Calnex Solutions (LSE:CLX) — Investor Presentation

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 they can be submitted at any time using the q and a tab situated in the right hand corner of your screen. Simply tap in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. And I

0:32 would now like to hand you over to CEO, Tommy Cook. Good morning good afternoon to you. Alright. Good day. Thank you, Ash. Thank you, Alex, and good afternoon, everyone. Thanks very much for taking the time to join us. We'd like to go through the FY '24 results. But before we do, and we've got quite a lot of things to cover today, I'd just like to for the people that are new to CALNEX, just give you a quick reminder who we are. CALNEX delivers solutions that allows our customers to prove performance of critical infrastructure. That could be network operators, telecoms network operators, or anybody operating a large network. It could be the equipped people or vendors that build equipment to to meet these networks, or it can be the component people that make components to go into the equipment that then builds networks.

1:20 And increasingly, we're also focused on people in the data center or cloud computing while both people are building the infrastructure for cloud computing as well as the applications that are running on top of it. In all cases, there are equipments used to prove performance of the application or the equipment under test and make sure that it's gonna work under all real world conditions. Today, we have sold into 68 countries in the world, so we're very much of a global footprint. And we run a lean business model and use global supply distribution channels across the world to get our product to market. So where does telecom where does TESS fit in the world of telecoms? Well, it fits in just about everywhere, but the area that we primarily focus on is that areas marked with the red circles there, which is design validation conformance test and the monitoring and and maintaining aspects.

2:13 So design validation conformance test, this is when if you're a vendor making a new piece of equipment, you need to prove that the design is working to your specification, and you need to prove it's gonna work under all situations that it's used in real networks. So very much that's an area where getting the right tools is important because they use our equipment to prove that they've got best in class equipment. And they use it both in the r and d and in the verification phases, each time they do software releases, they need to reverify. And if they're claiming conformance to standards, then they'll do conformance testing, which is really proving that they do actually meet these these standards they claim to meet. The other area that we focus on is maintenance of networks, where not so much building them, but if there is a problem and it turns out to be a difficult problem, they need equipment that gives them deep insight into the network network to understand what is going on to allow them to fix it. And one of the areas that we're moving into, we'll talk later, is monitoring. So if you have got a network, you basically want to monitor it at all times to ensure things are working well, to get early visibility of failures, and obviously allow you to fix these failures.

3:24 So let's just jump straight into the review of FY '24. So in '24, we closed we finished with revenue of 16,300,000. We made a loss of 400,000, and we ended the year with a closing balance of just under 12,000,000. And we have we plan to propose that we issue a dividend of the same as we did last year of 0.62 p per share. As you know, if you've been to any of previous, broadcasts that it's a difficult market in telecoms at the moment. It's definitely a flat market. We would say in the last three, six month periods, we've seen a kinda consistent or stable level of business coming out of there. There is a little seasonality, but in general, the market's flat. It's not going down, but on the other side, it is not starting to recover anymore at this time.

4:14 But we still receive good customer engagement. We actually had orders from 274 customers last year, which was from a proportion, this didn't drop the same proportion as the amount of sales. So we actually got a lot of smaller orders, and a lot of maintenance, as you'll see when Ashley presents these results, of people are still committed to our products and want to maintain it and get software updates, but haven't the money at this time to invest in new equipment. And, course, we have had hotspots as well as we've seen strong performance in our new any one product, in particular, into the defense sector, which we'll talk about later as well. So in this sort of climate, and we've seen it many times, unfortunately for me, this is my forty third year in this industry, and it seems that every eight to ten years, you get a flat period. It's by different global effects each time, but the behavior in this period is the same and basically you read in terms of key customers, it's important to stay connected with them. But we can't just sit here and wait for the world to give us a break, we need to go and look for growth. And so we've refocused our engineering programs into where we believe we can generate growth even in a flat market. And it's not just the engineering programs, it's the marketing programs that are equally important, the way we go to customers, the way we're trying to open up new markets. And again, we'll talk about these later as well.

5:35 Through this period, we've put in some fairly strict cost control measures, making sure we can we have reduced spending where we can. We're managing spending very carefully, but we've maintained the head count because we believe that we enter this is our engineering teams, our marketing teams, our sales teams getting to new customers and developing that new business. So we've continued with our product innovation. We've got some innovative products coming out into the telecom sector in the Paragon Neo, which I'll talk about later as well. And we've also got products that will take us into new spaces in the SND X and the SND Ignite. And more for a longer term, in that monitoring space, our SyncSense products are in an early stage. We would hope to potentially see the first order on this financial year, but more into '26 is where we would hope to see growth coming from that product line.

6:24 So a lot happening in the company. But if you look at our key markets, are two major global trends that actually drive our business, and that's the build out of the mobile network and the move to cloud computing. And there's a quite a different complexion at this point in time. We still firmly believe this for many years to come, these two sectors will grow. But at this point in time, if you look in the cloud computing, it's still growing fast. People are pushing things into the cloud. And also the appearance in the last year, eighteen months, and and to the public's awareness is the AI technologies, and that's really putting pressure on the infrastructure and and data centers. The growth, the modeling that's required when to make AI algorithms work and to run is huge. And already, are seeing quotes that say in our past, you know, you know, up to 50% of infrastructure has already been used just to run the AI info the AI modeling that's happening. So there's real pressure on the the the operators in these data centers to grow them and create more bandwidth, but also not just grow from an overall size, but actually look at the efficiency and effectiveness, and that creates opportunity.

7:34 And if you look at the telecom world, of course, that that, you know, we you can see that we still need mobile networks. We are gonna need more and more connectivity in the future. And these two things overlap with one another because in some ways, the more that things are run-in the cloud to applications running edge or equipment running edge, then that's coming through the the telecoms infrastructure.

