Calnex Solutions (LSE:CLX) — Full Year Results

0:01 Good afternoon, and welcome to the CALNEX SOLUTIONS PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press end. 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.

0:33 Hi. Thank you, Lily, and good afternoon, everyone. Thanks very much for taking the time to hear the the update from CALNEX on the results and of FY '23. Before we go on to talking about '23, let me just take a couple of minutes for the people that may be less familiar with CALNEX to to just go over who we are and what it is we do. So CALNEX makes test instrumentation primarily for the telecommunications industry, but more and more for anyone that's running a telecoms, type network, whether it's in a data center or in an enterprise as well. Fundamentally, all our customers use our equipment to prove can prove performance and conform us of their equipment to to the performance that they expect from the network or their equipment. We already have a a global footprint. We've sold in 68 countries around the world, and we run a lean business model and use global distributor channels to to create that footprint together in the world.

1:29 If you look at our customer sets, it breaks into kind of four main buckets. Top left is the telecoms equipment vendors, so you get companies in there that you'll recognize like Nokia, and Cisco. So we sell into their r and d teams where they are developing pieces equipment and they need to verify performance before they release it into production. That group represents roughly around 55% of the business that we generate. In bottom left, we have the network operators. Again, familiar names, AT and T, BT, China Mobile, that run the large networks. Again, our business is split in two parts there. One part, we sell into their r and d teams that evaluate new equipment prior to deploying in the network. And we also have maintenance products that we'll talk about through the presentation as well. The third group of in the telecom space is bottom right. That's the component manufacturers. Yeah. Intel's, Broadcom's, Qualcomm's as well that make very sophisticated chipsets.

2:28 They sell our chipsets to the equipment vendors, they build them into equipment, then send sell products onto the network operators. And they represent around six or 7% of our business. I think I forgot to say the operators are around 15% of our business. Then the last part that's a growing part and currently around low twenties, 23, heading to 25% of our business is what we've termed hyper scale and enterprise. So these are either large companies running their own networks, but also of great interest are the companies that are running the big data data data networks of the world, the data centers. And these are the focus for us as we'll talk about later. If you look at the life cycle in terms of why do people need to test, well, at every stage of a life cycle, building new equipment through to manufacture, through to building networks, maintaining networks, there's a need to test.

3:18 The areas that we focus on are highlighted with the red circles there, and it's primarily what we call design validation and conformance tests. So this is the r and d teams are building a new switch or a router or a people piece of mobile equipment. And as they get the the first prototypes back on the preproduction units, they need to fully verify that the equipment's working, and it'll work under all conditions once it's deployed in the real world. They've got good design margins so that they don't end up having manufacturing issues with a a low yield. And also, if a claim and conform is to international standards, again, they need to prove that they actually do meet these standards before they start shipping to their customers. The other part that we focus on is in the far right here is what we've called monitoring and maintenance. To date, we've actually been focused on the maintenance part. So this is after, for example, a mobile network out there. If there's a problem at a base station and a base station won't work correctly, then they have to send their engineer out to understand what's going on so they can verify the correct the problem.

4:19 The other part that we're looking at now is monitoring as well, where you've got actually a deployed monitoring system that actually touches most of the nodes in the network and sends information back to the central system to see that there's a problem or there's an issue at a particular node. Again, we'll talk about that a lot more later on. So CALNEX is really you know, since we we floated on just over two and a half years ago, since we floated on the end market, Through that time, we've grown that we're a profitable cash generation generative business, and and we've got a robust balance sheet. We're considerably larger than we were two and half years ago. We've had three years where we've grown very healthily both in revenue and profit and in terms of staff size as well.

5:04 And key to us, and we'll talk a lot about this later, is the strong customer relationships that we have, and also relationship with our partners across all territories. We have a large expanding addressable market and challenged as all businesses are to keep growing growing that as we move forward. And although at the moment, as we'll talk about, there are some challenges in the in our sector where the the the kind of macroeconomic effects are slowing down spend on making some of our customers being more cautious with the spend in the near term. Underneath that, we believe we are in a good place because the drivers for the networks that we're involved in are the the parts of the market we're involved in remain healthy. The build out of the mobile network often referred as five g. The move to cloud computing, the need to build data centers to host the cloud computing and then put test services running in cloud computing are all continuing to grow and show no sign of slowing down. And so our markets remain very healthy.

6:02 So that's who CALNEX SOLUTIONS, and I've whistled stop to you. So let's just talk about last year, FY '23. Well, we are really pleased to what happened in '23. It was a great year. We grew our revenues 25%, sat 27,400,000, and profit pretty much aligned up 21% in that period, 7,200,000. And we generated cash with a healthy closing cash balance of over 19,000,000. And we at the AGM in August, we will propose a a final dividend of 0.62 p per share. And it's not only I say it's supposed a great year, and it's not just because of the numbers, but also from an organization point of view, we had a great year. We've been growing a lot lately, and as you continue to grow, things need to change to to deal with the the different challenges you get, and we've gone through a number of changes within the organization which have all been successful.

6:53 And now as an organization, we feel we've matured and grown over that period as well. One of the biggest issues we had to deal with last year, same as everybody in the technology sectors, was the problem with the supply chain component shortages. And if we look back now, probably this time last year was probably the darkest hour. It was really torrid time for our manufacturing teams working with a contract manufacturer and our r and d teams trying to manage, get components, and if you couldn't get them, get replacement components. But I'm pleased to say it is much better now. I'm not saying the component industry is back to normal, but it's definitely in a much healthier place. And all our products now are back down to normal lead times that we would expect and not the extended ones that we were managing last year. And the team really did a great job of getting us through there, and it really was down to that relationship and strong relationship we have with a contract manufacturer, CALNEX SOLUTIONS, that allowed us to work closely with our procurement team and interface with our operations and our r and d team to deal with the many, many challenges these guys had to deal with last year.

