21 May 2024

Calnex Solutions plc

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

FY24 Final Results

Financial Highlights 

¹ Refer to note 32 for explanation of the alternative performance measures calculations. A full reconciliation between Underlying EBITDA and profit before tax is also shown in the Financial Review below.

² The Company takes advantage of high interest deposit accounts for surplus cash balances not required for working capital. 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. 

Financial Highlights

·      Performance impacted by the wider economic environment and resulting deferral of investment in telecoms market.

·      Three consecutive 6 month periods of stable order levels (H2 FY23 through to H2 FY24).

·      Revenue of £16.3m (FY23: £27.5m).

·      Gross margins maintained at 73%, broadly in line with prior year (75%).

·      Loss before tax of £0.4m (FY23: profit before tax of £7.2m).

·      Profit after tax £0.04m (FY23: £5.9m)

·      Closing cash position of £11.9m (31 March 2023: £19.1m, including fixed term deposits).

·      Proposed final dividend of 0.62 pence per share, making a total of 0.93 pence per share for FY24 (FY23: 0.93 pence).

Operational Highlights

·      Refocused engineering programmes on areas of the market showing near-term resilience and growth opportunities, such as cloud computing and defence.

·      Successful launch of new network assurance offerings SNE-X and SNE-Ignite, and positive initial customer response to SyncSense our newly developed data centre and telecoms network timing management product.

·      NE-ONE offering for application assurance testing performing strongly, particularly in the defence, government, and satellite markets, with further success anticipated in FY25.

·      Development of major new release of Lab Synchronisation (Paragon-Neo) offering to capitalise on increasing demand for 800 Gb/s telecoms testing, expected to launch in H2 FY25.

·      FY23 closing headcount was maintained through FY24 (with the only increases being graduate hires), with Calnex well-placed to convert the telecoms sales pipeline once the trading environment improves. 

·      Post-period end review of sales channels and channel partner arrangements has identified opportunities to strengthen existing customer engagements and to reach new customers. To provide the Company with the ability to optimise the channel partner arrangements, the Board has elected to terminate its reseller agreement with Spirent and initiated the process of implementing the company's new sales channel strategy.  

Outlook

·      Recently launched products are gaining traction, providing confidence in a return to growth in FY25.

·      Cloud computing and data centre markets represent a growing opportunity, based on the increased data centre infrastructure investment and testing required to support the increasing demand for AI and virtual reality-based applications.

·      Challenges across the wider telecoms market are expected to remain for the duration of the year but the fundamental long-term need for telecoms testing solutions remains unchanged.

·      Longstanding customer relationships across all territories leave us well positioned to convert our telecoms sales pipeline once the trading environment improves. 

Tommy Cook, Chief Executive Officer and founder of Calnex, said:

"We have successfully expanded our new product development programmes to focus on near-term growth channels - specifically the development of new capability in the telecoms market to capitalise on demand for 800Gb/s, as well as our product launches to capitalise on the increasing demand in the cloud computing and data centre markets. Our recent product innovations are gaining traction and we anticipate a return to growth in FY25, notwithstanding the challenges in the telecoms market which are expected to remain for the duration of this year.

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, and our longstanding customer relationships across all territories leave us well positioned to convert our telecoms sales pipeline once the trading environment improves.

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 customers, team, and shareholders."

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Overview of Calnex

Calnex Solutions designs, produces and markets test and measurement instrumentation and solutions for the telecoms 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 telecoms 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.

Chair's statement

Overview

While the year ended 31 March 2024 was a difficult period for Calnex, we are positive moving forward. In the year I continued to be struck by the dedication of the Calnex team, who worked tirelessly to respond dynamically to market conditions, focusing on the opportunities showing the most near-term resilience. The Calnex team is experienced at navigating the business through challenging trading environments, reinforcing confidence in a return to growth during FY25.

Resilient performance in FY24

As previously reported, the Group's financial performance in FY24 was impacted by the ongoing downturn across the telecoms market, with caution across the sector leading to subdued spending levels. The Company reports revenue of £16.3m and a small loss before tax of £0.4m. We have a healthy liquidity position, with cash as at 31 March 2024 of £11.9 million.

Measured cost-action was undertaken, while refocusing the Group's engineering programmes on opportunities showing the most near-term potential within the Group's established telecoms market and in the newer markets of cloud computing and defence. This year has seen the launch of new products across both these end markets, which have shown well received signs of initial uptake. The Board is encouraged by the level of engagement with customers on the Group's new product programmes and, in particular, expects that continued orders from the defence and cloud computing sectors will enable Calnex to return to growth in FY25.

ESG

Calnex continues to operate with a high regard to a good level of environmental awareness, social responsibility, and governance.  Calnex is a "people first" company, built on trust and respect. Not only for each other but also for the environment and for the local communities of our employees across the globe, where we do our best to make a meaningful impact. Our employees are encouraged to share their views, contribute to decision making, challenge each other and improve our processes to make a positive contribution to business success. This is reflected in the approach we take to delivering leading-edge test and measurement solutions for 5G networking and wireless technologies.  