7:56 And actually, lot of the technology blocks in terms of the that's being used both within the infrastructure, within data center is the same technology that's used in the telecoms. So for us, the engineering program has a huge commonality between addressing these two segments, but really the go to market is very different. So at this time, it is. It's not the best of times in this telecom world, but we firmly believe that the fundamental drivers are still there, nothing's changed, and it will come back again. And, of course, the data center world and the cloud computing world is continuing to move at a pace, and that's why we've moved a lot of our focus in the near term onto that. So at this point, I'll hand over to Ashley, and she'll give you more details on the financial review. Thanks, Tommy. Just before I take you through the next few slides, I just thought it would be useful to to remind those of you that have that already know CALNEX or for those of you that don't know CALNEX to just chat you through our revenue model very briefly.

8:55 So we have two revenue streams. One, we call bundled hardware and software, and the other one is software support program revenues or the maintenance revenues that Tony was referring to earlier. So from a bundled hardware and software revenue perspective, which is our main revenue stream, a typical customer will purchase one of our hardware products with a number of software options included at that time, and that's invoiced as a bundled sale at that at that point in time. And then they can come back for upgrades or additional options that are added to the existing hardware through the provision of a license key, and then we sell those those as stand alone software sales or or upgrades. And that bundled hardware and software sales pricing can differ for each order because it really just depends on the hardware product being purchased and the combination of software options that a customer may may choose, and that will depend that will differ customer to customer and order to order.

9:56 So you can imagine there is a variability in the average revenue earned per bundle from order to order. That revenue is recognized on, on dispatch and receipt by the by the customer and or delivery of the software license key that's a standalone, software option. And as I said before, that makes up the majority of our revenues. 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 our our second revenue stream. That this revenue is recognized over the life of the product. So if a customer purchases a support package or a maintenance package that spans over more than one year, the revenue that's associated with those future years is deferred on the balance sheet and released over the relevant number of years that the the package covers.

10:50 So you can see from the graph in the top left of this slide, the trend in previous years of our split of those two revenue streams has been approximately 90% hardware and software bundles and 10% support revenues. And this year, we saw a growth in the percentage of support revenues coming through. So the proportion of those revenues to the total, as you can see here, was 23% in f y twenty four. And that increase in support programs, as Tommy was talking about, both in proportion to the total and in absolute terms, reflects the fact that OpEx budgets are still available at our end customers. And those customers place a lot of value on ensuring that they can continue to receive support on their existing CALNEX products that they already own if they if they if they don't have the budget to buy, CapEx budget to buy new product products at this time.

11:47 So just moving across the top of this slide to the middle chart. So as you'll know, our 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 across our three geographic regions, and that's Americas, North Asia, and the rest of world, which spreads the the risk globally. In the last couple of years, we have seen a slight decline in the portion of, total orders coming from North Asia as a result of The continued US China geopolitical tensions. Although you can see from the chart here, this region still contributed to 25% of total orders on average over the last three years. Rest of world, as you can see here, has the biggest proportion of orders over the last two year average period, and that's as a result of the more diverse range of end customers in that region. I've got more information on the regional and product line revenue trends in the year on the next slide. So I'll I'll pause on on that just now. I'll come back to it.

12:53 So just moving over to the to the top right chart here. As you maybe remember for if you've been on our previous presentations, our sales are are predominantly derived from, from telecoms customers, but the end application is within a tel telecoms network. And cloud computing market customers include, hyperscale data centers, enterprise, defense customers to name to name a few. At the top right here, we show that in f y twenty four, these cloud computing market customers represented 39% in f y twenty four 39% of orders, sorry, in '24 compared to 34% in f y twenty, '3. And this increase in the proportion of orders going to the cloud computing customers is not just the combination sorry. Not just because of lower, order volumes coming from telco customers, but it's also because of the strong n e one performance in the year and strong hyperscale order volumes in the year as well.

13:53 So just moving to the bottom of this slide, just starting from the left. As you'll maybe know from other from previous presentations and from other information that we've given, our customers are some of the largest in the industry. And over the last three year rolling period to March '24, our top 10 customers contributed 52% of total orders, and that's in line with previous year's averages as well. And in addition, the average length of relationship we have with these top 10 customers is eleven years, which demonstrates the repeat nature of business that we do with them. So that repeat nature, of business is driven from various things. For example, it could be that customers will come back to order from us, frequently for, maybe because they want to buy multiple kits for multiple bits of same kit for them for multiple sites.

14:49 They may want to add new kit and new equipment as they grow their labs and their testing requirements. They may want to add new software options or upgrades that I was referring to earlier to existing hardware that they already have, or they may want to move on to our newer products and functionality as we release them to the market. So that repeat revenue demand is something that we measure across our whole customer base as well as the the top 10. So the middle chart here shows that that metric for the whole business. So over the three year rolling profile, repeat orders from end customers generated across the whole group were on average 76% of total revenues, and that's slightly above last year's average of of 74%.

15:38 And in f y twenty four, we received orders from 274 customers, and that's a decrease of 31 on last year's 305 customers, but it's still a really strong number given the challenging year that we've experienced. And then the last chart here on the bottom right is really here to and you may have seen this this chart before. It's really just to show you an example of one of our top 10 customers, but it's really very much a similar trend that we see across a lot of our customers. And what we're showing here is the so the blue area chart at the but the area part of the chart at the back is the the amount of orders that this customer has has has ordered from us over the the years, And it's to show the the fact that the growth in orders from one example of a customer is not just driven by them coming and buying hardware products, but it's also driven by them coming back and asking for upgrades.

16:38 So you can hopefully then see the repeat nature of of the the business that we do with them and that bundled effect of the the hardware and the software as well. So just on to the next slide, just cover a little bit on the the geographic and product performance revenue wise in the period. So you can see from the disclosure notes in the r and s and and from what Tommy was talking about earlier that the subdued market had an impact on revenue levels across all all geographies. So our three regions I just mentioned before are Americas, North Asia, and what we call rest of world, which is Europe, Middle East, India, Southeast Asia, and Australasia. So the rest of world region, as I mentioned before, was the was the largest revenue generator in the year. And although still affected by the slowdown with a 31% decline in revenues year on year, it was the least affected of the three regions with the Europe subregion performing the strongest.

