Calnex Solutions (LSE:CLX) — Interim Results

0:00 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 by the q and a tab situated on the right hand corner of your screen. Just simply type in your questions and press send. The company may be in a position to answer every question it receives to the meeting itself. Have the company review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Tommy Cook. Good afternoon, sir.

0:30 Good afternoon, and thank you very much everyone for joining us today to hear about the results from h one f y twenty four. So before we go into the results, let me just take a few minutes to for the people that maybe don't do it know us so well to just remind you who CALNEX is and what we do. So CALNEX delivers test solutions to the worldwide telecoms and cloud computing industry. We already have an established position shipping product to over 68 countries in the world. And primarily, our products are used to prove performance whether it's within the r and d or it's within networks scenario. We use our products to prove that the the product the telecom infrastructure is gonna work correctly to the specification and also also to international international standards. Standards. We operate a lean business model where we use an outsourced indirect sales channel partnership around the world to give us that global footprint, and we also use a local manufacturer, outsourced contract manufacturer to do a a production for us. And you can see on the right the right hand side some of the the names that you'll be familiar with that we sell to telecom vendors like Cisco, Sienna, Ericsson, the the operators such as BT, AT and T. We sell to the component manufacturers, Intel, Qualcomm, Broadcom, and then increasingly we sell to some of the large enterprises and the hyperscale people like Meta, Google, and Apple.

1:55 So quite a wide space. So where does TEST fit into the world of telecoms? Well, it fits in just about everywhere. Whether you're designing new equipment, you're verifying new equipment, new designs before they go into production, end manufacturing tests, building networks, managing networks. The bits that we focus on mainly is that design validation conformance test. So you can imagine that, see, r and d teams in a company like a Cisco or Ericsson. When they get the prototypes back, they have to test them to see make sure the design's meeting the the public specification. And then the conformance test part of that is if they're going to claim conformance to international standards, which virtually every piece of equipment will, then they need to put it through and check that it actually does meet that. And it's very much an area where you can command a healthy price and gain margin because effectively we are enabling our customers to get their new designs to market quickly and robustly. And robustly is as important as quickly because ultimately they want to make sure they have good design margin that once again to manufacturing test, they don't, have yield issues.

2:58 Plus once they start getting deployed in the many networks around the world, all of which are different, topologies, that it's gonna work under all conditions. So that's very much an area where we focus on. The one other area we focus on is the maintenance and and monitoring part. So it's not so much in building new networks, it's more about maintenance that once they figured out there is a complex prod problem, then they need a tester that gives them deep insight into what's going on in the network to allow them to debug it and that's where our test is fitting. So that's really broadly where we sit in the world. So what's been happening lately? Well, as you know, it's not the greatest of times in the telecoms world at the moment. Very much the industry has gone through a flat period.

3:44 Looking back, it probably started at the turn of the year and for the last three quarters, our business from the telecom space has has proven to be quite flat. And I think in general, what happens in the whole ecosystem, you have the operators at the head of the food chain. You obviously are building out the mobile networks, and they still need to do that. And then I have judgment on that. Everything we see in the trade press suggests that need is still there. They need to do it in the future. But they've slowed down the build. A lot of these build outs are done using bonds from or debt, and obviously interest rates going up has caused that to slow down. And of course, when the operators slow down the spend, then the equipment vendors that supply the operators, they slow down and basically become more cautious about the spend, especially in capital equipment budgets and our equipment's bought from their capital equipment budgets. So we are a bit of the, you know, the tail of the dog in the situation.

4:36 We've seen this before within CALNEX. We've seen it twice before. In my forty years in this industry, I've seen it many times before in the telecoms industry where when there's lack of confidence in in growth, then they basically slow down that spend. They become very cautious in capital spend budgets, which all companies do. It's the first lever you pull. And in fact, what I would say is the behavior we're seeing from key customers is is the same as it always is. They basically keep trying to delay the spend. They will spend so it's not like we are not getting any business, but they'll try and hold off spend to kind of manage that expenses through these periods. So the behavior is the same as we've always seen in terms of street prices as well. You'll see the street price hasn't changed for our product. It's either they can get it signed off or they can't get it signed off.

5:24 And leading with things like discount, etcetera, is not a great way because all they'll do is take the discount and still give you the order on the next period, but take the discount in the following period. So we've managed through these situations before. It's about staying close to customers, managing that customer relationship. It's a chance to build relationships with customers, try and help them. The thing that's difficult to to forecast is how long it's gonna last, and in each one of these times, it always lasts a different amount. And really because that, in my view, the the pressure's coming from outside the industry, interest rates, the general concerns about the wider economic situation. It's, you know, it's it's hard to see and at this point we still don't see the green shoots of recovery. And the recovery is likely to take a kind of three to four to five month period because it they won't suddenly start spending overnight. They'll just start to release their budgets.

6:14 And that's why it's important to stay close to your customers to make sure your PO is top of the list or high in the pile to get, to get budget when budget comes available. So gotta stick in, but it's not a matter of sitting doing nothing during this time. We're gonna continue to drive, work with a core customer base, but also look for other opportunities that we'll talk about. So as I said, it's you know, I guess, let's look at what's happened through the first half. So for the first half of this year, our revenues were 7,800,000. Our profit before tax was we made a loss of 600,000, but we and we have a closing cash balance of over £13,000,000 in the bank. And we're gonna continue to supply a dividend of 0.31 p per share, and that's the same level that we supply that we awarded last year for the first half of FY twenty three.

