and they really don't like it when when they buy recurring type licenses because quite often as you know, when trouble comes over the horizon, the first thing that gets cut is capital budgets and so they find they have no ability to buy the equipment they need. So we haven't actually pushed it too much. It's been valuable at times when people our products can be quite pricey and if they haven't enough from a budget, we can sometimes allow them to buy in two stages to buy the first part, buy some timed licenses and then the second period, they then convert these timed licenses into perpetual licenses.

46:07 And that allows them to manage their budget, and it allows us to avoid getting into a lot of discounting discussions. And as I mentioned, we've got a new product coming out, a virtual personal SME. That's going into an environment where people do perhaps do buy more software type products that are actually bought more on a timed license basis. So we will, with that product, offer it both as a timed license and as a perpetual license. And as far as we're concerned, we're driven by what is the best for the customer, and and if they prefer either one, then we'll offer them that as a solution. Let me pick up one other question here, which is a good question. I see management has reported results ahead of expectation three times in the short period as being a listed company. Is this because management are deliberately conservative in the guidance to the market, or does it reflect inherent uncertainty predictability of the business and the timing completion of orders?

47:03 That's a good question. I thought that would come in. You know, I think back in my past life, I used to have a manager that used to always say to me, a trend's a trend when it's a trend. And then actually, I've found in this industry, there's times where you get a burst of orders coming in, you have a good period and it's too people are too quick to say that's a trend, it's all going up the way, when in fact it was a burst of orders. So we do felt last year that we had had a great year, but there wasn't enough conversion, wasn't enough longevity in that to see if it was a trend in the upward direction. I think that's definitely changed in the last period because of this period we have actually now seen people coming back buying a second one and buying more, getting into more areas. So, you know, we are always going to be slightly conservative. We want to try and meet our and exceed our expectations, and I'm not going to call a trend when I don't believe it is a trend.

47:54 But I think at this point, we actually are feeling more confident now in the next period and hopefully we can deliver growth in the period ahead as well. Ashley, you got Sure. Yeah. Sure. I've got a couple here. James c, you've asked do you expect the dividend to follow typical third interim two thirds final profile? We've not actually had had the discussion at the board yet in terms of what our final dividend profile is gonna look like. So when we do when we do know that, we will we will we will confirm that. But that's that that decision is likely to be made closer to the to the full year results. And then there is a second question that I saw here.

48:42 Katie has asked what percentage of revenue comes from the recurring revenue compared to new sales. So as as we were talking about previously, the we we don't actually have our recurring revenue apart from that 10% revenue. If you can class that 10% warranty revenue as it amortizes down into the p and l as recurring revenue. Our main bundle hardware and software revenue, we we don't have recurring revenue, but we call we we do have repeat revenue. So from a repeat revenue perspective, we our our repeat revenues for the last three years have averaged up by 80%. So 80% repeat and 20% new. So hopefully that answers that question. Okay. Over to you, Tim. Yep. I see Rick's asking a question. Somebody asked some further up there about manufacturing capability.

49:36 I think this kinda captures both. You mentioned looking to improve manufacturing capability. Is this likely to lead to use of another contract manufacturer in addition to Kelvin's side or bring any production in house. No. This kind of fundamental approach that we're taking is not planned to change at the moment. It's perhaps making us more able to change in the future if we choose to do that. What we're really talking about is just the way we work with our contract manufacturer, the way we manufacture. The products tend to be brought into house to do the final testing and shipping to customers. And in the early stages when new hardware has just been released, a lot of the debug has to happen here using our engineers. So what we're looking to do is just improve the whole and mature the whole way that we go about this forecasting to supply our work in closely with CALNEX looking at the way we forecast future capability and whether there's a way that helps them procure material more effectively, make sure that we have more flexibility in a whole supply chain to wax it up or down as and when we need to do it. So that's really what we're looking to do. And at this time, we're not looking to change that relationship.

50:43 You know, a lot of the the value we get from CALNEX SOLUTIONS is not just building it, but they do the procurement for us. And at this point, when the challenges are happening in the world, you know, the the good relationship we have with the procurement team in CALNEX SOLUTIONS with the engineers here, you know, is a key part of giving us robustness against the the challenging situation we have at the moment. Ashley, have you got one you wanna pick up? Yes. Actually, one linked to that from Darren here saying, will your new VP of operations spend time at the Kelvin side electronics manufacturing partner? And the answer to that is is yes. So he his his a lot of his time will be spent on a on a day to day basis. He speaks to Kelvin's side, and a lot of his time will be spent actually being at Kelvin's side as well, speaking to us, honestly speaking to the mondorand plans, etcetera. So there's very close link between between us already and and Calvin says, who's just embedding our new VP of operations into that process.