7:56 But through that time, we've continued to innovate in our products, and you'll see later on that we've got a number of new releases and new things that we're coming out with. And of course, one of the key things that we're trying to do is is strategically grow our relationships with the hyperscale customers. We've had some early success with these guys, and we believe there is a number of opportunities in there that we continually want to build relationships, develop good relationships with these customers, and then hopefully generate convert that into healthy business as we move forward. And we've made good progress over the last year. We we already have a strong relationship with one of the hyperscales. We have seed units into two of the other ones. These are early units into their r and d team while they're evaluating the need whether they want to put timing synchronization across the data centers or not. And we engage very closely with them and help them do that evaluation and make sure we are seen as the partner of choice if they choose to go ahead and do that.

8:51 M and A has been part of our strategy and for a number of years in in April last year, we acquired iTrinity in Stevenage. And year one was very much about the integration of that team, building out the team over the period so that we're ready to create growth this year. And I would say that we're pretty much on track with the the road map really right. The team's almost twice the size it was when we acquired them. We've put people into sales, into business development, into product marketing, as well as engineering to really round out that team and make sure we had a strong team. And this year, it will be about trying to really push and make sure we can create good growth into that new set of customers for us. So at that point, I'm gonna hand over to Ashley and she's gonna cover the financial review.

9:36 Thanks, Tommy. So just before I take you through the financials, I thought it would be useful to briefly remind you of our revenue model as I've done in previous presentations, and it will also be good for those of you that are new to CALNEX just to understand our revenue drivers. So CALNEX generates revenues through the sale of bundled hardware and software, as well as software support and extended warranty programs. So typical customer will come to us to purchase one of our hardware products. And within that sale, there'll be a number of software options included at the time, and that is invoices one bundled sale to that customer. That same customer can then come back for upgrades or additional options that are then added to the existing hardware through the provision of a license key, and we sell these as standalone software sales or upgrades.

10:26 And bundled hardware and software sales pricing can differ for or for each order as it really just depends on what hard hardware product is being purchased and the numerous software option choices that each hardware product can offer. It really just depends on what each customer wants to purchase combination wise for what for what they need. And that revenue is recognized on dispatch or delivery of the software license key if it's a standalone software upgrade and makes up 90% of our total revenues. And you can see that from the graph in the top left of this page here. And that has that has effectively been the trip the trend for for the last few years, and you can also see that that in the the trend trend is showing there for 2021 and 2022 as well.

11:12 Each of our products comes 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 as you can see here. And that revenue is recognized over the life of the product. And moving across the top of the slide to the middle pie chart, as you will also know, our revenues are generated across a global customer base and distributor network. And in the past few years, we've had an almost even split of orders and revenue across our three geographic divisions, Americas, North Asia and rest of the world. And that just helps give us a spread of risk. This last two years has seen a slight decline in the portion of total orders coming from North Asia as a result of The continued US China geopolitical tensions.

11:57 Although, as you can see from the chart, this region still contributed 27% of total orders on average over the last three years. I'll come back to the geographic split in just a minute on the following slide. And as you remember from previous presentations, our say and from what Tommy just said on on slide three, our sales are predominantly derived from telecoms customers where the end application is a telecoms network. However, a non telecoms customers as Tommy was saying include those hyperscale data center and enterprise customers. At the top left here, we show that on a three year average rolling basis, and at this moment, and this graph here excludes our recent acquisition just just for a second because it just to get a like for like comparison.

12:44 These non telecom customers represented 25% in f y twenty three compared to 23% in f y twenty two. If you add back in our our the sales of any one or acquired products in f y twenty three, the three year average percent percentage of non telecoms rises to 26% in FY twenty three. So just moving on to the bottom of this slide to the left hand, so starting from the left again. As you'll seen from previous presentations and from what Tommy just covered on slide three, our customers are some of the largest in the industry. And over the last three year rolling period to March 23, our top 10 customers contributed 47% of total orders. And in addition, the average length of relationship we have with our top 10 customers is ten years, although there are customers within that top 10 that have been with us much longer. And that just demonstrates the repeat nature of the business that we do with them.

13:43 We'll see customers come back to order from us frequently as they may want to order different bits of kit for bits of the same kit for multiple sites. They might want to add new kit as they grow their labs and testing requirements. They might want to add new software options or upgrades as I just talked about, or they might want to move on to our newer products and functionalities that release to the market. And repeat revenue demand is metric that we measure across the whole customer base of CALNEX, not just the top 10. And that's what we're showing here in the middle chart here at the bottom. You'll see here the three year rolling profile for repeat orders generated across the whole group for an average 74 of total revenues. In FY twenty twenty three, received orders from three zero five customers, an increase on two thirty three customers in FY twenty twenty two.

14:34 Both metrics here have the effect of any one customers being introduced into the mix in FY twenty three as well. And there's just a case study here that I won't cover in detail that we've shown before, but it just shows the it shows the the nature of a typical customer and and their life cycle with us and or their history of trading with us. And the makeup of of them buying hardware and software upgrades and how that contributes to the revenue and and orders that we get from a typical customer.