7:06 The revenue drop is really down to the the subdued level of orders. Our funnel is quite healthy, but it's that last part of getting it closed that's a challenge. And obviously, we should know we we announced a downgrade in October, and that was really because we didn't see the uptake. Most of it typically in our quarter, the the third month of the quarter is always a stronger order month. And in these situations, it's it it becomes even stronger that way where basically our customers are waiting to hear whether they're allowed to spend and customers are waiting to see what happens through the quarter before they decide and and towards the end of the quarter. So September really didn't uptick in the way that we hoped it did and that meant we had to look at what was happening and kind of be realistic in terms of what we expected in the near term.

7:52 But we believe we're in a strong position in the market. We still have a strong order funnel. Know, orders that are well qualified don't disappear. Again, that's typical to what we've seen in these markets. They may what becomes hard is to predict when it's actually going to turn into an order, but we don't get cancelled orders and and even deals, as I said, that are well qualified tend to stay. They don't go away. They just it's unpredictability at the end. But of course, our business in the non telecom space is starting to grow and that's an area that we're gonna focus on while keeping contact with the telecoms and waiting for it to come back again. We'll focus on the non telecom space to to address new applications in places where we can generate growth. So we're gonna maintain our investment in r and d and customer relationships.

8:37 You know, in terms of and we'll talk some more about the new product program. We have an extensive product program and that's essential to get growth back coming out with new equipment, whether or new enhancements to our equipment, whether it's to better address some application areas where we can close business, or whether it's to meet the ever changing standards that we have. Because again, when you have new equipment, again, from experience, it's we find it's it's easier to get the deals over the line when it's something new rather than selling a second or a third unit to our customer. So that's really important. That's why we believe we can get growth back in the business and we're keeping our investment in R and D. And of course, in customer relationships, the investment in that in terms of travel budgets, although they're tightly managed, it's a time period where you want to engage more with customers, not less. You don't want to retreat to the fort. You go out there and speak to people, work with them, try and help them, get that relationship strong so that when money becomes available, you get the benefit at that time.

9:37 And we have already some new capability released. There's a new product type called the SNE X and SNE Ignite. It's a common platform. It has two variants. And we've already released SNE X and Ignite will ship in q four, which is January, February time. And we've already secured the first orders for that equipment. And our NE one platform that we we acquired last year when we acquired iTrinity, that's gaining traction and being moved more into places like government and defense spend, again, areas where it's not been so affected as the telecom space. So there are things happening and things that we're gonna continue to follow through to ensure that we cannot just sit around waiting for the world coming back to us, but we look to to generate growth from the things that we are doing on the ground.

10:26 As I said, we are closing business and I've just come up with kind of six case studies here to try and give you a flavor of where where are you getting business, I'm sure you're asking. The telecoms world is still given, you know, we're still getting business from the telecoms. It's just a bit harder than it has been in the last couple of years. On the left hand side of the slide, the top left there, we're actually one of our tier one European operators who we've sold to for many years have actually just bought some Paragons because the need was such that they would decide that need to spend and invest. So there's still business coming from our top customers. We also had success from one of The US big network operators where where, again, we've sold for many years, but we actually just sold one of our new SNEX products. Again, we'll be able to persuade them the capability and and the value that delivers to them was worthwhile to to invest in it at this time.

11:18 But then there's some new cases where we're getting new business as well that we've tried to show on the right hand side. In the middle at the top, India data center operator just acquired one of our products. And this is for what they call a hyper converged infrastructure, a grand term. But what it really means is that basically host on the network, a mobile network infrastructure in the data center. So that's basically the storage capability, the switching capability, that's required. And that that's been successful. And like in all these cases, our standard processes, when this happens, we get a new customer. We really understand why the customer tried to why the customer has bought it, where the value was so that we can then create sales collateral and take it to other similar operators, data center operators, and see whether we can turn that one success into multiple successes.

12:06 We've also been successful with an education research center in Europe. They've actually set up a proof of concept lab where they're actually inviting companies to come in and look at and come up with ideas on future five g and obviously six g infrastructure, what it's going to do.

12:23 These don't often generate a lot of direct follow on business, but what it does is it actually allows us to meet other customers and other potential customers and people to see our equipment in action and cause customer relationships. So we would hope that would lead to us getting new customers in the future while people coming to these labs, bringing their equipment but seeing our equipment in action and become interested in inquiring one for their own lab. As I mentioned earlier, the defense and government sector is an area where spending is continuing and is not so affected by the kind of global challenges that are happening. And the center bottom there, we actually sold to a US defense contract. And as you know, if you've ever sold to the defense sector, it's pretty hard to understand exactly what they're doing because they don't like telling you very much.

13:12 But it looked like they were using any one, which is a network emulator to basically for training for their operators of remote stuff, whether it's, I guess, people on the ground, equipment on the ground, things in the air. And basically, they were setting up realistic world situations where all our devices are at different positions in the battlefield that actually get, you know, different bandwidths, different sort of network connections to them, and using their equipment to emulate that situation to allow them to train their people to be effective in the real situations. And the last one I brought up here is an IT system integrator that fought in The US that focuses on government contracts. Now I've kinda labeled that new customer slash channel because although it's a new customer and that we would sell it direct to them, effectively it's like a channel because they basically take contracts from the US government and whether it's for full systems, IT systems, cyber security, the whole thing, put things together, do the installation, so very much system integrator.