Our software-first approach significantly reduces the impact our products have on the environment by building in best-in-class longevity and providing long-term expert support through cutting-edge upgrades designed to meet customer requirements. Although already a low environmental impact business, the senior management team and our staff are keen to do more to tackle environmental challenges and have several initiatives running to address this. Our employee-led environmental, social & charity team also continues to be extremely successful, with high levels of employee engagement experienced throughout the year.  This in turn enables the business to retain its talented team.

Outlook

With the product innovation and investments that have been taking place, we expect business growth in FY25 without reliance on the revival of the telecoms market, although we are confident that the fundamental need for our telecoms solutions in the long-term remains unchanged. We are, therefore, well-placed to capitalise on a return to normalised investment programs when the market stabilises.   

Stephen Davidson
Non-Executive Chair
20 May 2024

CEO's Statement and Operational Review

Our financial performance in 2024 was impacted by the well-documented and ongoing downturn across the telecoms sector, with caution across the market leading to subdued spending levels during the period. However, there remain reasons for optimism moving forward.  We have continued our focus on product innovation, maintaining R&D spend and adjusting our engineering programme to focus on areas showing the most near-term potential across both the telecoms and cloud computing markets. We believe that the fundamental drivers of the end markets for our products remain strong.

Within telecoms, we have focused on the area of 800Gb/s synchronisation testing for release in FY25, an unmet need where there is growing customer demand, while we also saw early successes in the year with recently launched products across the cloud computing and data centre markets.

We are confident that the action taken during FY24 to diversify our product offering positions us for a return to growth in FY25. Longer term, we continue to be supported by favourable underlying trends. We are confident that budgets will return in the telecoms market as the economic backdrop improves, in turn creating the need for test and measurement equipment to prove that new systems operate effectively and conform to rigorous international standards.

We continue to be supported by a strong balance sheet, with cash as at 31 March 2024 of £11.9 million. This cash position enables us to continue targeting growth opportunities across our key sectors and maintain relationships with customers as they plan future investment in their projects.

Customer metrics

The number of customers who ordered from us this year was 274 (FY23: 305 customers). The proportion of orders coming from customers from cloud computing markets continued to increase to 39% (FY23: 34%), with the sales of NE-ONE products the driving force behind this increase as we diversify into new sectors.

Our top 10 customers accounted for 52% of orders (FY23: 47%) on a 3-year average basis, and 76% of our orders were from repeat customers (FY23: 74%) on a 3-year average basis. Our geographical spread of orders across regions shows America 32%, North Asia 25% and ROW 43%. Although each region's order levels in the year have been impacted by the slowdown in the telecoms market, ROW's performance was mitigated by the diverse range of end customer sectors in the region.  

Market backdrop

Spending within the telecoms sector is generally led by the large infrastructure projects of the major telecoms operators, which filter down through the wider ecosystem. As previously reported, we are continuing to see a particularly prolonged period of limited customer spend, with network build-out projects continuing to be either slowed or delayed amidst a high interest rate environment and increased geopolitical tensions.

Due to the team's long history in the sector, we have experienced markets such as these before and we are adept at managing the business back to growth, as is expected in FY25. We have maintained close customer relationships, with customers confirming that they remain committed to the delivery of projects once spending budgets are released. We have also focused on segments of the telecoms market where demand remains, such as 800Gb/s synchronisation testing, the next wave of high-speed interface testing, driven by emerging technologies continually increasing the need for higher bandwidth.

While the wider telecoms market is anticipated to remain challenging throughout the remainder of 2024, the underlying structural growth drivers remain intact, including the increase in network complexity and the build-out of mobile infrastructure utilising 5G technology. The need for the testing solutions we provide will naturally increase as the transition to 5G continues and new technological standards gain traction. The scale of our long-term growth opportunity is considerable, with telcos projected to invest US$342.1 billion in their networks in 2027 alone¹.

Newer markets of cloud computing and defence continue to offer significant growth opportunities for Calnex. The impact of network connection on the performance of cloud-based applications is increasingly recognised, and there is an ever-increasing demand for testing solutions across these markets. With the rapid progress of incorporating Artificial Intelligence into applications and the uncertainty that surrounds its operation under varied networking impairment effects, test instrumentation is more important than ever. The development of these technologies that are both new and unknown drives the need for reliable testing, which in turn creates significant scope for growth for Calnex.

With these new developments, we are starting to see opportunity not only from data centres but also from devices and applications that incorporate cloud-based processing with end user devices. The performance of the network can impact the performance of the application or user experience, which can then impact the market share of the application or end user device.

Product innovation

Innovation is the lifeblood of our business, expanding our ability to capture a growing proportion of our customers' spend and taking us into new areas of the testing market where our engineering expertise provides us with a competitive edge. During the year, we pivoted R&D spend to focus on opportunities showing the most near-term resilience and potential within the established telecoms market and in the newer markets of cloud computing and defence.

Targeting growth in the telecoms market

R&D spend has been channelled into the development of our Lab Synchronisation (Paragon-Neo) offering, which provides support for very high-speed interfaces, 800Gb/s testing, which marks the natural next wave of the telecoms industry at a higher speed.

During the year we enhanced the Paragon platform and expect to launch a major new release in H2 FY25 to support leading edge 800Gb/s interface testing, for which we are already receiving customer requests and expect to generate revenue during FY25.