15:04 So just moving on to the detail on the geographic and product performance in the period. So this is this is this year specifically as opposed to averages. So you'll see from the disclosures and notes in the r and s that we released yesterday, the rest of the world region for us was our biggest performing region in the year. And in particular, within that region, Europe contributed to the majority of the growth within that region. And the North Asia region, just mentioned, has been operating against the backdrop of The US China tensions, which remain in the region. And as a result, China specifically is a challenging country for us within the North Asia region as a whole. However, we've seen a strong performance in Taiwan and there's continued ongoing potential in both Taiwan and Japan.

15:53 The Americas revenue saw growth in the year, which you'll you'll have seen from the numbers as well, and that was a strong start to the year. However, orders were impacted in the latter period due to the challenging macroeconomic environment we're dealing with. So onto the the product line revenue drivers, we experienced revenue growth across all of our major product lines. Lab sync growth has been driven by PAM four release, as well as under underlying growth in existing platforms. Network sync, which is which includes our Sentinel and Sentry products, has performed very well as a result of the diversification of our customer base within this product line, which now includes data center customers, Tomi talked about earlier. And cloud and IT saw good organic growth from SME sales as well as incremental growth from our newly acquired product, the NE one.

16:43 So just on to the income statement itself, just to bring that together, you'll see the revenue growth was 25% in the year, growing from 22,000,000 to 27,400,000. We did see an incremental beneficial foreign exchange effect to total group revenues, which I mentioned at the half year, And that was obviously as a result of the strengthening of the US dollar over sterling in the period. So 80% of our revenues are US dollar generated. And as a result, just over a third of our revenue growth on the previous year came from positive currency movements. At the same time, we saw the supply chain delays easing, as Tommy was mentioning earlier as well, in h two. And as a result, our order backlog, which was higher than normal at the half year, unwind over H2 allowing us to meet our revenue targets for the year.

17:36 Gross margin of 76% in the year, and that's in line with the prior year margin. And as a reminder, that is gross margin that is net of commissions payable to our channel partners. We saw a rise in costs as result of increases in component prices and general inflation over the period. However, we were able to increase our pricing through discussion with our distributors earlier on in the year, which helped maintain our our gross margins. I'm just moving down to underlying EBITDA for a second, and then I'll step back to talk about the costs that that sit within that. This is EBITDA stated after charging r and d amortization Because our r and d amortization is such a large component of our p and l, we like to put this second EBITDA KPI within our p and l just to aid the reader in understanding our p and l drivers.

18:26 So as you can see, underlying EBITDA grew by 1,600,000 in the in the year, and that's driven by the the trading performance, the revenue performance on the top line. Margins were 29%, which is in line with last year as well. And that that is against also against the inflationary increases in external cost pressures within the the non direct cost cost base as well. Hence, we were also able to maintain those profit margins at that that level as well, which was great. Large cost component, as you can see of underlying EBITDA is administration costs. So administration costs in this table excludes depreciation and and any amortization because they're shown on separate lines. That was 9,900,000 in the year, not as you can see using an increase in 2,000,000 on the prior year.

19:13 This increase includes the planned investment including including run rate from the previous year as well in management, sales and support teams across the business, which was all in line with our growth strategy at the start of the year. We also saw an expected increase, which again was budgeted for in travel costs as COVID nineteen restrictions have been lifted across the majority of our regions. And we also saw a small incremental increase in overheads as expected as well to the Stevenage site as a result of the Stevenage site, sorry, after the acquisition of iTrinity. So we have an additional site now from April. The majority of our overhead costs are sterling based and with the exception of our over overseas sales teams.

19:59 So as a result, the group's overhead cost base in general has not been materially affected by FX movements. But but there has been some FX movement as you might expect within our overseas sales teams, especially the ones based in the state. And as you'll know, we capitalized a 100% of our r and d costs currently and amortized these to the P and L over five years. Amortization of R and D costs, as you can see here, was GBP 3,300,000 in the year, and that's versus a cash cost of GBP 4,500,000, which I'll cover in a second in the cash flow. And the increase on the prior year is similar to previous years, so due to the planned ramp up in R and D headcount in the year, but also previous years just due to that five year amortization profile, and that's all to support our growth strategy and project plans.

20:47 Profit before taxes, as you can see here, GBP 7,200,000 in the year, and the margin was 26% compared to 27% last year. The small difference there was due to an increase in intangibles amortization, which will be be up I think the same number for the next the next five years due to The Us bringing on a 1,300,000 of intellectual property intangible asset as part of the iTrinity acquisition. And that that asset is amortized to the p and l over a five year profile. That adds 300,000 to that number. Effective tax rate for the period was 18%. So so the the the increase in corporation tax rates and underlying corporation tax from 19 to 25% is built into that. However, we were able to benefit quite well from our the r and d tax credit schemes that that that are available to us. So that that got us back down to the 18%.

21:47 And earnings per share, as you can see here, saw good growth. Majority of that is driven by the revenue the profit performance, but we also saw an incremental increase in benefit to that because of that change in or because of the the decrease in the effective tax rate. Just on to the cash flow, I'll just pull out some key items here. You can see from the the cash flow summary, 3,700,000 of a cash inflow in the year, and that total cash figure includes the two point the net GBP 2.3 effect of the acquisition of Bank Trinogy, which we funded from cash balance. And that just demonstrates a strong underlying cash generation in the period. So pre acquisition, our cash generation was GBP 6,000,000 in the year. Net cash from operating activities was GBP 11,100,000 in the period. Working capital movements can differ year on year just depending on the timing of of when we get payments in from our distributors, which are on set days. So so often happens just a couple of days after the year end or a couple of days before.