17:42 And that's where business, as I said before, has come from a wide range of sectors, including automotive, power, and rail to to name but a few. The North Asia region saw a 48% decline in revenues in the year, and that, as I was saying earlier, has been operating against the backdrop of The US China tensions in the region, which remain. And as a result, China remains challenging for us as our country within the region. However, we've seen strong performance in both Taiwan and Japan in the year and also see continued ongoing potential in both countries going forward as well. The Americas revenues also saw a decline in revenues, also saw a decline, sorry, of 48% in the year, and that was because that region is most impacted by the telecoms slowdown.

18:33 So we're continuing to stay very close to our end customers in that region and the other two, while increasing our focus on opportunities within the hyperscalers and government end markets where we see the best chance to close business while the telecoms markets are a bit slower. From a product line perspective, LabSync, that's our Paragon Neo and Paragon X products, experienced a decline in revenues this year, and that's driven by the fact that they're very dominant in the telco market. This is similar case with Sentinel. That's our telecoms focused network sync product. Our plans for growing Sentry sales, which is our network sync product aimed at using data centers are are continuing.

19:15 And then within our network and applications assurance product grouping, which is what we used to refer to as cloud and IT, we've got two separate types of product there, and the drivers are just slightly different. So our emulation product for infrastructure testing, which is the SME, had a challenging year as it's got quite a large exposure to The US market. But order performance did pick up in h two, and that that was as a result of our growing demand for the newly launched SNE X and the SNE Ignite products. And then in applications, NE one, which is the product that we acquired through the iTrinity acquisition back in 2022, that experienced good growth in orders and revenue in the year, and that and that's as a result of channel expansion since acquisition and a strong performance in defense and satellite communication sectors.

20:06 So just onto the income statement itself. As Tommy just said, the revenue for the year was 16,300,000, which is a 41% decline on last year, driven by the dynamics in the telco market and everything I I covered from our regional perspective just there. As you may know, our our indirect cost base is largely fixed. There are some variable elements, which I'll cover in just a second, but it's largely fixed. So the performance and revenues created a negative operational gearing effect, as you can see on profits, by dropping through to the bottom line. But that that operational gearing can work the other way around, as revenues start to start to grow again. Gross margin was 73% in the year, broadly in line with margins in the in the prior year. So that just as a reminder, that gross margin is net of commissions pay payable to our channel partners. So it's the gross margin that belongs to us.

21:00 And that margin, as I said preview in previous presentations, it can fluctuate one to 2% through the year depending on the mix of products and the mix of hardware and software bundle shipped. It can also be affected just slightly by if if there is a dip in revenues, we do have some direct cost base in house, a a small order fulfillment team in house. So some of that some of that direct cost the absorption of some of that direct cost can be less in times when the revenues are slightly lower. However, product margins have held very much in line with with previous years, which is good. We kept a very tight hold on cost, as Tommy was talking about earlier, and while we go through this period of reduced order volumes. So as a result, we, our headcount only increased by graduate hires. So we took on five graduate hires in the year, and that's maintaining that hiring program for graduates is really key for us for future succession planning, innovation, and investment into our future road map opportunities.

22:01 Aside from that, any people cost increases across any of the the people cost buckets within the p and l, have come from just from inflationary rises in the year or full year effects of hires made in f y twenty three. There were there were no other additional headcount headcount increases across the company in the year. And as you can see, admin costs, so that's a bit in this table here that excludes depreciation and amortization because that's shown separately further down the the the income statement. Those costs came in 1,000,000 lower than last year, and so that partially offset the the impact of the lower revenue volume. So that's the so that's due to the fact that there's there's a slight portion of variable cost in there. And those those lower admin costs were as a consequence of lower commissions costs on the lower orders, lower recruitment costs, and the other kind of hiring costs that go with that as well, plus reduced profit share and bonus accruals compared to last the the compared to f y twenty three years. So there were no bonus or profit share payments accrued within the f y twenty four income statement. And that's just partially off all those all that is partially offset by increases to share these payment accruals as a result of share option awards.

23:21 We had a small amount of acquisition costs included in the f y twenty three year in relation to iTrinity, which were nonrecurring, so that's also not not recurred again in f y twenty four. As you'll know, we we capitalize a 100% of our r and d costs and amortize these to the p and l over five years. Our r and d amortization came in at 3,800,000 for the period, as you can see here, and that was all as planned, all in line with our plan. And that was versus 3,300,000 in the prior year. So in a period when there's little or no headcount increase, you can still have an increase in amortization of r and d because of that five year amortization profile if you've had headcount increases increases in the prior years are included within that that five year look back, and that's what's driving that increase there.

24:14 So loss before tax came in at 400,000, a small loss of 400,000, and that's driven by the the the revenue performance and the drop through of that those lower volumes. And as we as I said, we we've we're maintaining we're still maintaining a tight control on cost into f y twenty five as well. There are no headcount increases planned for for f r twenty five except another round of graduate graduate hires. So just very quickly on the effective tax rate. The the effective tax rate for the period was a 111%, a credit of a 111%. That is quite an unusual rate, but it's really very much driven by this very small loss making position and the effect of our r and d tax credits being added to to the to that tax charge. So we benefit from r and d tax credits both in the SME and RDIC scheme. The SME scheme part gets added back into the the tax charge. That's calculated on the amount of r and d spend you spend in the year.

25:26 So on a very low loss making position, that credit has the effect of giving you a very large credit back into into your or a large percentage credit back into your into your tax. That was offset partially by timing differences relating to deferred tax movements as well. And then just last thing on the slide, basic EPS, as you can see here, is 0.05p, a very small profit given the breakeven profit after tax result, and then diluted EPS, was at 0.04p. And just moving on to the cash flow. Total cash outflow for the period, and that's including all the fixed term deposits we had in the previous year, was 7,200,000.

26:14 And that reflects both the lower trading volumes in the year and increases in working capital, namely inventory. So as you can see here, the working capital movements were 3,700,000 of an outflow, and 2,800,000 of that was inventory. And the drivers behind that movement were very much the same as the half year of your our half year presentation. And and it's divided into kind of three different drivers. So first one is we we had a planned buildup of some of our on the shelf invest inventory to use as buffer stock to mitigate against any future supply chain delays that may happen, which we experienced a few years a couple years ago. Demand plans and our our demand plans with our outsourced manufacturer, if they if they're in line with previous order expectations, so prior to the telco slowdown, they can take some time to dial down through the supply chain as you might expect, if it's a long supply chain. So that can take time to to dial down. So in the in the interim, you have to take some inventory onto your balance sheet. And then inventory purchases, we also had to make inventory purchases as a result of the tail end of the supply chain issues coming through as well.

