Calnex Solutions PLC Interim Results (0561U)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Calnex Solutions Plc	LSE:CLX	London	Ordinary Share	GB00BMBK7016	ORD GBP0.00125

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	61.00	60.00	62.00	61.00	61.00	61.00	16,148	08:00:00

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Communications Services, Nec	16.27M	40k	0.0005	1,220.00	53.41M

Calnex Solutions (LSE:CLX)
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RNS Number : 0561U

Calnex Solutions PLC

21 November 2023

Calnex Solutions plc

("Calnex", the "Company" or the "Group")

Interim Results

Calnex Solutions plc (AIM: CLX), a leading provider of test and measurement solutions for the global telecommunications and cloud computing markets, announces its unaudited results for the six months ended 30 September 2023 ("H1 FY24" or "the Period").

Financial Highlights

-- Performance impacted by the wider economic environment and resulting deferral of investment in telecommunications market.

   --    Revenue decline of 38% to GBP7.8m (H1 FY23: GBP12.7m). 
   --    Gross margin maintained at 74%, broadly in line with the prior period (H1 FY23: 76%).

-- Cost controls implemented, while maintaining key product development and customer engagement to support future growth.

   --    Underlying EBITDA(1) loss of GBP0.4m (H1 FY23: profit of GBP3.5m). 
   --    Loss before tax of GBP0.6m (H1 FY23: profit of GBP3.1m). 
   --    Basic EPS loss ( pence ) of (0.42)p (H1 FY23: 2.78p).

-- Closing cash position of GBP13.5m (H1 FY23: GBP14.4m, including fixed term deposits), enabling exploitation of growth opportunities across key sectors. Cash levels expected to be maintained for H2.

   --    Interim dividend of 0.31 pence per share to be paid in December.

Operational Highlights

-- Sales pipeline remains strong with customers committed to delivery of pipeline projects once budgets are released.

-- New products performing well, with first orders for SNE-X and SNE-Ignite and NE-ONE gaining traction in new sectors, such as defence.

-- Ongoing product development programme to support growth and meet the evolving needs of customers.

Outlook

   --    The Board expects to close the year in line with the current market expectations.

-- Confident in a return to growth in the 12 months to March 2025 ("FY25") through creation of new use cases for existing products, plus the development of new products and expansion into growing sectors.

-- Underlying market drivers, including the increase in network complexity, the build-out of 5G and data centre investment, remain positive.

Tommy Cook, Chief Executive Officer, and founder of Calnex, said: "While the results for the first half are disappointing, the strength of our offering, team, and balance sheet, resulting from our consistent delivery in recent years, means we are well positioned to weather the current conditions while continuing to invest in our product roadmap.

"We have experienced markets such as these before and are adept at managing the business back to growth.

"We believe the fundamental drivers that underpin the build out of the mobile network and the expansion of data centres and cloud computing capacity have not changed, but rather investment put on pause due to the macro-economic climate. We will continue to focus on the deployment of our new product programme as a means to generate additional customer demand and are confident that Calnex will return to growth in FY25."

(1) EBITDA after charging R&D amortisation.

For more information, please contact:

 
 Calnex Solutions plc                               Via Alma 
 Tommy Cook, Chief Executive Officer 
  Ashleigh Greenan, Chief Financial Officer 
 
                                                    +44 (0)131 220 
 Cavendish Capital Markets Limited - NOMAD           6939 
 Derrick Lee, Peter Lynch 
 
                                                    + 44(0) 20 3405 
 Alma                                                0213 
 Caroline Forde, Hannah Campbell, Joe Pederzolli

Overview of Calnex

Calnex Solutions designs, produces and markets test and measurement instrumentation and solutions for the telecommunications and cloud computing industries. Calnex's portfolio enables R&D, pre-deployment and in-service testing for network technologies and networked applications, enabling its customers to validate the performance of the critical infrastructure associated with telecommunications and cloud computing networks and the applications that run on it.

To date, Calnex has secured and delivered orders in 68 countries across the world. Customers include BT, China Mobile, NTT, Ericsson, Nokia, Intel, Qualcomm, IBM and Meta.

Founded in 2006, Calnex is headquartered in Linlithgow, Scotland, with additional locations in Belfast, Northern Ireland, Stevenage, England and California in the US, supported by sales teams in China and India. Calnex has a global network of partners, providing a worldwide distribution capability.