Cloud computing and data centre markets

We are seeing strong early progress within the cloud computing markets, given the significant investment into data centres to support the growth in cloud services and adoption of AI.  New opportunities in the areas of network time monitoring as well as data centre efficiency and effectiveness, are currently in the early stages of development.

¹ PWC "Perspectives from the Global Telecom Outlook 2023-2027", 2023

We have recently launched SNE-Ignite and SNE-X products to strengthen our portfolio. The SNE-Ignite is the high-performance platform that will initially target testing of telecoms equipment designed for use in the O-RAN Mobile network deployments. The SNE-X is our high-speed, high port count platform designed to prove the performance of new, real-time cloud-based applications. Both products are helping to build Calnex's presence in key markets for Network Emulation. SNE-X, the second version, is already finding some promising opportunities with Hyperscalers and companies developing wearable devices, such as virtual and augmented reality devices.

Our NE-ONE product, the recently acquired Network Emulation product following the acquisition of iTrinegy in April 2022, is performing well. The platform provides a targeted solution for engineering teams developing software applications to be hosted in-house or in cloud services. Since forming a business development team last year to drive sales for the platform, the product has been successful in the defence, government, and satellite markets, with further success anticipated in FY25. We have been particularly encouraged by the strong relationships formed with many major system integrators, through whom we have secured several defence contracts in the year and see this as an avenue for future growth in this market.

Our enhanced Network Emulation portfolio has a strong competitive position due to the breadth of Calnex's product offering. Although there are other solutions available, we are the only provider of both a hardware-based and software-based offering, which allows the Group to provide the optimal solution to meet our customers' needs.

SyncSense, Calnex's newly developed data centre and telecoms network timing management product, has also been well received by customers. SyncSense offers a Timing Performance Monitoring solution that provides real-time topology and network operational information associated with the distribution of time across large networks. The product will leverage the reputation of Calnex as the Sync experts and can be sold in conjunction with the Sentinel and Sentry platforms to provide fault diagnoses insight capability to complement the fault identification capability of SyncSense. Customer engagement is at an early stage, but feedback has been encouraging.

Financial performance

Financial performance was impacted by the challenging trading environment. We report revenue of £16.3m (FY23: £27.4m), and a small loss before tax of £0.4m (FY23: profit of £7.2m). Importantly, gross margins remained strong during the year. Our investment into newer markets has driven strong sales growth across our Network and Applications Assurance ('NAA'- formerly Cloud & IT) products, and NE-ONE product orders grew by 56% over the course of the year, compared with revenue growth of 15% in the year.  The variance in revenue versus order growth is as a result of the level of multi-year support contracts being purchased by customers in the year which are recognised as revenue over the life of the contract).

During the year, tight cost control measures have been implemented, including overhead cost reduction and reduced spend in areas such as travel. We continue to benefit from a healthy cash balance, with cash as at 31 March 2024 of £11.9m (FY23: £19.1m). There was significant investment in inventory during the year 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.

People

The engine of our business is our dedicated group of staff globally. In the year headcount has been maintained, with new hires being frozen excluding graduate hires. Total headcount as at 31 March 2024 was 160 (FY23: 155).

We work as one team, sharing the successes, the challenges and the Group's ambitions moving forward. Our retention rate of staff over FY24 was 96% (with an average tenure of 5.3 years) which reflects Calnex's culture of inclusion, respect, and support. We firmly believe that we possess the right team to drive the business forward.

Calnex enjoys and thrives on a diverse workforce where inclusion is key to building high performing, engaged and successful teams. Our strong values, as reflected in our Investors in People Gold Award, are promoted through a variety of employee engagement programmes, such as supportive initial training and mentoring programmes, culture sessions and an extensive training and development framework.

Sales channel review

With an expanded product offering and growing global customer base, the Board has undertaken a review of the Company's sales channels and channel partner arrangements, to ensure that they will meet the Company's evolving requirements. The Board's review has identified opportunities to strengthen existing customer engagements and to reach new customers by adding both new channel partners and resources to support direct selling.  As part of this, and considering the proposed acquisition of the Company's main distributor, Spirent by a third party, the Board has commenced discussions with new and existing channel partners to facilitate changes to strengthen the current arrangements. 

Calnex has direct relationships with its end customers due to the technical nature of the Company's products and has close relationships with many existing and potential channel partners.  In order to provide the Company with the ability to optimise the channel partner arrangements, the Board has elected to initiate the termination of its reseller agreement with Spirent.  The existing agreement with Spirent will terminate with effect from 31 July 2024 and the Board is confident that the positive discussions to date with new and existing partners, including Spirent, will result in a straightforward transition to the new sales channel arrangements, with minimal impact on the business.

Outlook

We are confident of a return to growth in FY25, having expanded our new product development programmes to focus on near-term growth channels - specifically the development of new capability in the telecoms market to capitalise on demand for 800Gb/s, as well as our product launches to capitalise on the increasing demand in the cloud computing and data centre markets. Our recent product innovations are gaining traction and we anticipate a return to growth in the current year, notwithstanding the challenges in the telecoms market which are expected to remain for the duration of this year. We expect the growth in utilisation of AI will increase the growth rate of data centre infrastructure and increase the complexity of the relationship between edge devices and processing happening in the cloud, both of which should lead to increased opportunities.