27:28 That increase in inventory in this year in f r twenty four was very much one

27:32 off in nature. We don't expect it to repeat into f y twenty five. The current inventory on the shelf will serve our the demand of our current products through f y twenty five, and we only expect to change the inventory profiles from new products. So for instance, for the Paragon 800 gig, we will have to take on new stock onto the balance sheet, but that will be very much linked to live orders that we have at the time. We paid £850,000 in tax to HMRC in f y twenty four for f y twenty three's profits. But given the the trading and the the the loss making position for f y twenty four, this cash should be refundable in f y twenty five after submission of the f y twenty four year end tax return. Cash spent on r and d activities, which as I said before, is capitalized and amortized over five years, was 5,600,000 as you can see here. That's against 4,500,000 in the previous year. But very much that increase, as I said before, just reflects inflationary salary increases, full year effects of f y 23 hires, and graduate headcount increases as well. So there were no other headcount increases in that number.

28:43 We still manage surplus cash balances through notice accounts to benefit from higher rates of interest, and we don't hold any on long term deposits on on quite short term deposit. And we have we still have no debt on our on our balance sheet at this time. So just to summarize, while the results for the period were disappointing, we are seeing encouraging performance from our new products with the NE one and the SME products gaining traction in the cloud computing markets. Our gross margins have remained healthy, and we're keeping tight control of our existing cost base to minimize any additional impact to the profit.

29:19 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 telco the telecoms markets or the cloud computing end markets. And our investment in inventory means we can be ready to reduce order fulfillment, lead times once demand picks up with a healthy cash balance, which we expect to maintain through FY twenty five, providing us with a really good foundation on which to return to stronger financial performance in future periods. And I'll pass you back to Tommy now. Okay. Thank you, Ashley.

29:52 So in this last part of the presentation, I just wanted to kinda give you a review on the strategy and talk about some things that are happening in our market and give you a bit more color on some of these product releases that I talked about. The strategy is is still the same as we presented before. As I presented at the beginning, the two big growth engines we see in the industry that are actually driving our our opportunity is the continuous build out of the mobile infrastructure and also the expansion of the cloud computing sector both in terms of the infrastructure and applications that are running on top of that. So that still remains key to us and and will do for the foreseeable. We continue to look for targeted, selected acquisitions and strategic partnerships. And again, as we've talked about, there isn't huge numbers of companies out there that we can potentially acquire, but there are a number and we continue to look for them and also look to partner with companies. And fundamentally, what that's always trying to do is create

30:48 new business. And I define new business as getting to customers we do not sell to today or it gives us something in addition to sell to the people that we do sell to. If you look at our product programs, starting on the left, you've got our our products, the LabSync products. These are the testing time in that design validation conformance test situation. And we've got a major release coming up in that in the second half of the year as we're gonna add 800 gigabit capability to that product.

31:19 Now 800 gigabit in in my lifetime in this industry is probably the sixteenth wave of technology that come I've seen come along. And in terms of finding customers, it's obvious to us who that all the ones that have bought the 400 and bought the 100 before that and bought the 25 before that. So really getting to these customers is is straightforward. The challenge is that working in 800 gigabits is really at the scaling edge scaling edge of technology. It's extremely complex product to work on. And at the moment, the engineering team are on track to bring it early in the second half, but, you know, that is really the challenge. It's it's it's it's difficult technology. That's why you can charge a high premium for it because it's not easy to do, and that will come out. And if when it does come out, we we know where to go and to sell that product, and that should deliver some of the growth that we're looking for in f y twenty five.

32:11 In the second area, the network sync, this is more in that maintenance and monitoring area. We've got the the telecom and the data center and maintenance products. At the moment, this you know, we've switched our focus more onto this new product in terms of monitoring network six SyncSense. We would, with a better luck, be able to get the first, orders for that this financial year, but it's probably more like into next year. We're getting really good customer engagement. There's some interesting activities happening in the standards organizations

32:41 to define when you're monitoring a network, are the right parameters to look at. And standards are really important in our industry because it it really informs our customers that this is the right thing to do. It's one thing going and telling your customer, we think you should monitor ABC, and the other question is, well, how do you know?

32:59 But when the standards say this, then it's the experts from across the industry who said that. So it really it reinforces the message that that that's the right thing to monitor. And really, our value add is collecting that data and presenting it in a consumable format and finding inform you know, and determining where the real problems are in the network from our understanding of synchronization. So an interesting opportunity that we're continuing to press. The other area of growth that we really hope to get this year is in our network emulation products. This is in the network application sector. You can see we have a higher a large range of network emulators. And then the SME Ignite and SME X, this has taken us to new opportunities, especially in that cloud computing, the applications running in in in the in the network.

33:47 And I'll I'll come back to talk about that later on as well. And we've considerable enhancements coming through the year to very much focus on particular target applications. So when you look at our product program, there is a huge amount happening at the moment. All of these are important to continue to innovate, add capability to our product to build the to get these new orders. And as you can see, if I'm not gonna go through every line by line in this, but if you look on the right hand side of this chart, you can see that a lot of some of it is aimed at telecoms, but a lot of it is aimed at non telecoms. That's into the cloud computing or the defense sector, where we've switched across a lot of our engineering to focus on this area where that we feel there is opportunity that we can realize in the near term where we wait for the the the telecom sector to grow.

34:35 We're still investing in telecoms. We're still are getting business from telecoms. It hasn't gone away. It's just flat and we do need to keep up with our customers and ensure that when revenues revenues for them start to flow and they could ease up the spending, then the the then we are top of the list to get that. One of the areas that we find really interesting and we're really focused less from not just on the engineering but on the marketing side is really creating marketing collateral and showing how customers how they can use our product. You can go to a customer and say, here's a general purpose tool kit that can do lots of things. You figure out what to do with it. That's not usually the best approach to encourage them to spend money. What you want to do is really position it in language and in an environment they understand, here's what you're trying to do, mister customer, and here's what our product can do to help you get your product to market quicker or get it to market much more robustly.