Operational Review

Overview of the Period

Throughout the first half of the financial year, Calnex continued to operate in a challenging economic environment, reflecting the ongoing caution in the wider telecommunications market. Our order inflow remained at the subdued levels we experienced at the outset of the year. The cautiously improving outlook reported widely across the sector earlier in H1 failed to gain the momentum we expected and the typically strong September trading period that we usually experience, following the seasonally quiet July and August, did not materialise. As a result of these factors, the Group achieved HY24 revenue of GBP7.8m (H1 FY23: GBP12.7m) and a loss before tax of GBP0.6m (H1 FY23: profit of GBP3.1m), below the Board's expectations set at the start of the year.

While the extent of the first half decline in revenues and profits is deeply disappointing for us all, there remain many reasons for optimism over the longer term. We have multiple customer orders that have passed through technical and commercial validation stages and are awaiting budget allocation. Our strong sales pipeline provides confidence, and customers have confirmed they remain committed to the delivery of projects once budgets are released.

Spending within the telecommunications sector is generally led by the large infrastructure projects of the major telecommunications operators, which filter down through the wider ecosystem. These infrastructure projects face macro slowdowns at times, and we are currently experiencing one that is particularly prolonged, reflecting both the high interest rate environment and the increased geopolitical tensions, which have caused network build-out projects to be slowed or delayed.

Due to our long history in the sector, we have experienced markets such as these before and are adept at managing the business back to growth, delivering historically, low-teens long-term revenue CAGR. We are confident that we can capitalise on the opportunities available to us once market dynamics normalise.

While we are confident that budgets will return in the telecommunications market as the economic backdrop improves, we are not simply waiting for the market to re-open. Our new product programme targeting both telecommunications and non-telecommunications markets, such as cloud computing, data centres and the defence sector, which are less affected by the macroeconomic environment, is more important than ever, as a new product that serves evolving customer needs provides a more compelling reason for customers to buy, even in a downturn.

While order levels were suppressed across all product lines and regions outside of the data centre and cloud and IT markets, we continued to secure sales for both existing and newly released products in the Period. Highlights include the first orders for our newly launched products, SNE-X, SNE-Ignite and NE-ONE, which is gaining traction in new sectors, such as defence.

The business continues to be supported by a healthy balance sheet, with cash at the end of September 2023 of GBP13.5 million. There was significant investment in inventory during the Period to develop more flexibility in the ability to respond to customer orders plus an element of inventory build-up from material received to support previous order expectations. This cash position enables us to continue to target growth opportunities across our key sectors and maintain relationships with customers as they plan future investment in their projects.

Market drivers

The underlying structural growth drivers in the telecommunications and data centre markets continue to offer long-term growth opportunities for Calnex. Within the telecommunications market, these include the increase in network complexity and the build-out of the mobile infrastructure utilising 5G technology. This will see a long-term transformation of the telecommunications network, creating the need for test and measurement equipment to prove that new systems operate effectively and conform to rigorous international standards. The telecommunications market is still very much only at the start of this build out. In a recent interview with Bloomberg, Pekka Lundmark, Chief Executive Officer, Nokia, is quoted as saying "In Mobile Networks there is still substantial need for operators to invest in 5G globally with only approximately 25% of the potential mid-band 5G base stations so far deployed outside China."

The ongoing investment into data centre capacity and efficiency to support the growth in cloud computing and adoption of AI is also providing Calnex with new opportunities in the areas of network time monitoring (with our recently introduced product 'SyncSense') and data centre efficiency and effectiveness.

Product development

Innovation is the lifeblood of our business. We have consistently brought highly engineered, high value and differentiated products to market, stimulating customer demand and supporting our growth. Each new platform we develop offers a large number of features and capabilities. Much of this core capability can be used in a multitude of testing scenarios in a wide range of markets, both within telecommunications and non-telecommunications markets. These core capabilities are then complemented by added features making the platform appropriate for a specific market in which we have identified a verified opportunity.

In this way, previous R&D investment is repurposed for new growth channels, such as the adaptation of our telecommunications network synchronisation offering, Sentinel, for the data centre market, re-named Sentry.

We have innovation programmes across all of our product families, adapting them for new customer needs or markets. These include SyncSense, a new product to target network time monitoring in data centres, and SNE-X and SNE-Ignite, targeting high-speed, and high accuracy Network Emulation opportunities across both telecommunications and non-telecommunications markets. We anticipate the launch of these new products will support our growth in FY25, as well as the demand we are seeing for the newly launched Sentry and the acquired NE-ONE offering in defence.

Outlook

The Board expects to see a seasonal increase in H2, closing the year in line with the current market expectations.