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. Our longstanding customer relationships across all territories leave us well positioned to convert our telecoms sales pipeline once the trading environment improves.

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 customers, team, and shareholders.

Tommy Cook
Chief Executive
20 May 2024

ESG

A meaningful impact

Calnex is a "people first" company built on trust and respect. Not only for each other but also for the environment and for the local communities of our employees across the globe, where we do our best to make a meaningful impact.

The Group follows the Quoted Companies Alliance Practical Guide to ESG, which is intended to supplement The Quoted Companies Alliance Corporate Governance Code (the QCA Code), which the Group also follows. The QCA Practical Guide provides pragmatic steps for small and medium sized listed companies to develop how to identify and disclose those ESG issues that are important to them and outlines an approach that is proportionate to the resource availability within smaller companies, whilst also giving stakeholders the relevant information that they need. We have established an internal ESG Steering Committee, members of which are a cross departmental team of senior leaders who are responsible for reporting to the Senior Management Team on all ESG related activities and initiatives throughout the business.

Calnex is an innovative and forward-thinking business where our employees are encouraged to share their views, contribute to decision making, challenge each other and improve our processes to make a positive contribution to business success. This is reflected in the approach we take to delivering leading-edge test and measurement solutions for 5G networking and wireless technologies.

Our focus is increasingly on delivering platform products that enable software upgrades in line with customers' aspirations. We can't control how our customers use our products, but we can influence how they benefit from additional functionality without the need for additional hardware. Thanks to the skills of our team, our in-depth knowledge, and market insight, many of our customers enjoy hardware longevity of between 10 and 15 years.

Our software-first approach significantly reduces the impact our products have on the environment by building in best-in-class longevity and providing long-term expert support through cutting-edge upgrades that anticipate customer requirements. Although already a low environmental impact business, the senior management team and our staff are keen to do more to tackle the environmental challenges facing the planet and have several initiatives running to address this. Our employee-led environmental, social & charity team also continues to be extremely successful, with high levels of employee engagement experienced throughout the year.  

We also work closely with the UK Electronics Skill Foundation (UKESF), supporting the future talent of Engineering in providing student placements and supporting STEM education and development.

People

We work as one team. Respectful of each other, we consider how our actions, ideas and approaches impact others.  We are transparent, sharing in the successes, the challenges and the Group's ambitions moving forward. We help and encourage each other, supporting the business and our colleagues in building on an already successful company. Calnex also enjoys and thrives on a diverse workforce where inclusion is key to building high performing, engaged and successful teams. Our retention rate of staff over FY24 was 96% (with an average tenure of 5.3 years).

Our strong values, as reflected in our Investors in People Gold Award, are promoted through a variety of employee engagement programmes:

·      Robust Recruitment Process that only ever hires top talent and employees who value and support a positive working culture.

·      Supportive Induction Training Programme including a comprehensive internally delivered training programme that supports the integration of new employees.

·      Mentoring Programme to support the development of staff and career progression. All new employees are assigned a mentor as part of their probation.

·      Employee-built Annual Review Programme that recognises personal achievements and supports development and career progression.

·      Extensive Training and Development Framework to further develop skillsets and secure educational qualifications. Including a minimum of 5 days training as part of our Drop Everything and Learn initiative, as detailed below.

·      Group-wide mandatory Compliance Training to remain legally compliant worldwide.

·      A benchmarked Benefits Package that strongly supports the financial, physical and mental wellbeing of our people including, amongst other things, profit share for staff if the Company achieves budgeted profit targets, an employee share incentive plan, a flexible/hybrid working model, an employee wellbeing activity programme (including fitness classes, an onsite gym, and free use of facilities at the local sports and recreation centre), income protection and life assurance polices which covers all staff and a healthcare scheme of which 84% of UK employees signed up for in FY24.

·      Quality Management System that encourages inclusivity and drives process improvement.

·      Regular Culture sessions chaired by Calnex's CEO to gather feedback on the Company's culture, practices and processes, encouraging employees to provide their input into organisational development. In FY24 we held 17 meetings with 122 employees attending.

·      Annual Employee Surveys to enable two-way dialogue on topics such as company strategy, career progression opportunities and other current topics affecting the working lives and wellbeing of our employees. During FY24, 68% of employees completed the anonymous survey. The results and feedback from the survey helped us to focus on key areas resulting in the implementation of a new learning platform, increased Senior Leadership development and building on the Psychological Safety training.

·      Free Financial Education Workshops for UK employees, delivered by St James' Place, including an onsite and online employee clinic for those employees who want to seek free financial advice. 

Learning and development

Building on the prior year Power Skills programme and following a suggestion from one of our employees who had attended the programme, we identified a need this year to deliver more technical training to our Engineering team (58% of our employee base).  After trialling 3 different platforms, employee feedback and system performance led us to choose the Udemy platform.  The Udemy platform not only provides the high level of technical training the team requires, it also provides an abundance of content (24,000+ courses) relevant to all job roles at building on the Power Skills programme, supporting employees in not only advancing their technical knowledge but also looking after the general wellbeing and softer skills development.  Every employee at Calnex has a licence and 'DEAL' time (Drop Everything and Learn) of at least 5 days per year with managers also having the ability to assign learning paths to their direct reports, actively supporting their personal development with suggestions on learning content to focus on.