14:13 But they've agreed and and see the value of including the anyone in bundles that they sell to their customers. So that's another case where we're continuing to look for new areas where we can expand our footprint and gain further business. So at that point, I'm gonna hand over to Ashley, and she's gonna give you some more details on the financials. Tommy. Just before I go on to the detail on the next slide on the income statement, I thought it would be useful just to give you a quick recap of our revenue model. So some of you will know CALNEX generates revenues through the sale of bundled hardware and software, as well as software support and extended warranty programs. So a typical customer will purchase one of our hardware products with a number of software options included at that time, and then that is invoiced as one bundled sale.

15:00 And then that customer same customer can come back for upgrades or additional options that are added to that existing hardware that they've purchased in the past through the provision of a license key, and we can also sell those software sales or upgrades as a stand alone sales. So bundled hardware and software is our main our main revenue stream. And as you might expect, the pricing will differ for each order because it really just depends on that combination of what the customer has purchased in terms of hardware and software option choices depending on what what they what they need at that time. Then that revenue is recognized on dispatch or delivery of the software license key if it's just a standalone software upgrade deal.

15:46 And then 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 a smaller portion of our revenue streams. That that was stream, sorry. The revenue that revenue is recognized over the life of the product. So just onto the income statement. As Tommy's revenue for the half was 7,800,000, which is a 38% decline on last year's half, and that's driven by, as Tommy was also seeing, the dynamics in the telecoms market and consequently our lower level of orders generated from the same market. Our indirect cost base is largely fixed, so the performance in revenues dropped through to the bottom line profit as you can see here. I've got more information on the regional and product line revenue trends on in the half on the next slide. So I'll I'll I'll go through the rest of the income statement and come back to revenue just to give you a bit of extra detail on the revenue trends in just a minute. So just working down the income statement here, you can see gross margin was 74% in the half year, and that's largely in line with the full year margin in the prior year and prior year and half prior half trends as well.

16:59 So just as a reminder, that gross margin is net of commissions to payable to our channel partners. So that's the gross margin that belongs to us. Gross margins can fluctuate one to two percentage points through the year, and that really just depends on the mix of the products and the mix of that bundle of hardware and software that I was talking about before, particularly in a shorter period. We increased our pricing through discussion with our distributors in the early part of last year, and that's helped us maintain gross margins while while we have seen some of the direct material cost increases come through from the wider economic challenges that the world is having. So we're keeping a very tight hold on costs while we go through this period of reduced order volumes. As a result, we haven't had any headcount increases apart from graduate hires in the period. So we have a graduate hire hiring program that we have continued because it's on a cyclical basis.

17:58 So the only increase in heads has been five graduate hires in the period. No other headcount increases across the company. And as you as you can see here, admin costs. So admin costs in this particular table excludes depreciation and other or in other and amortization, sorry, which are shown separately here. That came in just under the prior year level, as you can see, as a result of lower commissions on the lower order volumes, lower hiring costs because of our pause on adding heads and reduced profit share accruals offset partially by increases to share based payment accruals. We also had a small amount of acquisition costs included in the prior year p and l for the iGenuity acquisition, which were non recurring, so we had to save in there as well.

18:48 And as you'll know, we capitalized a 100% of our r and d costs and amortized these to the p and l over five years. Our r and d amortization came in at 1,800,000 for the period as planned versus 1,600,000 in the prior year. And that increase is solely due to the the pattern of r and d cash spend in the previous five years as that five year amortization profile comes through.

19:17 So the loss, as Tommy was saying, loss before tax came in at GBP 600,000, and that's very much driven by the revenue performance from a volume perspective. Our fixed cost base creates a negative operational gearing effect on the P and L at this time as we retain our headcount and retain our cost base in order to return to growth in future periods. The full year market guidance from our brokers shows a breakeven position, And so that assumes a slightly heavier weighting to h two for revenues, but that heavier weighting in revenue volumes will drop through to profit to bring the profit back to a breakeven level. Costs should continue on h one run rates. So just just a quick one on the tax rate here just to explain it. Looking looking at the tax number and the tax effective rate, looking at it mathematically, the effective tax rate comes in at 37%.

20:15 However, that's quite an unusual rate, and it's very much driven by by the mathematics on the loss making position. So I just wanted to pull out a couple of things here to explain it because it's not something that we wouldn't envisage being our effective tax rate going forward. As we return to profit and as we return to growth, we would expect our effective tax rate to go back in line with previous years, which sits around about that sort of mid 20%. So just a couple of things to explain that. The underlying applicable rate applied to the loss making profit before tax was 25% cent, which is the usual UK corporation tax rate. And as you'll know, we benefit from r and d tax credits. And in the period, we benefited from the SME scheme in the in the half year, the the the RDEC scheme, which is the the larger scheme, we also benefit from, but that comes in in the in h two years on on accounting journal.

21:14 The SME scheme credits are accounted for within the tax lien, and the tax credits are calculated as a percentage of the r and d spend in the year and not on the on the profit. So that that tax credit has had the effect of increasing the overall the tax tax in the period, the tax credit in the period and flipped it into a credit position. So that's what's driving the 37% there. EPS is currently at a loss plus per share of 0.42p, and that's driven very much by the trading performance. So just on to the next slide, just to take you through some of the revenue movements in the period. So as you can see from the disclosure notes in the RNS, the wider economic climate and subdued market had an impact on revenue levels across our geographies, and it it has also had an effect across our product lines as well. So I just want to give you a little bit more information on that. So as you'll know, we've got our three regions, which are Americas, North Asia, and rest of world. And then that rest of world region is broken down into Europe, Middle East, India, Southeast Asia, and Australasia.