35:29 And remember, when we sell to our customers, quite often the people we sell technically to are not the budget holders. It's their managers that are the budget holders. So first you need to persuade them this is the right product and then tool them up with the right information to persuade their manager that they should invest in this product. And some of the areas that we see really quite interesting and we're focusing on is this applications and equipment that are sitting at the edge or unused customer premises, but actually processing everything in the cloud.

36:00 That means that what happens in the network impacts the behavior of the application or the user experience at the end. So there are a number of cases where we're really focused on there of trying to show how you can use or you should use network emulators to really fully stress test your equipment or your application to make sure that it is gonna be robust whether there's users at different locations across the world and and different network, connection topologies

36:27 with different bandwidths, with different delays, and actually prove that the equipment is robust and the devices is robust that your customer could have a good user experience. So from a marketing point of view, there's a big focus this year internally in trying to create this collateral very targeted at different applications where we believe we can generate revenue in the medium near and medium term. One other thing I need to talk about that remains today is that we're gonna evolve our sales channel As we've talked about for many year as as I've talked about for many years, we have worked with Spirent, one of the other big test vendors in the sector. From 2012, we started working with them, and they are basically a channel partner for us and that they provide our they resell to our customers.

37:15 And we've announced that and we've informed Spirent we plan to terminate that contract. So that contract will normally terminate from the July 31. Now up until now, about 65% of our sales have gone through spirals. So you may be saying, oof, you're just moving 65% of your sales. That seems a bit problematic. Well, it's not really as bad as it sounds like, and it's quite straightforward. It's not without challenge, challenge and it's not without effort required, but it is something we definitely feel we can manage. When you break down what we've been selling through Spyron, it really comes to sales into three big regions, North America, which is US, Canada, India, and China. And when you look at each of these and you look at each problem, if you look in The US, we basically already got other partners. We sell the any one through a company called CPU.

38:04 We've spoken to them. They can actually pick up our other products. So in terms of being able to take orders on the August 1, that won't be a problem. But actually, we've changed a lot since we started working with Spirent ten years ago, and now we're thinking we should be going direct in areas where we've got the bulk we've got a significant bulk of business that justifies putting the infrastructure in place to actually sell direct in terms of reporting, in terms of compliance. And when you look into The US, there's a couple of states like Texas, California where we sell a lot of our business and we're in the longer term looking to go direct in there. So we go direct because that means we won't have to pay margin to any partner and we'll get more margin into the company. But even if that's not ready to go in the August 1, we already have a backup plan to make sure we've got a smooth transition and then we can move across there.

38:56 Same in India, we've already been speaking to partners and we've got a fairly small set of customers there, so it's not too hard to move them across. We've already been speaking to partners that will provide that, smooth transition. And, course, we're looking at other opportunities whether we could one or two of the big customers, we could start selling direct or through these enterprise zones, which again would reduce the the channel cost and increase the margin that we get. Same story goes for China. Basically selling through partners and potentially going, direct where it makes sense. So, you know, we've it's been a great relationship with Spyrant and I will always speak warmly because it has been a very positive relationship and even on the meeting call I had with them on Monday, where all the full, the senior sales leadership team were on, They always act they've always acted professionally and they still act professionally.

39:47 They recognize and respect our decision that it's time for us to move on. Are moving to the next phase of their company's evolution and we need to move to ours. We're gonna work together through this phase and make sure we maximize the business for them and we maximize it for us. That's what we're gonna need to do. It will be that after the August 1, we will still close some business through Spirent into the coming months because if deals are well progressed, as you know, deals for us can take four or five months typically and sometimes longer. And if a deal is near that end phase of the customer about to place the PO, it really does not make any sense to try and move it to another partner. A, because it it would mean in some customers, they'll say we need to go back through the procurement process, and b, Aspirin's done the work for that deal and they deserve to get the margin for it.

40:34 So we will work with them through this transition to make a more it's not a sharp edged transition, it's more a scale down and move it across and that's why I feel completely comfortable that this is going to work for us. And more than that, you know, if you could ask me if Keysight hadn't decided to acquire Spyrant, would you be talking about changing channel today? If I'm honest, probably not. We probably would have done it. We're more likely would have done it next year because the contract was due to come to an end next year. But actually, in hindsight, now we've crossed the Rubicon, I actually think this is a good time for us to do it. And we are taking the positive setting up our new channel that's more aligned to where we want to be, more aligned to who we are now and who we were in the past and where we want to be in the future. So I actually see this as a huge opportunity for us and it's been a real motivator for the sales channel team who have had obviously in a, you know, in difficult situations to go out there and create this channel that will actually take us forward to the future.

41:32 And talking about route to market, I just thought I would spotlight defence here, really to focus on how it's not about, you may have a great product that people want, but that's not the end of it, that's just the start of it. How do you get it to the customer? How do you get it in front of the customer? How do you manage that whole selling process? And we've found in the last couple of years as we've sold more into defense, that we're better using these what's called system integrators. So these are companies that take on large government based projects and bring together lots of suppliers, put together everything, do the installation, do the commissioning. And that's what we're finding is the best way to get to these customers. And we've got three examples where we've done that in the last couple of years. The first one is in The US where it was installing a new cyber range. So a cyber range, you may have heard the term digital twin. Think of it as a real live emulation of a real world situation that allows you to experiment things. If things go wrong, you can try it in this simulation to understand what's going on, or if you put new equipment in to try it.

42:35 And a cyber range is just a form of digital twin, but it's really set up to create that environment to see how robust the system is from cyber attack. So the company were commissioned to put this whole IT infrastructure in to create this cyber range, this digital twin type cyber range. And by working with them and showing them what are the value add we can give, they've included that into the project and installed it. And of course, when you're working with governments, they've tight restrictions on who they work with in terms of checking them, and basically, they rely on the system integrator to have done all that evaluation of the companies which we've done with the system integrator and allows us to get to these customers. Similar one in the middle where it's both in The US and The UK, where again you've got the situation where you're running lots of pieces of equipment that are on the ground in offices, they may be in the air, they may be on the sea, they may be on the ground, They're moving. They're different very different environments in terms of connectivity that they've got, and they need to prove that everything works, train their operative operators to make sure they know how to work it. And basically, they are helping them do that, putting these systems in place and introducing their equipment and how they can use that in simulations and training exercises to actually really to, show and make sure their systems are and their people are robust to all situations.