22:48 An outflow of 500,000 was was expected, and that's predominantly as a result of the timing and volume of shipping and invoicing to customers. No surprises there. Key cash flow items moving down the cash flow. As I mentioned before, cash spend on r and d activities was 4,500,000, and that's all capitalized and amortized over five years as I mentioned previously. The dividend was so the the dividend here is the combination of our final dividend paid or final dividend for f twenty two paid in August, and then the interim dividend for f y twenty three paid in December. And as Tommy mentioned earlier, we're proposing a final dividend for an if approved at the AGM, that will be paid at the end of August.

23:37 So just moving down the other the other things just to mention here, $2.2300000 net cash impact of of iTrinity, which I've covered. That that was the acquisition that completed on on 04/12/2022. That was two entities that we acquired as part of the acquisition, iTrinity Limited and iTrinity Inc. Both will be hived up into the CALNEX UK entity quite shortly. And then we all we put surplus cash balances as we've said before as well. We've done this for a couple of years now. We put surplus cash balances into high interest deposit accounts. And under accounting rules, you have to show some of them as a fixed term investment. And so you'll see that there's two two cash balances effectively on the balance sheet.

24:27 And we pull them all together on on this cash flow here. So to us closing cash including fixed term deposits was 19,100,000, which just gives us a really healthy cash balance to take into this current year now. And and still no debt on the balance sheet, and we still have our 3,000,000 RCF sitting there and still not utilized since since we opened it up in as as part of the IQ.

24:52 And just the last slide here, I'll just touch on really briefly. It just gives you a bit of a flavor of the kinds of things that we're doing around ESG and and our and the progression that we've made in the year around ESG in general, particularly environmental and social aspects of it. We follow the QCA guides to ESG for small to medium sized entities from our framework perspective and and from our from from the the perspective of embedding an ESG methodology within the business. But we also work very closely with with our investors to understand what's important to them with regards to ESG. We've recently been scored by one of our investors using the integrum framework for ESG scoring and came out with a rating of very good, which is the second rating down, which for a company of our size and for our first go at being scored, we were very pleased with.

25:47 Just a couple of things here, we've created a corporate giving scheme, we created at the start of this year, the f y '23, sorry, and that's up 1% of our budgeted profits are allocated to this fund. It's employee led, where employees are encouraged to propose charities or organizations for us to donate some of the funds money to. And as you can see here, our fund of £70,000 this year was donated to it was used to donate to 84 different charities and organizations across not just our local head office area, but any area that's local to our employee wherever our employees are are located, which is core to our goal to making a meaningful impact to our local communities, either from a social or environmental perspective.

26:34 We also continue to and we always have, and we we continue to invest in training to enhance skills, leadership development, mental well-being awareness across the organization. We're also working with external bodies to support the future of talent and engineering. Our products are innovative, leading edge solutions, as you might already know, minimizing the impact on the environment for our customers. And we are continuously

26:59 looking for ways to reduce the impact on the environment from our own product manufacturer process. And there are various projects happening within the business to understand what kinds of things that we can do that are within our control and within the business model that we have and to try and reduce not only reduce our environmental impact, but also help us understand and gather data and report on our on our environmental impact as well. So that's everything for me. I'll pass you back to Tommy to talk through the strategy. Thanks, Ashley. So let's have a quick look at the strategy and I guess in particular, what's happening in the market and what we're doing to try and increase our addressable market.

27:41 As we all know, back in March, we had to downgrade our forecast for f y twenty four because across the board is we've been seeing exact same as the other big players in the test equipment market space that customers are becoming more careful in terms of their spend on capital equipment, and most of our equipment is bought out of capital equipment. And very much, this is the way that our customer base I've seen over the in many decades, I've been involved in this. That's the way they behave when they get concerns in this sort capital equipment spend because it is the easiest lever to pull. And it really seems to be driven by the macroeconomic situation, not by sector specific problems. In fact, when you look at some of the reports coming out, it still shows that the there's a growth the the the growth remains healthy in the build out of the mobile network, that there is a need for that.

28:31 And also then from a data center point

28:33 of view, again, there's a real need to expand these data centers and and increase the numbers out there because of the amount of utilization that people want to use in cloud computing. So from a market point of view, we continue to see that our fundamental drivers across our markets, our core markets are still there. They haven't really changed. We are in a tighter situation where customers have a delay in spend. But again, from a funnel point of view, we are starting to see a funnel a longer term funnel building.

29:04 The big question is when is it gonna convert? So deals are being delayed. We're not seeing any deals canceled. Things that are in our funnel suddenly, you know, with the engineering teams that we're working with are being told they're not allowed to buy anything at the moment. And we work closely with them, and it's an opportunity to strengthen relationships because they're having a thorough time as well. They want the equipment, but they're being restricted from getting it. So we sometimes lend them equipment, but we continue to build that relationship so that when they do get the chance to start to spend, our PO is quite close to the top of the pile and one of the first ones to cut. So the market remains strong. Definitely, the global macroeconomic effects is affecting us in the nearer term, but we still believe we've got a strong market. But in doing that, we you know, so from a a strategy point of view, a strategy slide is the same as it's been for a number of years. We continue to see that the the two key markets that we're gonna track is looking to innovate products to capitalize on the growth of five g or the the mobile network build out.

30:01 And also from the cloud computing, bit bit both from focusing on the building

30:06 of the the infrastructure to create data centers, but also focusing on testing services and applications that run on top of the cloud service cloud network as opposed to in in office. So these markets remain strong and remain our key drivers. We continue to look for m and a. As you know, we we acquired a company last April, as Ashley was saying, and we have continued to look for other targets. And we've had some interesting discussions through the year. As I've said before, it's a sector that isn't thousands of companies making test measurement.