22:22 And in that rest of world region, trading was least affected by the slowdown with the EMEA sub region performing strongest in that region. And that's where business has come from a wider range of sectors, including automotive, power, and rail alongside telecoms at the same time. Within North Asia, we're increasing our focus on growing the business in Taiwan and Japan, while China remains challenging due to the impact of US restrictions. And the Americas region saw most of the impact from the slowdown in the telecoms market as you might expect. We're continuing to stay close, very close to our end customers in this region and the other two, while increasing our focus on opportunities within hyperscalers and government end markets, where we see the best chance to close business.

23:11 And from a product line perspective, lab lab sync and that's so that's the Paragon products, and you'll see that on a a slide coming up in in Tommy's next section. That saw performance come in lower than the previous period, which is driven very much by that product lines end market being largely telecoms. That's also the case with Sentinel, which sits in our network sync product line. Our plans for our growing our Sentry sales, which is our newer network sync product aimed at using the data centers are continuing. And from a cloud and IT perspective, we need to look at it from both infrastructure and applications perspective as the drivers are just slightly different. So in within infrastructure, the SME has that has had a larger exposure to The US market. So saw performance drop as a result of the wider economic challenges.

24:01 This is expected to pick up in H2 as a result of the launch of our

24:04 SME X and SME Ignite products, which Tom will touch on later in the presentation. And in applications, which is our new our NE1 product from the Trinity acquisition last year, We're on track to achieve our original full year revenue target as our channel expansion plans continue together with success from selling into defense and satellite communication sectors. So on to the cash flow. So as you can see here, total cash outflow for the period was 5,600,000, which reflects both the loss in the period and increases in working capital, just namely inventory. And and the the increases in working capital are are largely one off in nature in the period, so I just wanted to pull out a few things there to explain that.

24:51 So working capital movements are 3,300,000, and the large majority of that was inventory. So that that was driven by three things. So we always planned to build up a little bit more of our own on the shelf of inventory inventory that we can have access to within our own building as opposed to our outsource manufacturer. And so we we always had that plan to use that as a buffer stop to mitigate against any future supply chain delays that that we suffered from in previous years. We also are the demand plans that we have in place with our outsource manufacturer were based on previous order expectations, which always take a little bit longer time to dial down compared to compared to the the the market the end market forecast changes that happen out in the in the wider world from a customer perspective.

25:46 So it just takes time to dial down through the supply chain as the supply chain is longer than just our outsource manufacturers you might expect. And inventory purchases made as a result of the tail end of the supply chain issues are also coming through as well.

26:02 So a lot of these are one off in nature. And excluding any further tail end effects of the supply chain issues, we don't expect working capital movements in h two to mirror those of h one. We don't expect them to be as material. We paid £800,000 in tax to HMRC this period, but that was based on profits generated in the prior year. And given the current expectations for trading for FY '24, this cash should be refundable in FY '25 after submission of the FY '24 year end tax return. Cash spent on r and d activities, which is capitalized and amortized over five years, was 2,600,000 versus 2,500,000 last half year. And that slight increase just reflects the inflationary salary increases and and the graduate headcount increases that I was talking about earlier.

26:52 And as I as I said earlier, there were no other headcount increases in r and d in this period. We still hope cutting out surplus cash and notice accounts to to gain a little bit more of a higher interest when we can, but we do not hold any on any long term deposit over ninety five days. So that just explains that 1,500,000 cash inflow coming in there and in the one off item section, which explains the statutory layout of the cash flow. We still have no debt on the balance sheet. And as a result of the the the working capital flows normalizing in h two weeks and and the the profit coming back to breakeven, we expect h two cash to be breakeven and to in order for us to maintain that cash balance to the end of the year.

27:42 So to summarize, while the results for the period are disappointing, we're seeing encouraging performance from our new products, and Tommy will touch on that a little bit more on in his next section. Our gross margins have remained robust and in line with previous years, and we're keeping tight control of our existing cost base to minimize any additional impact to profit.

28:02 Our ever productive R and D and sales teams are focusing on areas that will generate future growth for the business, whether that be in telecoms or non telecoms end markets. And our investment in inventory means we can be ready to reduce order fulfillment lead times and control order fulfillment lead times once demand picks up with a healthy cash balance, which we expect to maintain over h '2, providing us with a good foundation on which to return to stronger financial performance in future periods. I'll hand you back over to Tommy. Okay. Thank you, Ashley. So just to finish off here, let's just have a quick recap of our strategy and also just wanted to look at our product program to try and give you some insight to why it's important and how it's it's gonna deliver growth for us moving forward.

28:49 Our strategy is the same as it's been for a number of years, not surprisingly. We're gonna continue to focus our product innovation and capitalize on the growth of five g or the build out of the mobile network. You know, I think everything we we watch very carefully in the trade press and then and then, you know, back in 2001, there was a structural problem in our industry and we suffered badly from it. I do not believe that's what's happening here, that it's a wider economic climate. There's definitely a slowdown at the moment, but the drivers, the underlying need of the world to get a a more effective communications network just seems to be still there. So we firmly believe that it will come back because it needs to come back. So it's a it continues to be a key focus for us. And, course, the cloud computing area is the other area that we focus on. Whether it's actually the infrastructure that creates these data centers or whether it's the applications, and software that's running in in the cloud, Both of these things, again, the world's still kinda moving towards that way. Things like AI, talked about, causes some concerns in that world because of the processing required to to to deliver an AI request.