43:57 And the last one is another one where there's a test lab in The UK where when the government agencies are buying new pieces of equipment, they ask the test lab to run evaluation. So again, we've sold to the test lab, persuaded them the value of the equipment, and also they are exposing our equipment into other people as well. So as you can see, selling to customers is not just about things, it's not just about equipment, it's about relationships, it's about understanding the ecosystem and how to get to your customers. So in summary, we go into this year, you know, we we really believe we can gain some traction with our new products both into the telecoms and the non telecom space. The market remains challenging in telecoms. It is what it is. You just need to get on with it and deal with it, and it will come back, but we need to just manage the situation.

44:46 We are, as Ashley talked about, from an inventory point of view, from an organization point of view, from a change of a sales channel point of view, we're strengthening our position so when the channels do come back and the the market comes back, we can grow and benefit from that. So that's why we remain confident that we can deliver our results in FY twenty five against current expectations and deliver growth. So at that point, I'll hand back to Alex. Perfect, Tommy. Ashley, thank you very much indeed for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the top right corner of your screen. While the company take a few moments to review those questions submitted today, I would 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.

45:35 Tommy, Ashley, as you can see, we have received lots of questions throughout today's presentation. And, Tom, if I may now hand back to you and kindly ask you to read out those questions, and I'll pick up from you at the end. Thank you. K. Thank you. I'll I've got I can answer one of these questions. I'll go first if that's okay. So there's a question here that says, as stock price has fallen a lot, what are your thoughts on share buyback? So share buybacks are something that we regularly review with the with the board and discuss. But at at this point in time, the management team and the board's priorities of the return to growth in f y twenty five and the transition away from the the the spiraling arrangement. So because of that available funds our available funds, we have we have quite a good surplus cash balance. We believe the best use of those funds is to be is to to fund our return to to growth.

46:37 However, it's the share buyback is a thing that we will we will revisit on a on a regular basis. Okay. Let me there was three pre submitted questions, so let me make sure we cover them. Quickly, the first two are almost identical. I'll read the first one out because it's a kind of super set of the second one. If there are no green shoots for general market recovery already, when do you expect them and what do you expect will start the market recovery? Will it be related to lower interest rates? I think there's a strong view that interest rates are part of the problem, and have been part of the reason why the operators slowed down their spend. As I said, we've seen these slowdowns in the past, or I've seen them in both in CALNEX and in my past life as well. And this it generally is driven by that more macroeconomic situation and the general increase in that and and confidence in the general world will help.

47:32 Obviously, within the telecom sector, quite often, it's driven by the front of the food chain, which is the operators, and the operators build their networks, whether it's four g or five g or whatever they're building. And, obviously, the higher interest rates because most of that is done under debt has definitely had an impact on that. So, hopefully, when debt debt cost starts to come down or at least it's clear that it's not gonna go up, that will start to bring confidence. And really, that's what we think will be the first signs of confidence coming back is when you start to see the the operators recommitting to their build out plans and and starting to grow to grow their their investment and their infrastructure, which will then encourage the vendors who's, provide the equipment to accelerate their programs and release budget as well to buy test equipment.

48:22 There's one other question that came in pre submitted. Do you ever hold open days for investors to to visit the business? If not, this would help current potential investors going forward. Well, you're welcome to come and visit us anytime you want, but we tend not to encourage it because you might be underwhelmed by the experience. Linlithco's a nice place, so you'll enjoy visiting Linlithco. You know, like most technology companies these days, you come in, you'll just see a sea of people working on on PCs. So if, you know, you can see our equipment, anytime you wanna come, you're welcome to drop in. You know, I think if you're trying to understand more about our business very much in our marketing on our website, is a bit around what I was talking about. We're really focused on trying to educate our customers about the application and the value of what we deliver, not so much on a feature, this feature does this, that feature does this.

49:14 And and so you may actually if you have a visit there, you may find some short videos and information there that will give you more color on what we do with our products and where we believe we can add value and effectively generate business. Ashley, have you got another question to pick up? Yep. Got a question here about the the the increase in receivables on the balance sheet in this year compared to last year. Effectively so there there was a a slight increase, and it does look strange given that our revenues were lower in the year, but very much to do with timing. So so it's it so very much the the timing of the orders that came in in q four and the relationship of of them to the payment terms that we have with with Spire and so or or our other distributors.

50:04 So, actually, a lot of those receivables have already effectively been been paid already. So so nothing nothing out of the ordinary with those receivables, just a matter of matter of timing and when the cutoff for the year end happened. Okay. Let me pick up one from Patrick here. He said, in last year's annual report, you actually said your commitment to the long term spiraling reseller agreement resigned in July 22. What changed for you to dissolve the agreement? How do you see the sales channel structure in the future? Well, I think I hopefully, I've answered a lot of that, Patrick. You know, we have had a long term relationship. The contract tended to be a three year contract, and each time we can ask and tell her the question, is it the right thing for us to do? And then when we did that before, we we did that.

50:51 The chi the the change was then being acquired by Keysight. You know, we have some overlap with the products in Keysight. Could we make make a relationship work potentially? But I think it would never be as effective as what it was with with, Spirent because of this confusion in terms of the product position and what the sales guys would take to market. And that really was the catalyst for us to see, look at it wider and decide actually maybe it's time to move on. And as I said, I do believe that we can restructure the channel. We've kinda changed the channel a few times. We started with regional partners, and then we worked with GDS, which had a similar relationship with Spire, then we're back to regional partners, then we went to Spire, and they will go back to regional partners. And now you've gone to some direct as well. So it's not unusual for us to change. And even in our other partner network, we continually look at partners. And if they're not responding, we move to other other partners and regions that are at a relatively low level to overall business. So that sort of change of channel is something that's happening all the time, and that's why we feel quite confident we can manage this situation. We've done it before. And that the new structure we have will actually open up opportunities for us moving forward.