In recent years, we have partnered with Connect Three to provide Leadership Development (LDP) and Power Skills programmes to our employees. Our LDP is a mandatory programme for managers which supports them in leading high performing teams, developing capability, effective communication and leading effective change, which, in turn, will help with overall business productivity. As the business continues to grow and change, self-awareness and Psychological Safety training has also become a key element of this programme as we strive to retain the positive, inclusive and collaborative culture that has contributed to our success to date.

As we continue to build on our Psychological Safety awareness training (branded as our Positive Connections programme in-house), 89% of our people managers and leaders have now completed the LDP programme and presented their learnings to the senior leadership team, with suggestions for personal skills gap training and opportunities for improvement in how we manage our people and develop our leaders.  The Insights Discovery (psychometric profiling) approach was used as part of the training, to help our people managers understand themselves and others, with the goal to strengthen workplace relationships and interactions.  This programme is in line with our desire as a company to have trust and respect, inclusivity and approachability at the forefront of our culture in the way we behave towards each other, and our general desire to take care of the professional development and wellbeing of our employees.

In the last 12 months, our learning and development activities have supported all our managers and leaders in developing themselves and the organisation. As a result, we have a stronger internal network of managers supporting each other, sharing challenges and successes and building new cross functional relationships, which in turn supports positive communication and collaboration across departments.

Calnex Corporate Giving Scheme

We have two main initiatives in place under the Calnex Corporate Giving Scheme - the Calnex Corporate Responsibility Fund where employees can nominate charities, clubs or organisations for a monetary donation each quarter and our Calnex in the Community scheme where employees are given two days each financial year to volunteer within their local community during working hours, without the need to book annual leave.  

The Board is committed to setting aside a portion of the annual budget each year for the Calnex Corporate Responsibility Fund. The scheme is managed by an employee-led team (with senior management sponsorship) who consider proposals from employees for donations or support for groups and events that matter to them. The Calnex senior management team want to empower our employees to make a difference in their communities by directing the Company to support initiatives that our people truly care about.

The Calnex in the Community Scheme is also very popular with our employees. Group volunteering activities such as planting trees and helping out at food banks are beneficial in so many ways.  Beyond the obvious benefit of the primary task and the psychological benefit from making a positive contribution, we recognise how significantly such activities boost team spirit and engender pride in being associated with a company that helps our employees make a meaningful, local difference.

This financial year Calnex has donated £33,770 to 77 charities and organisations and social events across the globe through our Corporate Giving Scheme.  These donations were made to a wide range of different charitable causes including donating to meals for the homeless, mental and physical health charities, animal rescue organisations, sports clubs and rewilding programmes. 55 out of the 77 charities were put forward by employees across the globe. Key charitable donations included:

·      Foodbanks across Scotland, England and Northern Ireland.

·      Puppy supplies were donated to Dog Rescue in Bulgaria

·      Birmingham Children's Hospital

·      SiMBA charity and the Miscarriage Association

·      Save the Children

·      Breast Cancer Now

As well as monetary donations, we also supported homeless and hygiene bank charities and sexual assault referral centres in the UK and the US by creating care packages including items such as personal hygiene products and winter essentials, delivered in Calnex tote bags.

Our annual Christmas giving continued with our charity raffle in aid of HopScotch who give vulnerable children a much-deserved seaside holiday. Through employee ticket sales and Calnex Corporate matching scheme, £4,560 was raised. Our festive giving campaign also includes our gift tag appeal, where employees across all UK sites bring in toys which are then given to local charities to support vulnerable children over Christmas. In total over 140 presents were distributed to children across Scotland, England, and Northern Ireland. Calnex also made monetary donations to similar charities in America and Asia.

During FY24 Calnex organised 11 volunteering events for our 3 sites across the UK, and overall, we had 92 employees who participated in at least one of these events throughout the year, an 80% increase in employee participation on the prior year. These events were a combination of cross departmental and inter-department volunteering, both fostering team building as well as helping out in the local community.

Products

Our products are innovative, leading-edge test and measurement solutions for designers and operators of the equipment and infrastructure that enables 5G networking and wireless technologies. 5G technologies provide enhanced mobile broadband, mission critical communications and the Internet of Things, all of which have a significant global impact across many aspects of society and industry.

Through the sales and post sales engagement with customers, we gather feedback on features and requirements that we need to enhance the product for the future. Regular engagement with customers is core to the value we deliver to support our customer's current and future needs.

Our approach to product development is as follows:

·      we develop hardware platforms that can be enhanced with downloadable software upgrades in line with customers' everchanging needs. For example, both our Paragon-X and Sentinel platforms, introduced in 2010, and 2013 respectively, are still supported by the Company;

·      our products are built into test racks where they remain for as long as the customers' products are supported. Customers expect their products, once deployed in networks, to be utilised for 10 - 15 years;

·      this longevity feeds back through the supply chain as our customers now expect that same longevity from test equipment vendors;

·      all our products comply with the Restrictions of Hazardous Substances Directive;

·      our products are manufactured by a highly skilled contract manufacturer, Kelvinside Electronics, whose close proximity allows for excellent two-way support and communication regarding the complex technical challenges of building and testing our products; and

·      our bespoke product packaging is manufactured by a local supplier with a comprehensive environmental policy including a focus to reduce, reuse and recycle all packaging materials wherever possible.