29:59 For example, if you ask, you know, your your browser for you show me John Lewis' homepage. Imagine the the processing that's required to do that versus say, could you give me the history of John Lewis'? So it's, you know, the whole AI is gonna put a huge amount of pressure on the cloud computing or the the data centers. And they need to look at efficiencies as well as how to build the things. And a lot of what we are doing with them is making their infrastructure more efficient. So we still believe there's a lot of opportunities gonna come out of that. So these two growth engines, we still believe are core growth engines for our industries, for our markets and will continue to be for the foreseeable. And the third thing that we've always talked about is that we are open to M and A opportunities. We are continuing to look for these. As you know in our market, there isn't a huge number of test and measurement companies. There are a few, as in tens of them, but there's not hundreds of thousands. So there's always an element of of opportunism of when something comes around at the right time. So we are continuing to look. We're continuing to speak to people,

31:01 and if something comes to the point that we think it's the right product to expand our portfolio to create what I would call new business, that's either selling to people we don't sell to today or selling something in addition to our current customers, then it's a it's a case I would take to the board for discussion to see whether this is something that we should move on. Our product program, you'll have hopefully seen this slide before, is we're basically focused on developing platforms that we can add lots of capability to. We have a number of new things. I've already mentioned the SNE. You can see on the the right hand side, there's now three SNE platforms, SNE, SNE X, and SNE Ignite. And the reason for that is the top two are really based on a new platform that's tightly linked to the SNE, so there's a a lot of commonality. But by using different platforms, which actually have different build price points, It also allows us to position it to the the many different groups and the applications that need a network emulator.

31:57 So we can focus the right platform whether

31:59 it's high performance and ignite from a hardware based implementation or it's high complexity at the lower data rates in the SME or in the middle layer where you're working on the high data rates, high complexity, then we can target the right the right product to the right customer and obviously value price it in that market but still gain a healthy margin from that. And on the in the in the center block, we have the SyncSense. This is a new product that we introduced earlier in the last comms meeting, and we're just still in the very early stages of discussing this with customers. So this is a monitoring system where we put probes across a whole network, whether it's within a data center or whether it's within a telecoms network that looks at the synchronization and reports where there might be issues. So we're at a very early stage in with this, and we have started to engage with seat customers or what we would call development partners to

32:55 help us tune the the offering and make sure that we're offering something that's real value. So early to see when, you know, where that's gonna take us. We are quite excited about it. Unlikely to get much business or any business f y twenty four, but we'd be looking to hopefully close the first orders for that in f y twenty five. But in all these platforms, we've actually got ongoing development. And in this slide, I've tried to kind of summarize that and give you a flavor of why do you have this. So in this strange picture on the right hand side, there's three columns. The left hand column is the various platforms that we were just looking at in the previous slide. Middle column is the various projects, and then the right hand side, I've tried to indicate who that's aimed at, whether it's telecoms or non telecoms. And you can see in all our platforms, we're continually enhancing it. And that's very much the nature of what we do. Our customers invest in our platform, and it's not just investment in terms of buying the product, but they they train their their people to use them, but they often develop software routines to run automated test scripts to test their equipment. So they want our products to continue to keep up with standards following technology wave. So some of these are fairly big projects.

34:04 Like at the bottom there, we've got the SME Ignite and X that I've talked about. That's a a project that's been going over fifteen months and it's just coming to the end. It's a major platform change that's come along. I think most of our products and most of the technology, it's the same technology underneath even though different sectors are using it. So kinda 80%, 85% of the the functionality that we have to develop is common to all applications, but we add a layer on the top that sometimes there's special features that a particular application needs or you want to present it in a way that makes the cuss that specific customers understand how they can use it in their application. So that's why the same product can end up targeting both telecoms and non telecoms. We have other big projects, the one at the very top, 800 gigs, that's adding the the current leading edge functionality to the Paragon Neo, something our customers are already asking us for, and we've started developing it because we had to wait until the the building this is really leading edge technology, and the building blocks only became available about two quarters ago to us that we could actually start and make a project and and build that. That'll come out the second half of FY twenty five. So, again, it's that kind of longer term. But in between, we need to keep up with the standards. We need to keep giving new functionalities.

35:20 So things like Release 11, which is a bit of a vanilla name, but it's got a whole host of smaller features that the customers are asking for to make sure we keep up with the standards, keep up with our needs as we go along. So these are also very important because when you have something new, it allows our sales team to get in front of customers again saying, hey, we've got some new capability. Can I come in and explain it to you?

35:42 And allows them to go in there and start engaging. So our programs always need this. We continually need to enhance our products because our customers' needs are changing, but of course that means we can obviously generate revenue from these enhancements as well. So as you can see, we've got a full program of continuous enhancements. And these are what gives us confidence that in the future in FY '25, we can start to to generate growth even if the telecoms market stays flat on us because we feel that we're we are starting to come out with new products that will generate business and target new applications. So to summarize that all that together, we still believe the underlying market drivers of the build out of the mobile network and move to cloud computing have not changed. There is a clearly near term, you know, a softness in the market due to the macroeconomic effects that are happening around the world, but the drivers are still there.