During H2, we will remain focused on the deployment of our existing products as well as our new product programme that targets both the telecommunications and non-telecommunication markets, to address unmet customer needs. We are confident that these will enable Calnex to return to growth in FY25.

We believe the fundamental drivers that underpin the build out of the mobile network and the expansion of the data centres and cloud computing capacity have not changed, there is simply a pause caused by the macro-economic climate. Within the telecommunications market, the close relationships we hold with our customers and partners mean we are well positioned to convert the sales pipeline to orders once spending patterns normalise.

Our healthy balance sheet will enable us to weather these uncertainties, providing the Board with confidence in the medium- and long-term future of Calnex and in our ability to deliver for our shareholders.

Financial Review

While the results for the period are disappointing, importantly gross margins have remained robust and we continue to benefit from a healthy cash balance, strong customer relationships and a high quality and productive R&D team, providing us with confidence in a return to a stronger financial performance in future periods.

Broadly, the wider economic concerns and reticence in the market had an impact on revenue levels across all product lines and geographies.

Amongst our three territories, Rest of World (EMEA, India, South East Asia, Australasia) was the least affected by the slow-down, driven by a resilient performance in EMEA where business is derived from a wide range of sectors. Within North Asia, China remains challenging due to the impact of US restrictions and as a result, an increased focus is being applied to growing business in Taiwan and Japan. The Americas region was most impacted by the telecommunications slow down and therefore increased focus is being applied on Hyperscalers and government opportunities where we see the best chance to close business.

Looking at our product lines, Lab Sync (Paragon-Neo and Paragon-X) saw a softened performance in the Period which, given their dominance in the telecommunications market, is directly linked to the wider slowdown in the sector. This is also the case with Sentinel, our telecommunications focused Network Sync product. Sales of Sentry, our Network Sync product aimed at data centres, are continuing as planned.

Our Cloud & IT (infrastructure) product, SNE, endured a challenging H1 given its exposure to the US market, but performance is expected to pick up in H2 from the growing sales pipeline for the newly launched SNE-X & SNE-Ignite products. Across Cloud & IT (Applications), NE-ONE, we are on track to achieve our original FY revenue target, with the growth being driven by channel expansion and a strong performance in defence and satellite communications sectors.

Key performance indicators

 
 GBP000                            H1 FY24     H1 FY23      FY23 
                                 Unaudited   Unaudited   Audited 
 Revenue                             7,847      12,728    27,449 
 Gross Profit                        5,836       9,617    20,472 
 Gross Margin                          74%         76%       75% 
 Underlying EBITDA (1)               (411)       3,466     7,980 
 Underlying EBITDA %                   -5%         27%       29% 
 Profit before tax                   (599)       3,086     7,208 
 Profit before tax %                   -8%         24%       26% 
 Closing cash including fixed 
  term deposits (2)                 13,478      14,436    19,098 
 Capitalised R&D                     2,554       2,247     4,523 
 Basic EPS (pence)                  (0.42)        2.78      6.75 
 Diluted EPS (pence)                (0.42)        2.67      6.42

(1) EBITDA after charging R&D amortisation.

(2) The Group places surplus cash balances not required for working capital into notice and fixed term deposit accounts. Under IAS 7 Statement of Cash Flows, cash held on long-term deposits (being deposits with maturity of greater than 95 days, and no more than twelve months) that cannot readily be converted into cash is classified as a fixed term investment.

A reconciliation between the statutory reported income statement and the adjusted income statement is shown in note 22 to the financial statements.

Revenue

Revenue recognised in the first half of the year was GBP7.8m, a 38% decline on H1 FY23 revenue of GBP12.7m, driven by the subdued level of order volumes experienced through the Period.

Gross Margin

Gross margin in the Period was 74%, in line with the FY23 margin of 75%. (H1 FY23: 76%). This gross margin is net of commissions payable to our channel partners and can fluctuate by 1-2% through the year depending on the mix and timing of the hardware and software bundles shipped.

The Group increased pricing in the prior period to negate inflationary direct materials cost increases, which has contributed to the protection of the product margins throughout the Period.

Underlying EBITDA

Underlying EBITDA is stated after charging R&D amortisation.

Underlying EBITDA was a GBP0.4m loss in the Period (H1 FY23: GBP3.5m), driven by the reduction in revenue volumes. Underlying EBITDA margin was -5% (H1 FY23: 27%).

Administration costs excluding depreciation and amortisation were GBP4.5m in H1 FY23 (H1 FY22: GBP4.7m). The Group paused on any further recruitment at the start of the year as a consequence of the slowdown in trading and, as a result, excluding graduate hires, there were no new headcount increases in the Period.