·      We are certified to ISO9001 for our Quality Management System, and ISO45001 for Health and Safety.

Environment

Both Calnex's operational processes and products have a low environmental impact.

The majority of our staff are office-based and have the ability to work part of the week from home where their responsibilities allow, performing their operations using computer and internet-based services. Our contract manufacturer, Kelvinside Electronics, is ISO14001 (Environmental Management Systems) certified. Our products, sales and customer support services are managed by locally-based partners together with Calnex support staff, which greatly minimises global travel for our people.

Our company HQ and the majority of our operations are based in serviced premises leased from Oracle in Linlithgow. Calnex uses the waste recycling services provided by Oracle. Oracle have also invested in efficient lighting and air conditioning systems which minimise energy consumption on site.

The small amount of electrical component and circuit board waste we generate is disposed of in accordance with the WEEE regulations.

Our products are designed as platforms enabling our customers to take advantage of future software upgrades and hardware longevity which means the customer can retain the hardware for a number of years after the initial purchase.

Other environmental initiatives include:

·      During the year, we have collaborated closely with Spirent to understand their approach to reaching their net zero targets.  This involves Calnex working closely with Spirent on identifying the carbon and other environmental reporting information they need from their suppliers, to be able to achieve their goals.  This close collaboration will assist Calnex in prioritising our climate related projects and reporting requirements, particularly as we work towards Scope 1 and 2 emissions reporting in future periods and our medium-term goal of establishing an Environmental Management System that is fit for purpose for a company of our size.

·      A Product Packaging Project was launched in FY23 to measure and improve the recyclability of our product packaging, working with Spirent and our local packaging supplier, Dewar Brothers.  This project has continued with pace in FY24. We used a defined measurement method to provide consistency in measurement across all our product lines. All material included in the packaging that we deliver to customers is identified and weighed and assessed for its recyclability. This exercise has helped to allocate an internal environmental score to each product in our portfolio and we have started to see an improvement in the amount of recyclable material used in our packaging. Some of the notable initiatives we have progressed are changing to paper tape from traditional polypropylene tape, launching a project to reduce the amount of physical paperwork sent with our products, and working with component suppliers to reduce plastic packaging and find recyclable or recycled alternatives.

·      We are continuing with our product design improvement exercise, launched in FY23, to assess if we can reduce or change materials included in our hardware designs to take environmental impact into account, whilst also adding appropriate recycling labelling information to customers. Every improvement identified is reviewed to ensure changes do not have a detrimental impact on quality of the product, protection of our intellectual property or the customer experience; and

·      A Terracycle initiative (a voluntary based recycling platform) was introduced to our HQ office in Linlithgow during the year to help employees recycle items that would normally end up in landfill, such as make-up containers, toothbrushes and toothpaste tubes, contact lenses and writing instruments such as pens and pencils.  This initiative has been extremely popular with employees, and we intend to have this as an ongoing initiative in future periods. 

·      The Calnex Marketplace was an idea put forward during one of our employee-led Green Team Committee meetings, which has been a great success. This platform gives employees the ability to sell or donate household items to other employees, which may have ended up in landfill. Some items have included old TVs, laptops, DVDs, furniture, toys, puzzles, paint and clothes. Since its launch, employees have put more than 50 items on our marketplace.

Chief Financial Officer's Statement

While the results for this year are disappointing, importantly gross margins have remained healthy and we continue to benefit from a strong balance sheet and cash balance, robust 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.

The wider economic concerns and downturn in our telecoms markets had an impact on revenue levels across all geographies.

Amongst our three territories, Rest of World (EMEA, India, South East Asia, Australasia) was the least affected by the slow-down.  Although revenues in the year fell in relation to the prior year, the impact of the ongoing downturn in the telecoms industry was mitigated by the diverse range of end customer sectors in the region. Within North Asia, China remains challenging due to the impact of US restrictions and growing business in Taiwan and Japan continues to be a priority for Calnex. The Americas region was the most impacted by the telecoms slow down and, as a result, our current focus is on cloud-based infrastructure and applications and on government sector opportunities, which present a higher number of near-term opportunities.

From a product line perspective, Lab Sync (Paragon-Neo and Paragon-X) experienced a reduced performance in the year which, given their dominance in the telecoms market, is directly driven by the slowdown in the sector. Sentinel, our telecoms focused Network Sync product, experienced a similar trend in the year. Sales of Sentry, our Network Sync product aimed at data centres, are continuing as planned.

Our NAA network emulation product for infrastructure testing, SNE, had a challenging year given its exposure to the US market. Order performance picked up in H2 however, as a result of growing demand for our newly launched SNE-X & SNE-Ignite products. NE-ONE, our NAA network emulation for testing of applications product, experienced growth in orders and revenue in the year, driven by channel expansion and a strong performance in defence and satellite communications sectors.