30:36 There's a few, But we are being quite a lot more systematic at going around. And when we see a company that's right for us, that creates new business, and my definition of new business is to take us to new customers or allows us to sell something in addition to what we're already selling to our current customer base, and that's what will be the fundamental driver to take forward an acquisition and bring them into the company. So if you look at our product portfolio, for people who have seen this before, it'll look quite different. I'm going in the next slide to talk about the changes in a bit more detail. Our lab sync, which remains a key product for us. There's been a number of enhancements over the year. Our platforms stay the same. But in the network sync, there's two new platforms we've got. We've got the Sentry product, which is more focused on testing networks within data centers. Remember, a data center is almost just a big network in a building.

31:28 And so it's the same product a similar product to Sentinel, but more focused on what the data center guys need. And we've got a new product that we've literally just launched called SyncSense, and I'll come back and explain a bit more what that is. And then when you look at our cloud and IT, there's quite a change here because now we've got three versions of SME. We used to just have one, and again, I'll tell you why we've got three in a minute. And of course, we got the NE one which came from the acquisition last year. So what I wanted to do is just take a couple of minutes to try and express how we find new opportunities either selling more of the products we have, but also trying to expand the addressable market into for the current products we have, but also looking for new products and how that comes about. Because there are a few interesting dimensions to the world that we live in in terms of how we continue to move forward.

32:17 First of all, if you look at one of our main products, Paragon Neo, our lab sync product, we are dominant in that market. We're the market leader. We're regarded as a de facto standard for high accuracy time transfer testing. And today, we cover every interface. We can test every interface from a 100 megabits up to 400 gigabits. And in in terms, as you can see in the top left there, the standards, the ITUT have standards that cover this technology, so does ORAN, and they're continually moving these standards. So we have a continuous program of enhancing our product because the our customers need to when new things come into the standards, then they need to prove that they conform to these standards. So we have an engineering team that continues to release things once or twice a year enhancements to the product.

33:02 But every so often, we need to make bigger steps forward, and we've just started our work today. The highest speed interface that's just arrived in the network is 800 gigabits. And now we can get access to the technology that will allow us to do that deliver 800 gigabit support in the Paragon Neo. So we've just started a project now, and that'll deliver mid f y twenty five. So wouldn't expect it'll have any a definite a very any impact on the the revenue this year when we get the orderly order, but it's really about f y twenty five

33:33 where that'll make a difference. But, you know, the whole movement in the in terms of the higher and higher rates in telecoms just continues incessantly. And later this year, we will put a small team on starting to investigate the technology to add 1.6 terabit interface support to to Paragon. Now that's not gonna get launched to f y twenty six or '27. It's way down the road. And in fact, in a couple of years, we'll start working on 3.2. And you may say, how do you know you're going to do that? And that's because really, in in my time in telecoms, there's been fourteen, fifteen generations of the next higher rate. So really for telecoms to not go to the next higher rate is a discontinuity. Going to the next higher rate is not the discontinuity. It's the natural thing to do because the demand is there and technology pushes forward that allows them to move higher and higher bandwidths of of data at more cost effective prices.

34:27 So you can see here there's a long term plan. There is a there's a road map for this product. There's there's an element that changes every year as things change in the standard, but there's also a long term plan for the product to actually follow the wave and continue to ensure that we stay the market leaders. If you look at our network emulation products, in the past, had the SNE and we had the Attero. We first introduced the Attero over ten years ago, and then we acquired JAR in Belfast and that's where the SNE came from. That was back in at the end of twenty seventeen. But we've now moved the whole portfolio across onto that platform and we've generated three versions of the same platform, the SNE, the SNE x, and the SNE ignite.

35:13 So why have we done that? And it's really because there's a huge range of potential applications that we can target with this product. There's many people from many different reasons who need to emulate networks to prove allow them improve performance. And they all have slightly different requirements. So the SNE Ignite is a hardware based implementation. So it's it's used for applications that really need high accuracy performance and people would buy that product. And then we have the SNE at at at the lower one of the three there, is more of a low speed applications but need high complexity in terms of the the networks they emulate. And we have that product. And then in the middle, we've created the SNEX, which really sits in the middle and addresses the high port density applications. And the reason we do that is it allows us to create collateral that presents these products to customers very much the way that they need to understand it so they can see the value in what they do. And it also allows us to price the products in the market to make sure we maximize the potential for the company.

36:12 So now we've got a full range of products there that we feel and SNE Ignite really replaces the Arterra in the market space moving forward. And it's a common software platform and a very, you know, high degree of commonality in the hardware platform, so it allows us to move the product portfolio wherever we can find best, you know, applications that we can be successful in. And then, of course, last year, we acquired iTrinergy, and we got the NE one product at the bottom. And it's far more focused whereas the SNE is focused on testing equipment and networks. Anyone is focused on testing applications that run on top of these networks. And that might seem a subtle change, but there is quite a significant change in the way the product needs to present and the the subtleties and the capability that it needs to present to the users that actually need these different products.

37:03 So really, we're really trying to push this to say that we have this broad portfolio of network emulators that can test whether you're testing applications, testing equipment, low speed equipment, high speed equipment, broadcast equipment, any type of equipment, we can actually deliver a solution there. So the n e one this year very much is pushing to to see how we can expand that market. We're gonna focus on things like federal and defense where we know there's a higher degree of spending going on at the moment, as well as things like gaming and enterprise migration that we've been focused on the last few years, again, to expand into new customers with the current portfolio. The third example is to look at the data center world. As you know, we actually were successful in a major win inside one of the big hyperscale guys with the Sentinel product. The Sentinel was designed to to maintain telecoms networks.