The reduced order levels have resulted in lower commission costs compared to the prior period together with lower recruitment costs and legal fees (non-recurring deal fees for the iTrinegy acquisition were included in administration costs in the prior period). Staff and management profit share accruals have also been reduced compared to the prior year. These cost savings were offset partially by adverse foreign exchange impacts on overseas salary costs and increased share-based payment charges.

GBP0.1m has been charged to the income statement in the Period to account for the Earn-out Payment in relation to the iTrinegy acquisition, with a further GBP0.1m to be charged in H2. If revenue growth targets from the NE-ONE product line are met, the Earn-Out Payment will be paid as a combination of cash and new shares issued in Calnex Solutions plc in early FY25.

Whilst cost controls have been implemented across all cost lines and departments, the Group has not implemented any investment reduction programmes as maintaining investment in product development and customer engagement at this point is fundamental to support future growth.

Amortisation of R&D costs in H1 FY23 was GBP1.8m (H1 FY23: GBP1.6m). The increase on the prior period is due to the impact of the 5 year amortisation profile and growth in capital spend in prior years. Excluding graduate hires (of which there were 5 new hires in the Period), there have been no headcount increases in the R&D team in the Period.

Profit before tax

Loss before tax was GBP0.6m in the Period (H1 FY23: GBP3.1m profit), with the reduction in trading volumes and predominantly fixed cost base causing a negative operational leverage effect on profit.

Tax

The Group's loss-making position resulted in a tax credit of GBP0.2m for the Period (H1 FY23: charge of GBP0.7m), driven predominantly by the proportion of R&D SME enhanced tax credit relief.

The weighted average applicable tax rate for FY24 is 25% (FY23: 19%). The difference between the applicable rate of tax and the effective rate of 37% (H1 FY23: 21%) is largely due to the following:

   --    Availability of R&D SME enhanced deduction at 86% (increasing effective rate by 24%); and

-- A combination of such as prior year adjustments, timing differences, and overseas tax (decreasing effective rate by 12%).

We expect the effective tax rate to revert back in line with the weighted average applicable tax rate once the Group returns to profitability in future periods.

Earnings per share

Basic earnings per share was a loss of 0.42p in the Period (H1 FY23: 2.78p) and diluted earnings per share was also a loss of 0.42p (H1 FY23: 2.67p), with the movement compared to the prior period attributed to reduced trading volumes.

Cashflows

The Group experienced a cash outflow of GBP5.6m in the period, reflecting the loss made in the Period and increases in working capital.

Working capital in the period increased by GBP3.3m (H1 FY23: GBP1.3m) driven predominantly by increased levels of product to increase responsiveness to order intake, plus inventory increases as a result of the tail end effects of supply chain issues coupled with investment in inventory to support the previous order expectations. The inventory will be sufficient to support the remainder of the year and positions the company well to deliver faster turnaround of orders to revenue in H2.

The Group paid GBP0.8m in tax in the period based on the profit generated in the prior year. Given the Group's current expectations for profit for FY24, this cash is potentially refundable in FY25 after submission of the FY24 year-end tax return.

Cash used in investing activities is principally cash spent on R&D activities which is capitalised and amortised over five years. Investment in R&D in the Period was GBP2.6m (H1 FY22: GBP2.5m), reflecting inflationary salary increases and graduate headcount increases.

The Group places surplus cash balances not required for working capital into notice and fixed term deposit accounts. Under IFRS, cash held on long-term deposits (being deposits with maturity of greater than 95 days, and no more than twelve months) that cannot readily be converted into cash is classified as a fixed term investment. This is shown separately on the balance sheet and classed as a cash outflow within investing activities in the consolidated cashflow statement in prior periods. As at 30 September 2023, the Group held surplus cash in notice accounts, but did not hold any on long term deposit.

Closing cash at 30 September 2023 was GBP13.5m (30 September 2022: GBP14.4m including fixed term deposits; 31 March 2022: GBP19.1m including fixed term deposits). Subject to any effects of supply chain issues, we expect this cash balance to be maintained throughout H2.

Dividend

The Board retain full confidence in future growth and accordingly has resolved to pay an interim dividend of 0.31 pence per ordinary share (FY23 Interim dividend 0.31p) on 15 December 2023 to those shareholders on the register as at 1 December 2023, the record date. The ex-dividend date is 30 November 2023.

Calnex Solutions plc

Consolidated Statement of Comprehensive Income