36:36 New product program is really important and that's why we've continued to invest in our new products because that is important to keep engaged with customers, see that our customers that have invested in our programs that we are gonna follow through with them, but also develop new unmet needs and and basically, you know, and hopefully encourage people to place orders for the new capability. We have a team, you know, I keep mentioning I've been around for quite a long while in this market, but we're actually a very experienced team. So we have been through these downturns before and nobody wants them. But we do not work in a straight line market. We do not keep telecoms has never always kept going up. It wobbles as we go along and you just need to deal with the situation. And we've got a team that's been through this before and know how to do it, how to stay and keep these customer relationships strong, how to keep working with our partners and be in a strong position, go and make, you know, business where we can, but also stay strong so that when the market comes back, we can start to grow in these markets as well.

37:35 Our pricing has remained stable. We haven't really seen the street price drop. The problem is just getting the whole order over the line. It's not a matter of street price. As Ashley mentioned, we have a robust balance sheet. We have cash in the bank. We are at moment running more than kind of breakeven from this point on. So we are in a strong position, but we do believe that we can get growth back into the business both some in the second half from the kind of seasonality and some of the new the early introduction of programs. But obviously, as we're going to FY '25, even if the market stays flat on us, we will be able to bring growth back into our business and make and have a a stronger FY '25 than FY '24. So at that point, that's the end of the formal presentation. Perfect, Tommy. Ashley, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab which is situated on the top right hand corner of your screen.

38:29 But just while the company take a few moments to read this question submitted today, like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Tommy, Ashley, as you can see, we've received pre submitted questions today. We've also received a number of questions throughout today's live event. If I could just ask you to read out those questions and give responses where it's appropriate to do so, I'll pick up from you both at the end. Okay. Thanks, Alexandra. Okay. Let me so there was three presubmitted questions, so I think it's only right we answer these first. I'll take the first two and then hand over to Ashley to do the third one. So the first one was both Ericsson and Nokia have recently released pretty poor numbers and short term forecasts for continued weakness in their networking businesses. Do you feel your feel your financial balance and business structure is sufficiently robust to withstand another year or two of weak demand?

39:18 What do you need to do? In some ways, I think I've just well, hope I've answered that question. You know, I think, we are in a I think we have a robust balance sheet. We are in a we have cash in the bank. We are in a situation where we believe from this point on we can run a breakeven and above, but breakeven is not where anybody wants to be. We want to be above. And through our new product program, by going looking for opportunities, we can grow. As I say, at times, when you're the tail of the dog, you have to wait for the dog to waggle waggle you, but we are not going to sit back and wait for that. We're going to go out there looking for business. It's a good time to to encourage our teams and and drive our teams to go and look for new areas where we can we can we can find new applications which will spread our portfolio, spread our footprint which will be strong for us in the future. So, yes, we do believe we're in a position that we can manage, this period for if it goes on for a more extended period, but fingers crossed that's not the case.

40:16 Is CALNEX and its advisers aware that it's customary to release market sensitive information at 7AM? All other market sensitive announcements for CALNEX have been released at 7AM. Why was the trading update in the October 10 released at 03:17PM? Good question. Well, you know, I think the reality is that just to kind of clarify from a compliance point of view, we are required to release it as soon as it's available. I. The board has completed the work to complete the RNS in terms of they've made a decision. We have to then obviously get a document, make sure that we spend time to get wording right, especially in this one that was coming out or the one that came out on the October 10. It was important to get all the wording correct and get a clear message and a succinct message out to you. And actually, and by compliance, when it's ready, it's supposed to be released at that time. And if it's before 04:30 in the day, then that's what happens. We probably had assumed we thought we could get it out early in the day, but just getting that wording rate, it kind of drifted further into the day. And that's why it came out in the middle of the afternoon. But we believe we were following a a requirements by the market to release the information to you as soon as we we were aware of that, and we could communicate it clearly to you.

41:28 Ashley, do you want to take the third question? Sure. No problem. And then it's actually the third pre submitted question is actually related to another couple of questions that that have come in during the call. So I'll just read them all out because I hopefully will be able to answer them all in one answer. So preceptancy question, why are you confident that your only supplier, Kelvinside, will survive any major economic downturn? That's also a similar question to a question that Andrew Jay has asked. How has your slowdown affected your outsource manufacturer? Any issues with their stability? And Freddie a has also asked the question. We are reliant upon a third party for manufacture. How are they dealing with the industry slowdown?

42:13 Are they robust? So I'll just answer all of them in one block if that's okay. So CALNEX SOLUTIONS PLC managed for us, but they also have quite a diversified portfolio of of customers that that aren't that don't face into the telco end markets. So we we usually sit at the top in in amongst the top three customers for for CALNEX. The other two main customers that they have are non non telco based companies. They they deal more in aerospace, government, defense type industries. And those customers for for CALNEX PLC actually took a dip in COVID and are actually growing from the COVID times that have they've seen quite a lot of growth from those customers into into this period. So the diversified portfolio that they have helps to spread the risk in times when one customer is has dipped in demand. They they have seen an increased demand in their other customers.