37:53 But because the same technology was taken from the telecoms world into the data center world, we were able to take the product across. But of course, it's more in terms of its form, fit, and function. It wasn't quite right for that application, so we've created Sentry as a new product that's far better aligned to what the data center guys are looking for. It's got a a high degree of commonality from a technology point of view with this Sentinel, but it allows us to configure it differently, again, aligned to what these target customers need. And through these discussions with our customers that we've engaging with, we're seeing an emerging opportunity for monitoring systems, systems that monitor all the nodes. So very much Sentinel and Sentry are there to solve problems. Once there is a problem, you send your engineer across along with one of these boxes. It gives you deep insight and allows you to figure out what's gone wrong to fix it.

38:43 A monitoring system is more like a fire alarm system. It basically tells you there's a problem. So there could be thousands of nodes out there, and basically, it's all that data is sent back to central point and allows you to then figure out where the problems are. And where we feel that we can get the edge here is when you come to a world of timing, is very different to virtually every other aspect of telecoms. When you're monitoring other aspects of, like, links being up or down, the equipment tends to give you a simple, yes. It's working. No. It's not working. And then you can dispatch engineers. In the world of timing, it doesn't it's life's not that simple. What you get is a lot of parameters that you have to be able to interpret and compare to what's happening in other nodes to interpret that data and then guide the engineers. That's because we are regarded as experts in understanding this. We believe that's where we can get an edge.

39:32 So this is a brand new product. We've only started to engage with customers in the last month, and we're speaking to the data centers as well as a few pilot customers in the telecom sector to see whether this is a new arm to the business that we can expand into and create additional revenue for the company. And lastly, you know, these are quite big changes that we've talked about and hopefully end up being big changes for the company. But in a lower level, we continue to expand our addressable market. A couple examples of how we do that. We were successful with one of the tier one chip manufacturers that was creating a chipset to test time delivered operated and supported all the timing protocols. They bought a Paragon Neo from us because they needed to prove they conform to the standards. We worked with them to make sure they maximized the value of the the purchase, which encourages them to buy more.

40:25 But through that, we actually showed them how they could use our product to demonstrate the performance of their chips to their customers. So they went tight in the road and demonstrated it. Of course, that helped us a soft promotional product, and so we get additional benefit from their customers coming to us and saying, we have seen your product. We need one of them. Because once they take that chipset and build it into their whole system, then the whole system needs to get checked again to make sure it still conforms to the standards. You can't just rely on the fact that you the chipset that you bought was conforming than than the whole system would. So you can see how we can expand our reach and get new customers. The second example we have here is a tier one equipment manufacturer, a company we've worked with for many, many years. We've sold into many of the labs around the world, and they buy the lab sync products, the new Paragon products.

41:14 But actually, through that strong customer relationship, they actually introduced us to some of their colleagues in the building that actually needed network emulators. And through that, we were able to actually build that relationship, show them what our products did through that introduction, and then ultimately sell them the network emulation products as well. And when the LabSync guys go and sell to their customers in terms of selling their product to the operators, the operators allow for us, well, how are we supposed to maintain this equipment once it's deployed? And they would at times will say, well, you may wanna look at CALNEX. They've got some equipment. And so you can see how customer relationships is not an optional extra for us or a nicety. It's absolutely central to our strategy of building a market. We build relationships with customers not only as Ashley showed you in the graph to get recurring income from this sorry, repeat income from this the same customer in different sites, but also to find new opportunities for new products, be there with them, identify that opportunity, and also get into other customers.

42:16 So to summarize all that, looking back, I guess FY twenty three really was a great year for us. You've seen the results, we're very proud of the performance we achieved. There was a lot of things happened under the covers as well in terms of inside the organization that we're very proud of what happened. But unfortunately, at the time of the year as we had to downgrade in March, you know, we did see customer spending pulling back. It's stabilized, would say, but it hasn't perhaps got much better. We basically need to just wait until that confidence comes back into the market. We're continuing to do we're continuing to engage with our customers. We don't give up on our customers just because they won't spend. It's complete opposite. We work closely Cause they would like to spend and they're frustrated that they can't do it. The engineers and the engineering teams that we speak to. So we try and help them through that time to make sure we build their relationship and we can get business in when it comes back again.

43:06 We have started to see the orders, the long term or medium to long term funnel building, which shows that demand remains there. And when you look below the hood in terms of our core drivers in the industry, nothing's changed. The driver there, the need and the desire to build out the mobile network has not changed. The need and the desire to expand the number of data centers out there, the bandwidth that they can offer to the customer has not changed. So we believe we continue to be in a strong place. As you see, we've been working hard to come out with new products. We've got a number of other initiatives to continue to push to ensure that we maximize in a more difficult market than we had last year. You just need to go out there and shape more trees and make sure you get business what's there, but also be well positioned when the business comes back, we can return to growth.

43:52 So that's the end of the formal presentation. Tommy, Ashley, thank you very much for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab situated on the top right hand corner of your screen. Just while the company take a few moment to review those questions submitted today, I'd like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. As you can see, we have received a number of questions throughout today's presentation, and thank you to all investors for submitting their questions. Could I please ask you to read out the questions and give responses where it's appropriate to do so? And I'll pick up from you at the end. K. Thank you. I'll take the first question. So there's one here from Steven. Steven has asked, do you have a target for return on capital? For example, ROE, ROA, especially given your capital allocation approach of retaining most of your earnings and continuously deploying incremental capital.