52:07 Got another question here from David. The question is what what will be the impact of change in distribution arrangements on gross margins and operating costs as a result of the this violent change? So so long long term, we we would expect an uplift to our to our revenues as a result of going if we if we change to go direct, we should see an uplift in terms of that that margin because effectively, you're not you're not paying a a margin to distributor. With a lot of the other regional resellers that we have, their margins are a little bit lower than than with Inspiron. So, again, we should see a slight uplift. However, the the goal for we will we will be adding as Tommy was saying earlier, we'll be we would we will have to add to the operating costs for logistical and sales purposes.

53:06 However, the goal, the long term goal should be for that upside in in revenues and margin to be higher than the than the additional operating costs. So we should see a benefit to the bottom line in from a from a long term perspective. In the transition period, as we go through the kind of the next the next twelve months, that will that will kind of effectively determine where we go where we go long term. But that's effectively the goal is to is to make sure that the the benefit on the top line drops right through. Okay. There's lots of questions here. Well, sorry. My screen just lost that question. There was a question. Is there any termination fee associated with the SpyNet? That's easy answer.

53:54 No. There's no termination fee. I guess the fee was on sale by sale, so that's fairly smooth. There's nothing happening there. I've lost the other question. How many competitors do you have who might be oh, sorry. How many com competitors do you have who might eat your lunch? Nobody's eating my lunch. You know, there is a competitive situation out there. I don't think it's changed in terms of in any way that we are less competitive or anybody's coming at us stronger as a as a competitive world, you always have to expect that to be there. The main problems we have is more than the market situation. And in fact, I think what we, you know, and what we've done recently in terms of acquisition Trinogy, integrating that product, expanding that portfolio, we've got a much stronger portfolio in terms of this next phase in terms of trying to grow our business.

54:45 Kevin asked, can you elaborate on the weakness in The US telco market? There's always secular growth drivers such as the 800 gigs of ORAN, and the rest of US US economy is possibly growing. Can you can you help to understand what the problem Telcos? Well, most of our business in The US is actually to the equipment vendors, and it's the fact that they are selling to the telcos around the world. So they're not just selling to The US, that actually has caused them to be more, prudent in their spending patterns at the moment. So you're right. There are some areas where we can start to see growth, and they have started to see in such as the 800 gigs. But it's really there's a global market, and I guess it's the fact that the global market has slowed down that's affecting everybody in every region.

55:35 Have you got another one there, Ashley, while I'm trying to read one? I've got another one here. So Patrick has asked, with your finished stock inventory covering a large proportion of your current year sales forecasts, how will this affect your manufacturing partner at CALNEX SOLUTIONS? So in terms of the relationship that we have with CALNEX SOLUTIONS, it doesn't it doesn't change our relationship at all. CALNEX and we we work with CALN side on a very regular basis for them to understand. Even though we are holding more stock than we would usually, we still have interaction with them on on future demand plans. They're on on a new product development. For instance, if we're if as we go through the development of the 800 gig product, Kelvin said, we'll be working very closely with us in order to understand what is required from a from a production perspective.

56:32 It will mean that there'll be less there'll be fewer fewer inventory inventory volumes passing over. However, CALNEX SOLUTIONS very, very, very aware of our of our inventory balance, given the fact that we worked with them on that last year, and they will be working with us on on on future plans as well. They have quite a diverse customer base as well. So they have they've got quite a large range of of customers. So they are seeing they they did see a dip in some of their other customer revenues through, through the co COVID times, and they they're seeing some of them pick up now as well. So so they they share quite a lot of their their their information with us on how they're getting on.

57:22 So so we we intend for that to continue so that we can keep that relationship going into into the the the following year and work with them on on new products. This one I I probably should have mentioned there. How much additional sales headcount do you need to employ to allow you to go direct to customers? We don't expect a huge number. We have Ashley and the team created a model which cannot take a very conservative view of additional people, targeted sales, hires into each region, additional hires into Ashley's team and the operations team because there'll be more logistics, more reporting to be done. And that still showed with the with the reduced margin that we'd pay to channel that actually it would be cash positive just at the end of profit positive.

58:11 They were having you know, I think the key thing is we it won't cost us this. I think even putting people into the channel, it will be better, and we would hope once they especially could start going direct, there will be a positive impact. But we're gonna be careful about basically looking at each team, asking them what they need, making sure we understand the skill sets as well that'll be required to so that if we need to enhance the skill set of the team we've got. You know, we do we have a relatively small customer base, so it's quite easy to manage that. And in fact, even as as we are already in touch with all our customers, it's there's no customer out there that's bought from us that's not engaged with CALNEX at some point. So I guess that's why it's all really manageable for us in terms of moving it forward. And it's got a question. Going forward, does that initiatives make revenues more resilient by increased proportion of recurring revenues?

59:01 It is something we always look at, and especially in the same sense we're speaking to customers, hey. They'd like that. What's the best way for them or what encourages them to buy? Is it a is it a recurring revenue model? Is it an outright purchase with a support model? And to me, it's always about what makes the customers more likely to buy the product from you rather than what we want. It would be great to get more recurring, but ultimately, we do not wanna put barriers in place. We wanna reduce barriers in terms of getting people to same purchase rates. And especially with something like SyncSense and a system, even if they buy it as an outright purchase, the maintenance costs were much higher than what you would expect on an instrument. So in an instrument, when somebody buys an instrument, the the maintenance that Ashley referred to is usually kinda five to 10% of the the list price is what we would charge if it is a rebate. Whereas on the the the kind of six census, the the the monitoring system, it's more likely to be up around at least 25%.

59:59 So that will naturally increase the recurring revenue. But ultimately, to me, it's about what encourages customers to buy your product. That's what we focus on the most. It'd be great to get more recurring, but it's all about making sure that we get business through the door. And I'm just trying to find another question here. Given that oh, here's a quick one. Quite different from Melbourne. Given that you established reputation as a rival high highly professional company with accurate and dependable products is fatal to you, how do you ensure that your manufacturing partner maintains the standards?