43:18 We also have a really close relationship with CALNEX SOLUTIONS. So we share information with them when when we can share information with them on what on our public information. We do, but we also receive financial information from them on a regular basis just because of that close relationship that we have with them. So the communication channels are pretty open from a from an operational perspective, but also from a financial information perspective. So we do have very regular conversations with them on their on their financials, on their cash flow, on their on their overall stability. They they are they are actually in a in in growth at the moment just because of that growth, it's going back from their other customers.

44:04 At this moment in time, we don't see any any risks with their financial stability. They're also not not leveraged as well. So they have no no significant bank bank debt, so they're not suffering any interest costs that the other manufacturers may may be suffering. And then there was another question here. Hopefully, answers the Kelvin side question or questions. There's another question here from Simon b. So it says, FD mentioned that the slight reduction in admin expenses was partly due to less sales commissions being paid. I'm not an accountant, but should sales commissions be part of sales costs? So actually, all our sales costs so the cost of the sales team and their salary, their sort of non commission based salary costs, their travel costs, etcetera, all set within admin costs. So their sales commission the sales commission costs are linked directly back to that to to where they're accounted for within administration costs. So that's essentially where should that that should sit.

45:05 So so from a link for link perspective, they they both sit in the same the same pot when it comes to the statutory layout of the peanut. Okay. I got a couple of questions here, I shall pick up. Andrew asked a question. You mentioned kept having to work in various topologies. To what extent could you be liable if your equipment validates a piece of KET which subsequently doesn't perform as anticipated in a specific application? Yeah. I I guess that's never came up as an issue in in in in my experience, Andrew. We tend to specify or prove particular situations and what usually is the problem. And actually, the next question is maybe linked to this in some ways I'll come to from Derek. But, is that they haven't tested enough different scenarios.

45:53 So it's not so much that we test scenarios. It's up to the customer to take our instrument and create various scenarios. We can give them ideas. We can help them think about things, but it's up to them to create the test plan at the end of the day that they do. So our product will execute that test plan for them. If they haven't got an extensive test or an extensive enough test plan, then basically they may run, you know, leave themselves to particular problems. And I'll just jump to the second question because Derek's pointed one out of this sort of thing. So Derek says Optus Australia has had a complete breakdown of its service in Australia recently, which has proved very expensive. They say that it's due to an issue between its parent, Singtel Singtel and doing an upgrade. Are they clients and may you have helped them avoid this crisis?

46:41 They are we have sold Optus in the past. I'm not sure whether I've I don't know the exact details. I'm not sure whether they've released the exact details. And I don't think we I don't wanna say like an ambulance chaser, but actually these things help to remind our customer base why it's important to actually test and do that sort of robust testing. Because if you do a superficial testing, you may think it looks okay, but it's not until it's sent to these environments. And that's where we try and provide expert advice to our customers of saying, you need have you tested these things? What about this sort of scenario? And help them develop an extensive test suite so that they have completely understood what can happen in real world networks and then really replicated them in the test lab to see what their equipment does and whether it manages it. Because there is many different things that happen in real networks and it's about creating each type of event but sometimes combinations.

47:32 So we know packets get delayed, they get lost, sometimes they get misordered in networks and they come in different ways. But then you may get delay varying at the same time. So creating combinations of delay variation at the same time there's low throughput may create quite a different environment to the software than just doing each one one at a time. So it gives us a chance to basically engage with customers, try and help them. And quite of course, the bigger the test plan, the more likely is they'll need more test equipment from us. So it's something that we do do. Ashley, have you got other ones you can pick up? So we've got one here that might might be quite good for us both to to comment on. So Melville d has asked, given that CALNEX is an excellent example of a very high-tech UK company serving global market, how do you ensure that truly influential business supporting politicians in both Scottish and UK governments are kept very much aware of you? So I might just let Tommy just talk a bit some of the history of CALNEX because the Scottish enterprise the Scottish part of the Scottish government has been was very supportive of us prior to IPO, and they still remain quite a significant shareholder if you were to if you keep if there's a if you look at the significant shareholders on our website, you can see Scottish Shin price sitting there in the in the top five. They they were they were supportive right from day one

49:03 from us. And then for us going forward, it's just about keeping keeping that sort of conversation going so that people understand how how that investment from Scottish Enterprise has been a success. I don't know, Tom, if you want to talk a little bit about the history of how Scottish Enterprise Yeah. In the early days, we received a lot of support from Scottish Enterprise. There's a long story I'll maybe tell you one day of how without Scottish Enterprise, CALNEX would never have existed. It was a chance meeting that actually inspired me to start the company. And in the early days, they were a huge support to us in terms of not just grants that we we were never shy to take a grant from them, But in terms of just mentoring and support and all sorts of ways. So they've always been very supportive of us. Today we get probably less support because we do you know, we're a bigger company. We don't need support. We've got cash in the bank.

49:57 So it's I'm not sure it's right that we would be taking a lot of support. Think but in over the years, SC have been very helpful, so they've been very supportive to us. Even remember back when the banking crisis hit, that was one of the bad times for the company. We were a very young company. We were closing one or two deals a month, and I had three three months when there was no deals. So as you can imagine, it was a bit nippy to say the least. But SC was straight in and managed to get us a grant for travel to go as I said, go see customers. Don't sit there and do nothing. Get out there. So they've always been very supportive, and and and in many ways, CALNEX wouldn't have existed if it wasn't for Scottish Enterprise. Got another one here that I can take if Okay. Yeah. So Stephen r has asked two questions. I can just cover both of them, hopefully. So two quick ones. He says, am I right in thinking Spirent is an important distributor for you?