44:46 So we do have targets, absolutely. We don't publish them, but we are we are continuously looking and refreshing the the way and the the way that we target, particularly our return on investment on r and d spend. So so from a capital from a deploying incremental capital into the r and d side of the business, which is where where a lot of as you can see from the cash flow, a lot of our cash ends up. The that is that is intrinsically linked to where we believe the the value is on on the on the revenue side and the order side and in in future in future periods. So so we so we we do look at that from a from a when it from a new product perspective because we're bringing on the new products that we that Tommy has talked about.

45:45 A lot of them will have different types of ROI metrics. And we are we are because we are because we are growing our different product ranges, we we have to come back and look at those those ROIs or the RO the total ROIs for for the business on a on a continuous basis. So so when it comes to investing cash into r and d, absolutely hugely important that we have these we have these targets. We just we just don't we don't publish them. Okay. Thanks. Steven managed to get these questions in early, so I guess we should respect Mantle and Mantle. So the other question Steven had was typically, how often do repeat customers place a lot with you? At least once every year or every two or three years. If there's no sim single typical figure, can you please provide a rough range of aortas frequency from your repeat customers?

46:40 Yeah. It really, a lot of the they tend to spend a line to projects. So if you look at most of the projects that the customers that we work with are are working on, they'll run for anything from a year to perhaps eighteen months, even two years if it's a really good big project. And so individual teams tend to buy associated with projects early on as they start to know that they're gonna have equipment to test, then they'll buy and until they start their next project. So what you see is really within a team that sort of cycle. Now somebody like a big customer, one of the big tier one equipment manufacturers, they have ten, fifteen teams around the world, and sometimes each of them are running multiple projects. So that's why you see, like, that picture is a kind of spiky spend pattern because it just there is a bit of when do these happen. Sometimes they line up, sometimes they don't. And if it's a smaller company, then again, sometimes it is more than two or three year time that they'll buy something.

47:35 They may come back and get minor enhancements. And it's also dependent on what's happening in the standards. So they may buy a product and it may be two to three years before they buy another platform product, but they may buy enhancements during that time because if the standards have changed, then when we put enhancements on this from the standards, then that's a a charged upgrade and they'll do they'll upgrade at that time as well. So that sort of kind of if you kind of relate it to our customers, what they're up to, that kind of, you know, one to two year period is is is a good indicator because really, as I said, it's about buying a link to their fundamental needs as as they start and and progress through projects. You got another question, Ashley? Yes. So William has just asked what our market expectations for f y twenty four with regards to revenue and EBITDA are.

48:24 So so we have the the guidance that's in the market at the moment has the the revenue just given given what's happening in the in the wider macroeconomic situation, we have a a just over a 10% decline in revenues compared to this year is the the market guidance. So it sits at 24,000,000, the revenue and the guidance at the moment. That comes down to so I'll give you a couple of EBITDA figures because of the the fact that we show underlying EBITDA as well. And so that that comes out to about 8,500,000 at EBITDA, pure EBITDA level, and and just under 5,000,000 at the underlying EBITDA level. So so profit before tax, which is one that we also track quite closely, the margins on on profit before tax, We'll we'll be sitting closer to this 17% level compared to where we've we've we've been recently at the at the 26% level.

49:25 Hopefully, that gives you a bit of detail there. And James, a question here as well. You previously referenced the constraints on the customer budgets. Do you have any visibility on when that might change and anything you can do to influence us, I. Pricing? Yeah. I wish I knew James. You know, at the end of the day, it's really the confidence coming back into these larger organizations that release the budget. You know, the people that we work with and primarily sell, you know, there are a number of layers down from where these decisions are made. When it comes to pricing, you know, unfortunately, in this sort of situation, it's not about the price. So to suddenly give a 15% discount, it won't ease it. It's just they're not allowed to spend the money, and they can't get it through the procurement department or get it authorized up to the level. And in fact, it's it's dangerous to leave a discount because they'll take the discount, but then you'll still get the order next quarter just with a discount.

50:19 So all we can really do is, you know, keep working. There will be quite often, the situation is that it's not an absolute can't spend a penny. It's just as an extremely high bar and a very small budget. So in cases that when it becomes critical, we can support them in terms of creating an argument to the managers or the budget holder to encourage them to to put the money there. But it's really there is a amount of waiting in for it to come. But we you know, in terms of in a particular deal if they can't get it out, but it is about continuing to build that relationship so that we do help them. We might lend them the product. And again, sometimes you lend them the product that that can then easier it makes it easier for them to demonstrate to the manager or the budget holder how this is gonna make such a difference if we just had it. And that's the sort of of low level things that we're doing.

51:08 Have you got another question there, Ashley? Sure. Yeah. Gareth has asked, are any staff members still working remotely, or are all employees now back in the office? So for our UK based offices, so that's Linlisco, our our head office. We've also got Belfast office and our new Stevenage office. We are we operate a hybrid model, which means all staff members are asked to come in on a Tuesday and a Thursday, and then they they have the choice to either work from home or work from the office on the other days of the week. So we find that works really well for collaboration and and getting the staff together from a sort of cultural perspective on Tuesdays and Thursdays.

51:53 It just gives people also some flexibility on on the other days as well. We've always operated a remote model when it comes to our overseas staff. That's always been the case even pre COVID just because of the because of the spread of of our global reach. We we've our our sales teams have always effectively worked from home or on the road, so we don't have any any actual formal offices in any of our overseas locations. K. And William Asta, are you worried that China will steal IP on your products? No. And why why did I say that with confidence? Especially at high end products, if you take the lid off, you're not gonna you know, you can see what components we use, but that really doesn't solve your problem. You know, a lot of what we do in something like the Paragon that's been it's the market leader.