1:00:44 Yeah. Well, we as you may know, we have a partner that's actually based in Central Scotland, a small company, but they're a company that focuses on high, high complexity, low volume type work, and we've worked with them since the company started. We have a really strong relationship with them, and we have, regular engagements, virtually weekly engagements with the engineers, monthly engagements with the management, and Ashley has quarterly engagements in terms of financial discussions that we keep in view with them. And part of that is looking at the way they continue to invest in the machinery and the infrastructure. You know, when you work with leading edge technology, it comes in leading edge packaging. And if you're working with leading edge packaging, you need need leading edge machinery to put these packages, these components onto boards. And very much, CALNEX SOLUTIONS do that. They invest heavily in it. They invest heavily in training, and they really do provide a high quality product.

1:01:38 We monitor in terms of, failures in the field, the yields, etcetera, and it is extremely high. And we continually look, and wherever there's any shift, we communicate with them. We understand root cause analysis. And so we really are comfortable with our relationship we have with our partner that we are aligned to our goals of delivering a a high quality product. From what I understand, there was a relatively short lived negative impact when you switched from GDSU to Spyron in 2013. From what you're seeing, there will be even less impact yesterday in time around, or is that difficult comparison? It's a difficult comparison. There actually was a gap between the two, and I'm not sure that there was an impact.

1:02:27 Actually, when we ate at the blue GDS, say to us, they were canceling the contract. And it it was a lesson in life. You know, when you're working with somebody, they've got every right to change the contract to cancel at any time as long as they they stick by the terms and GDS stuck by the terms in the same way we're sticking by the terms with Spirent. And we did at that time change the financial plan expected at that. But by doing the things that I talked about, speaking to every customer on ongoing deals, making sure you communicate with all the other customers, manage this transition, we actually didn't see any dip in sales as we transitioned away from GDS into having regional partners. And so a lot of the learnings that we had there and what we learned from that is very much what we plan to use this time around to ensure, again, we have a a smooth as possible transition from the current arrangement to our new arrangement.

1:03:20 There's a rapidly expanding starlight network, a revenue opportunity, our threat. I see it as an opportunity, David. You know, I think we're already in n e one. We're actually seeing the the use of satellites, low orbit low orbit satellites, and even medium orbit satellites are really quite different in terms of for the of the applications we're focused on when we've successful is actually modeling that because when you're connected to a satellite, basically, the latency in your connection is constantly changing. You got a constant change as it tracks across the sky, and then when you suddenly when it disappears out the sky and you switch to another satellite, you got a state function and latency. Made to many people and most applications, who cares as long as it connects again?

1:04:08 But to some applications, they care a big thing, and it causes them problems. And again, so we very much see that as an opportunity. You know, in the world of test, if suddenly tomorrow the whole world went, we've got enough telecoms. We don't wanna need anymore. For the next hundred years, it's fine. Leave it alone. That's not a great deal for me because people invest into new technologies. So whenever there's change like moving, how can the works, you know, lower lower earth orbit satellites, how do they work with these satellites with the grain based ones, that creates challenge technically challenges, and that's what creates opportunity for us. So to me, that's just an opportunity, and it's it's something we very much are investigating and look for to see whether we can benefit from.

1:04:59 When do you see normalized operation margins settling? Trying to gauge, well, '22 was above average. Do you wanna maybe answer that one, Ashley, about margins? Sure. So so at at the moment, if the tech if the telco market comes back, we would expect our operating margins to to revert back to to what was, to the trend that we we were experiencing back in, back in the earlier years. At this moment in time, it's quite hard to tell when that telco market will will come back. So what we are trying to do is, as Tom was talking about earlier, is trying to increase that margin by by adding new opportunities, by looking at new opportunities in in the non telco side of things. With that, if if the telco market remains flat, that will take us time to get those operating margins back up to the same levels.

1:05:57 So it's all, it's all effectively linked to when the when the telco market does come back, but we will be working on it on improving those operating margins. And there's one last question here, and I think sorry. Think Alex was coming. Let me just answer this, Alex, and then I think we're we're on the time. We'll stop then. You said in the report that you expect growth in the coming year even if the telco market remains flat. Could you comment on where you want the the growth to grow a bit more? Hey. Do you think this market differs compared to the telco market that you serve? Could you comment on the products and the markets? Well, yes. I covered in the telco space. It's not like they're not spending they're spending no money. They're just being more restricted in what they're spending. And things like new technology, 800 gigs, we know people will buy that.

1:06:44 We have people who wanna place orders on us, and we haven't even launched the product. So very much that's growth in there. And then the other species is looking at things like defense, low earth, you know, low earth orbit satellites. It is looking at some of these other applications that are running over the the running from cloud computing to the edge that are really not connected to the, the telecoms world. They're all they may be using it, but they're not really connected to the dynamics of that market. That's really where we see there's a potential for growth, and that's why we're focused at both our R and D and our marketing resource into these segments to to basically see if we can generate growth from where there is a more buoyant dynamic in in the market. And at that stage, I'll pass back, I think, to Alex. Fantastic.

1:07:31 Tommy, Ashley, I believe you've managed to answer all the questions for investors today, so thank you for that. And, of course, the company can review all questions submitted today, and we will publish those responses on the investment company platform. But before redirecting investors to provide you with their feedback, which one is particularly important to the company, Tommy, could I please ask you for a few closing comments? Okay. Yeah. Well, thanks very much, everyone, for taking the time to to listen to us today. You know, I think it's an interesting time. It's not the greatest of times from the market, but it's a real interesting time. And in some ways, from an organization, sometimes when when things don't come easy, it makes you challenge yourself a lot more and take the positive from that. And I think what we've been doing internally in terms of organization, managing our resource into more where we really get more targeted, where we can see growth is all good. The change to the channel now, as I mentioned, that we've crossed the Rubicon on that. I'm really quite excited, and I think it is the right time for us to do this and set ourselves up to to be in a stronger position in the future as we get into these new areas and the market starts to grow. So challenging but interesting times, and thanks very much for your time.

1:08:41 Perfect. Tommy, Ashley, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the board 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, and good afternoon to you all.