50:48 Would that be more than 10% of revenues? And the second question is, did you give us the approximate split between telco businesses and other? So from a Spirent perspective, we so very much so from a distributor perspective, it's actually closer to 65 to 70% of our our orders go through go through Spirent. We still maintain that conversation with the cut the end customer. So we're very much in touch with the end customer at at at for every for every transaction. And the orders do do go through Spirent for that percentage of of volume in our orders. We also have other distributors across our our network that make up the large majority of the the rest of the rest of the order flows.

51:36 We have a very small percentage of customers that we deal with deal with directly. So hopefully, that answers that part of the question. And then in terms of the approximate flip split between telco businesses and other, we don't we don't show that in our half year RNS. We do on a from a full year perspective. So in a sort of trade from the over the last three years trend from a telco versus non telecoms orders in the year that has been averaging around about 23% in in terms of when you look at last year's last year's orders. We do expect that that percentage to to continue, maybe slightly higher than that in the in in the in the years depending on their percentage compared to to telcos, but that's essentially where we've seen the trends historically.

52:30 You should be able to see that within the annual report for for last year, which is on our website. In the financial section, you should see it within the revenue revenue model section. Okay. That's a question here from Lucas. I'll pick up. It's a good good question, Lucas. Can you talk a little bit more about the new customers for the military sector? Are those faster deliveries just a test run for them or or to try out the solutions? What potential do you see in the medium term, and where do you expect this to go? Do mind most of my life's been with telecoms and my working life's been with telecoms and we form really strong relationships and we I'd like to believe we're our trusted partner. We can sit down with our lead people who'll tell us what they're gonna do next year and the year after, what they think about technologies in a very honest way even though they know we speak to the competitors, but they completely trust us because we would never pass information between anybody, any customers. But they will tell us everything they're thinking of doing and that's helpful because it allows us to obviously get a a road map in place to have the capability there when we need it.

53:38 I always get frustrated with the military people. Guess it's spread into them. They just don't tell you anything. So I'm not sure how easy it is to answer this question, Lucas, because they really don't tell you very much at all what they're doing. They're very polite, but you walk away and you think I'm not sure he really told me anything. I couldn't, I guess. You know, I think from that sales that we had there, into the work, I would assume, and it's just my assumption, that they actually do lots of training of their operators to manage all sorts of scenarios in terms of different situations, different points in the world where equipment's getting controlled from. So I would like to think they are actually building this in, and they will use it not just as a as a kind of single run, an an ongoing because from what we know about it, it seems like it was getting put into an environment that would be used on an ongoing basis.

54:27 I think that's why, I guess, in the in the in the test case example slide I put up about this system integrator. Because I guess with the military, with all customers, it's how do you get to customers, how do you speak to them. You may have a product they like, but how do you get it to them? And I guess this is where having a system integrator who already has established relationships into the defense sector and a better return, it feels this is important for us to actually basically work through them as a channel partner and use their contacts and and leverage and make sure they understand how our product can be used and leveraged through there. And hopefully, we can get into the these military, accounts in The US and and increase our business there. Is that I sort finished all this. One more here. One more. Yeah. Let me try and answer this last one, and then I think that's that's done.

55:18 Are your telco customers mainly cutting on big investments, or do you see a broader cutting in smaller investments, r and d, opex? I would I guess in terms of what we are seeing, you know, at the end, we are further back. These big cuts are happening at the front end of the chain. We don't sell directly. We see the consequences of them slowing down. So what we see is within engineering departments that we sell to, we go through the standard sales cycle of technical close, commercial close, and then the last bit that's only the small bit is getting the people signed. And they get to that point and then basically because, within the company, there's either a freeze or the the authorization level's moved up in terms of getting things signed off. And so they definitely got more restricted budgets than they've had in the last few years and they find it more difficult.

56:06 And again, that's why we need to work closely with them because we need to equip the people we speak to to go and speak to whoever's the budget holders to have a compelling case why I need to buy this or they need to buy that. And again, as I said earlier, you know, when it's new capability and they can't do it without, then these things are important to try and equip the people we speak to to try and internally for and get that that that paperwork across the line. Perfect. Tommy, Ashley, thank you very much for that. I think you've addressed all of those questions from investors. And of course, the company will review all the questions submitted today and will publish those responses on the investor meet company platform. But just before redirecting investors to provide you with their feedback, which you know is particularly important to the company, Tommy, could I just ask you for a few closing comments?

56:52 Okay. Yeah. It's not the best of times, so I'm not gonna try and kid you this. And I've been through this before, and there's no pleasure in saying that either because it's better when it's all gone up to the right in this spot. You know, we believe we can come through this. We have a difficult time. We've been through here before. We need to keep managing. We know how to keep our current customer base on track or on on-site with us and manage to develop keep these relationships strong. And then sometimes you can strengthen relationships when you help people through this period. And we do have to kinda wait until the the world gives us a break, but we're not sitting waiting for the world to us a break with our new product program that we're gonna continue to invest in, looking for new ideas, looking for new opportunities. And where we do get opportunities and we get orders and we'll analyze them and go out there looking for where there is money because that's what we need to do. And if we can do that, then I believe we can get growth back into the the business next year.

57:45 So thank you very much for your time today. Tommy, Ashley, thank you once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure you'll be greatly valued by the company. On behalf of the management team of CALNEX SOLUTIONS PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.