Financial KPIs  

² Refer to note 32 for explanation of the alternative performance measures calculations. A full reconciliation between Underlying EBITDA and the statutory measures is also shown below.

³ The Group takes advantage of high interest deposit accounts for surplus cash balances not required for working capital. 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 and shown separately on the balance sheet.

Revenue

Revenues in the year fell 41% to 16.3m (FY23: £27.4m), as a result of subdued telecoms customer spending levels across all of our regions.   Revenues from the Americas and Asia regions both decreased by 48% and ROW saw a 31% decline on the prior year. ROW accounted for 48% of total revenues (FY23: 41%), Americas 31% (FY23: 35%) and North Asia 21% (FY23: 24%) in the year.   

Revenue model

Calnex generates revenues through the sale of bundled hardware and software, alongside the provision of software support and extended warranty programmes.

The Group's core sales model is bundled hardware and software. Sales pricing is dependent on the product type and the complexity of the software configuration built into the product package. Calnex also sells stand-alone software upgrades under licence.

Each of Calnex's units comes with a standard warranty period including maintenance and software upgrade cover in the event of any software upgrades being released for the options purchased. Calnex also sells software support programmes which provide customers with access to future software upgrades which are not included as part of the standard warranty. The Group also offers extended warranty programmes to cover repairs falling outside of the standard warranty period.

Bundled hardware and software revenues are recognised when the product is delivered to the customer, with stand-alone software revenues recognised in line with the length of the licence period. Revenues from software support and extended warranty programmes are typically recognised on a straight-line basis over the term of the contract.

Many of the products and services developed and deployed by Calnex's customers are interlinked and need to be tested independently, such as the individual components which are then built into the equipment used in telecoms networks. Calnex's test products can be used by a combination of equipment vendors, component manufacturers and network operators, to carry out testing during a new product development cycle. Products verified utilising Calnex's test solutions can be used in the knowledge that they will deliver consistent performance.

Sources of Revenue

Revenue streams

In FY24, 77% (FY23: 90%) of the Group's revenues were generated from the sale of bundled hardware and software products, with 23% (FY23: 10%) from software support and extended warranty programmes.   

This increase in support programmes, both as an absolute figure and as a proportion of total Group revenues, reflects the ongoing availability of operating expense budget at customers and the value they place on ensuring they can continue to receive support on our offerings. 

Geographical split (orders)

The Group's customers are located across the world. Our global customer base and distributor network enables the Group to spread risk across our three key regions: the Americas, North Asia and Rest of the World (ROW).

On a three-year average basis, the split of orders across the three key regions was 43% for ROW (FY23: 39%), 32% for Americas (FY23: 34%) and 25% (FY23: 27%) for North Asia. North Asia has been experiencing a steady decrease since FY20 reflecting the ongoing US-China geopolitical tensions.

Top 10 customer orders

In FY24, Calnex received orders from 274 customers, a decrease of 31 on 305 customers in FY23, driven by market conditions.

The Group's top ten customers in FY24 accounted for 51% of total orders (FY23: 39%) and 52% of total orders on average over the last three years (FY23: 47%).   

In FY24, no underlying customer accounted for more than 15% of Calnex's total orders.

Repeat customers

The average length of customer relationship across the top ten customers in FY24 is 11 years (FY23: 10 years), demonstrating our high levels of repeat demand from these customers.  In addition, the Group typically experiences a high level of repeat business from its total customer base.  In FY24, using a three-year order average, 76% of orders were generated from existing customers (FY23: 74%).

Telecoms v cloud computing markets customers

Calnex's sales are predominantly derived from telecoms customers where the end-application is a telecoms (fixed and mobile) network. Customers from the cloud computing markets include hyperscale/data centre providers, defence and enterprise customers.  FY24 saw an increase in the proportion of total orders that came from cloud computing customers from 34% in FY23 to 39%, driven by a strong NE-ONE performance, and an increase in sales to hyperscalers, coupled with the effect of lower order volumes from telecoms customers.

As telecoms networks evolve, we are finding a number of companies whose primary business is hyperscale/datacentres and IT are also moving into the telecoms space. We classify sales to these companies from cloud computing markets for use in telecoms applications as telecoms sales for the purposes of this analysis.

Gross Profit

Gross profit decreased by 42% to £11.9m (FY23: £20.5m) reflecting the decline in revenue. Gross margin, which is calculated after discounts to channel partners are applied, is in line with the prior year at 73% (FY23: 75%). 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.  

Underlying EBITDA

Underlying EBITDA, which includes R&D amortisation, fell to £0.1m in the year (FY23: £8.0m) as a result of the lower trading volumes. Administrative expenses (excluding depreciation & amortisation) were £8.9m in FY23 (FY23: £10.0m). This decrease on the prior year relates to lower commission costs as a result of lower order volumes, a reduction in recruitment costs as new hires were restricted to graduate hires only, reduced legal and professional costs (FY23 administration costs include £0.2m of non-recurring acquisition related deal costs) and no performance bonuses or profit share being accrued at the end of the current year due to Group FY24 budgeted profit targets not being achieved.

Amortisation of R&D costs increased by £0.5m to £3.8m (FY23: £3.3m) due to increased R&D investment in the current and previous years to support the product roadmap.  R&D spend is capitalised and amortised to the P&L over five years.  