52:47 It's really the knowledge of how to design these devices, and we base all our devices on FPGA type technology. So you need to get inside and and figure out what what's happening inside that. So, you know, we take a same philosophy. We're all a competition, you know, and that is can somebody do what we can do? Probably. But good luck at trying to catch us. And that really is the picture I showed with Paragon, the fact we need to keep moving. If we just stop and stand still, then the world will catch us. But if we run fast, nobody will catch us. And that really is the philosophy of how we we beat anybody whether in China, The US, or anywhere. In fact, about ten years ago, there there was a US company that copied one of the early versions of Paragon. And by the time they came out and had a data sheet pretty similar to us, we already had a bunch of other enhancements.

53:36 We could basically say to customers, well, if you want last year's model, that's fine, but I thought you needed to test all this other stuff. And so really, it's up on our own. It's down to us to stay in the lead by being faster than everyone else. Stay connected to the standards. Stay connected to the customer to make sure nobody catches up with us. Gareth has asked another question. So do do you have any hedging policy in place relative to your US dollar exposure? So we have some natural hedges already built into the business model essentially. So so our we have some dollar driven cost base when it comes to a large majority of our our sales team outside of The UK. We also are we have a dollar a dollar cost passed through to us. So the or the dollar effect cost passed through to us from quite a a lot of the majority of our our cost of sales, originates in US dollars from our component and from our outsource manufacturer.

54:44 And that that gets passed through to us when when when the time is the time is right from your perspective. And so the so those natural hedges allow us to to to to offset to offset some of the US dollar exposure. We do work very closely with with our our advisers and treasury treasury advisers on on when hedging might be right. At this moment in time, we don't have any hedges in place because we feel that's right for for where we are at this moment in time. But we do we do constantly look at at hedging within the business depending on on where the US dollar and sterling are sitting at the moment in time. K. Actually, and the last question is, what can you say about your position in the market in relation to the other competitors?

55:37 The first thing I would say just for the avoidance of doubt, you know, the kind of change that we're seeing in over the last six months, nine months has nothing to do with competitive pressure at all. The the competitive landscape really hasn't shifted very much over that period. So but in general, you know, if you look at our product lines let me just maybe flip back here. Just this easier one. Press too many buttons. So the LabSync, as I mentioned, we are the market leaders in that. On the left, the LabSync products, we are the market leaders. We have a competitor in China that competes with the Paragon x, which is not as high accuracy as the as the Paragon Neo. But in the high accuracy domain, we are in the lead, so we have a strong position there. When you come to the network sync, obviously, we get new products that just come out and unique in the market. So we have no direct competition, but we're also still trying to understand how big these markets are.

56:32 The Sentinel, we are the only maintenance tester that are, what we call installation testers, which are more like a general purpose tool kit. They they cover many many technologies. They they cover timing, but they also cover many other things. So really, we are unique, but our competitors that have installation testers very much argue that we're not unique, that you don't need a unique tester. A general purpose toolkit will do the job. So it's really our job to convince customers they need a specialized tester. And as we move forward into more into mobile networks with far more density in terms of the number of radio heads, small cells, micro cells around, then we believe that that message will become stronger and stronger. In the cloud and IT space, there are a number of competitors in some of these smaller segments. We are the only company that's got such a broad portfolio.

57:23 And in some ways, especially, it was part of that reason to create these three platforms out of one base was to give us a much stronger competitive position out there as well. So there is competition. We feel that at the moment, we're in a strong position. I think we're coming out with some new things that hopefully strengthen our position going forward as well. And the last question, think, which will be the last one because we're just about out of time. Can we say any more about the seed sales into the hyperscale? Really, these are into the r and d teams, you know, so basically, some of these other hyperscale the telecoms world's a very a very mature industry. It's very predictable as you heard me talking about the different interface rates that the the data center walls are are much younger industry.

58:10 People are still trying to figure it themselves. Rather than looking to standards and copying what other or repeating what other people do, each of these guys are trying to figure it themselves. So these siege units are really into their r and d teams. We might say they ought one or two more, but that's not where the business is. What we really are trying to help them do that assessment of timing and hopefully come to the conclusion they want to roll timing out across our networks, and that's where we've the opportunity to create a much bigger return. In that market space, the biggest challenge with these guys are that they often quite like doing it themselves. So they have the ability at times to do it. So really it's more about persuading them and that's partly where the relationships come in that's saying this is very specialist. You'd be better to let us do it and help you than than basically use your own medium reserves to build that. So these are really part of the relationship building and hopefully in the future, they'll they'll deliver significant extra business.

59:08 Tommy, Ashley, thank you. And I think you've addressed all those questions you can from investors. And, of course, the company will will review all questions submitted today, and we will publish those responses on the investment company platform. Before redirecting investors to provide you with their feedback, which I know is particularly important to yourself and the company, Tommy, could I please just ask you for a few closing comments? Sure. Well, thanks very much everyone for taking an hour to listen to us today. You know, it's not the best you know, we've been in better environments for sales than we are today, but that's life. You don't always get it the way you want. But, you know, the bottom thing the the key thing from my point of view is that the market drivers remain there. They remain strong. They haven't really shifted. There's macroeconomic effects. You can't be immune from what the rest of the world does, and we need to just work through that. We've got a great set of new products coming out. We've got low level initiatives in terms of building relationships with customers, and we believe the market remains strong and there will be new opportunities for us going forward. So we continue to believe we're on a good track. We just need to deal with the short term challenges, and hopefully in the future, we can soon get back to a more growing trajectory.

1:00:12 Thanks very much for your time. Tommy, Ashley, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected 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 I'm sure will 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. Good after