51:42 So he's key to that. And then sorry. No. That's alright. Let me just pick one. Melvin's asked an interesting question here. I think I need a pint for this one. What where do you see natural boundaries to CALNEX's operations? Volumes or technical aspects or needs to telecoms or the speed of light time things. What about quantum computer in the future? Yeah. All these might happen, Mel. You know, I always say that there's no boundaries. If there's a glass ceiling on CALNEX, it's because we put it there. You know, I think as long as there's innovation happening, then there's opportunity. You know, as at this point that they say the telecoms network's finished, that's all we need. We don't need ethanol, so it's not a great day for the test world.

52:29 But that doesn't seem like it's gonna happen anytime soon. And I think you've seen so many exciting developments, new groups coming along, new areas. I think once the actual, you know, infrastructure from the five gs paradigm gets out there, then it's going to create more applications. Other companies are going to come along and create new uses that will all end up changing our life and that will drive other innovations in telecoms to be able to support that. So we see an opportunity coming all around us in all groups of people in the telecom space, in the datacom, in the financial world potentially. So there are many different areas where we can see opportunity coming in the future. Our challenge is obviously to keep connected to all these people and then being in the right place with the right discussions to understand where we can create business from it.

53:19 Ashley, have you got a question? Yep. Another one here. Don't know from Adrianne, going back to operating cash flow. Over the past two years, there appears to be greater cash flow in h two than in h one. Is that expected in this financial year? So there's there's probably two two trends. There there we usually see an an uptick in our in a in a normal year, we usually see the the revenues and orders slightly weighted to h two. It's usually about 45 to 55% for the over the two halves. We also it will also depend on our a large majority of our cash, as you might expect, comes in from from Spyrin, and that being our biggest distributor.

54:05 So they're usually very good payers. They'll just depend on on where their their invite invoice cycle lands as a at the year end. And the last couple of years, one of their big batches of invoice payments came in just before the the year end. So we're hoping that that also happened this year, but if it doesn't if it doesn't land right at the year end, it will happen a couple of days later. So so we're quite comfortable about that about that cash flow. In terms of the cash flow guidance that we've given for this year from a from a previous perspective, just because of everything that's happening out there in the in the wider world, we've kept the the cash more or less in line with with this half year.

54:51 However, it'll all depend on that timing between those those last couple of days of the the year as to to what we get in from trade getters. Hopefully, that answers that question. And there's a question from Scott here. What kind of visibility do you have in your pipeline? So from from booking an order to shipment, it's typically four to six weeks depending which product line we're in, Scott. So about the average is about six weeks. And actually, going back to the manufacturing, that's one of the things that we're trying to improve is keeping it down near the four to six weeks. We've found when we introduce new products that are more successful than we expect, it's taken us longer than we'd want to get the lead time back down under control, and that's part of the kind of improving the manufacturing process.

55:36 So we've got kind of four to six weeks from once orders are placed. In terms of new orders coming in, sales tends sales funnel tends to give us about three to four months to five months of visibility. A typical deal takes three to four months to close. So from that, we've got a fairly good, view for the kind of three to five month out from the sales sales funnel and active deals. And then past that, it's it's more about our market intelligence and understanding of the market and detecting the growth drivers that that gives us a longer visibility. Ashley, have you got one? Scott's actually asked the second question. Do you have a view on the appropriate level of cash on the balance sheet going forward?

56:22 So for us, it for us, it depends on as you'll know, our sort of third string for our strategy is is m and a. Some of that cash that we've got on the balance sheet, if if an appropriate opportunity came up, could be used for for m and a depending on on on the size. There is there there is some capacity within the cash that we've already got at the moment for for for some some small m and a deals. So in terms of the surplus cash on the balance sheet, it really just depends on on nonorganic activity that happens over the next few years as to as to what that appropriate level will be. But we're very much within the within the we've got got quite a lot of of capacity within that that cash that we've got at the moment to to be able to come and run the operation as you can see from the cash flow.

57:21 Tommy, Ashley, we're just coming out towards the hour. And every time you answer a question, another one comes in. So thanks very much indeed to everyone who submitted the questions. And, of course, the company will review all questions submitted today, we'll publish those responses where appropriate to do so on the platform. But just as we come up to the to the close, Tommy, perhaps I could just ask you just for a closing snapshot before we wrap up and redirect the investors to give you some feedback, please. Sure. So it's been a really reassuring period for us. You know, we've had a, you know, we had an excellent period. We exceeded our targets. We're feeling good about the next period and that comes not from one thing. It comes from a number of elements. Both our base business and all three product families has increased. We're seeing new applications which gives us confidence we'll find other new businesses as we move forward. And we've got some really good releases that our customers have given us strong feedback from that actually gives us confidence moving forward. So all things apart from the component shortage which is out there, it's a slate that we all have to keep a very close eye on. But apart from that, we are feeling really good about the next period, and we hope we can continue to meet our expectations.

58:31 So thank you very much everyone for coming along. Fantastic. So, mate, Ashley, thank you again for updating investors today. Could I please ask investors not to close the session? It should be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete and is 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. That now concludes today's session. Thank you, and good afternoon to you all.