Underlying EBITDA margin was nil% in FY24 (FY23: 29%), driven by the effect of the drop through of reduced revenue volumes and the relatively fixed cost base.

(Loss)/profit before tax

Profit before tax fell to a small loss of £0.4m in the year (FY23: profit of £7.2m) and the margin was a loss of 2% in FY24 compared to a profit margin of 26% in FY23, with the drop attributable to the fall in revenue performance.   

Tax

The Group's loss-making position resulted in a tax credit of £0.4m for the year (FY23: charge of £1.4m), driven predominantly by the proportion of R&D SME enhanced tax credit relief.  This tax credit represents an effective tax rate of a of 111% credit (FY23: 18% charge).

The weighted average applicable tax rate for FY24 is 25%, which without any further tax differences, would result in a tax credit of £0.1m.  The difference between the applicable rate of tax credit and the effective rate of 111% credit is due to the following:

·      Availability of enhanced 86% SME R&D deduction (increasing the effective rate credit by 138%);

·      Timing differences not recognised in the computation (decreasing the effective rate credit by 120%);

·      Expenses disallowable for tax purposes (increasing the effective rate credit by 84%);

·      Other differences, such as prior year adjustments and overseas taxes (decreasing the effective rate credit by 16%).

The weighted average applicable tax rate for FY23 was 19%. The difference between the applicable rate of tax and the effective rate of 18% was due to the following:

·      Availability of enhanced 130% SME R&D deduction (decreasing the effective rate by 2.2%);

·      Deferred tax charged directly to equity (decreasing the effective rate by 2.2%);

·      Recognition of the change in tax rate to 25% on certain deferred tax assets and liabilities as they are expected to reverse after 1 April 2023 (increasing the effective rate by 0.7%);

·      Overseas taxes (increasing the effective rate by 2.0%);

·      Other differences, such as prior year adjustments and disallowable expenses (increasing the effective rate by 0.7%).

Earnings per share

Basic earnings per share was a small profit of 0.05p in the year (FY23: 6.75p profit) and diluted earnings per share was a small profit of 0.04p (FY23: 6.42p profit), with the movement compared to the prior year attributed to reduced trading volumes, offset partially by the tax credit.

Cashflows

Closing cash at 31 March 2024 was £11.9m (31 March 2023: £19.1m including fixed term deposits).  The Group experienced an outflow of total cash and fixed term deposits of £7.2m in the year (FY23: £3.7m), reflecting the trading performance in the year, continuing investment in R&D to support our product roadmap and increases in working capital.

Working capital in the year increased by £3.7m (FY23: £0.4m increase) driven predominantly by a £2.8m increase in inventory.  At the start of the year, the Group had planned to increase levels of product to increase responsiveness to order intake. This was further increased as a result of the tail end effects of supply chain issues coupled with investment in inventory to support the previous order expectations prior to the slowdown in customer spending. The inventory will be sufficient to support the FY25 forecasts (excluding new products in the roadmap such as the Paragon 800Gb/s) and positions the Company well to deliver faster turnaround of orders in the year ahead.   

As a result of higher volumes of software support and extended warranty packages being sold in the year, the deferred revenue balance increased by £0.7m to £4.5m from £3.8m in the prior year.  This was offset by a reduction in trade and other payables balances of £1.5m as a result of lower trading volumes with our contract manufacturer at the year end due to our levels of inventory in-house and the reduction in performance bonus and profit share accruals as no bonuses are due to be paid out in relation to the FY24 year.

The Group paid £0.9m in tax in the period based on the profit generated in the prior year. Given the Group was loss making before tax in FY24, this cash is potentially refundable in FY25 after submission of the FY24 year-end tax return.  If refundable after the submission of the tax return, it will be shown as a receivable in the FY25 balance sheet up to receipt of the cash.   

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 year was £5.6m (FY23: £4.5m).  £0.6m of this increase was people spend, reflecting inflationary salary increases, the full year effect of hires made in FY23 and increases in graduate headcount. R&D equipment spend accounted for £0.4m of the increase in cash spend, which was predominantly driven by the requirements of the Paragon Neo 800 Gb/s project, which is due to complete in the second half of FY25.

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 on investment is classified as a cash outflow within investing activities in the consolidated cashflow statement in prior periods. As at 31 March 2024, the Group held surplus cash in notice accounts, but did not hold any on long term deposit.

There is currently no debt on the balance sheet, leading to no borrowings related cashflows in the current or prior periods. Closing cash at 31 March 2024 was £11.9m (31 March 2023: £19.1m including fixed term deposits).

Dividend

The directors are proposing a final dividend with respect to the financial year ended 31 March 2024 of 0.62p per share. The final dividend will be proposed for approval at the Annual General Meeting in August 2024 and, if approved, will be paid on 30 August 2024 to all shareholders on the register as at close of business on 26 July 2024, the record date. The ex-dividend date will be 25 July 2024.

Ashleigh Greenan
Chief Financial Officer
20 May 2024

Consolidated Statement of Comprehensive Income

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Consolidated and Company Statement of Financial Position

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Consolidated Statement of Changes in Equity

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Company Statement of Changes in Equity

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Consolidated and Company Cash Flow Statement

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