Interim Results

19 November 2024

Calnex Solutions plc

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

Interim Results

Resilient trading in challenging telecoms market

Entered H2 with an increased backlog compared with the beginning of H1

 Benefiting from R&D investment and growing product offering

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 2024 ("H1 FY25" or "the Period").

Financial Highlights 

¹ A full reconciliation between Underlying EBITDA and profit before tax is shown in the Financial Review and in note 19 to the financial statements.

Financial Highlights

Operational Highlights

Outlook

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

"In a challenging telecoms market, Calnex has traded resiliently. We have entered the second half with an increased order backlog compared with the start of the first half and our new channel strategy is tracking well.  While challenges across the telecoms market are expected to remain for the duration of the year, good progress with our product expansion strategy provides confidence in a return to growth during H2 FY25 and into FY26.

As previously highlighted, 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.  The need for reliable testing solutions is synonymous with investment and advancements of network infrastructure in the telecoms sector and beyond.  We remain well positioned to convert the telecoms sales pipeline once the sector returns to normal market conditions."

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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.

CEO Statement

Overview

In a challenging telecoms market, Calnex has traded resiliently and is on track to report results for the year in line with market expectations. While the wider economic environment remains unpredictable, we are encouraged that order and revenue performance steadily improved throughout H1, and that the H2 opening backlog position increased compared to the H1 opening balance.

The Group has delivered revenue of £7.4m (H1 24: £7.8m) and a Loss Before Tax of £1.3m (H1 24: £0.6m) driven by the slightly lower revenue impact on Gross Profit and an expected increase in R&D amortisation in the Period. The cost base has been maintained in line with the prior year and we continue to carefully monitor all spend. We have recorded a cash outflow of £3.3m in the Period, driven by increases in investment in inventory to support order expectations prior to the slowdown in customer spending and the timing of trading volumes in the Period, and we have been pleased to see order growth increasing towards the end of the Period. We maintain a healthy balance sheet, with a cash balance of £8.4m at Period end, increasing to £10.3m at the end of October as a result of corporation tax refund and R&D tax credit receipts and cash inflows from Period end trade receivables.  We expect this cash position to continue to strengthen as we progress through the second half of the year.

Having adjusted our engineering programme to focus on areas showing the most near-term potential across the telecoms, cloud computing and defence markets, we are now seeing the positive impact of recent R&D investment in our growing backlog. Orders for our new Paragon-neo offering, focused on the area of 800Gb/s synchronisation testing, continue to build following successful customer testing and release in early H2. We are also encouraged that orders for the Network and Application Assurance products, which were forecast to be a driver of growth in FY25 due to their focus on markets such as cloud computing and defence, have increased on the prior period.

Our successful execution of the product expansion strategy in the Period provides confidence in Calnex's H2 performance and augers well for future years.

Channel Partner Network Operating to Plan

The implementation of the new channel strategy is tracking well and transitional arrangements with Spirent are working effectively. Following the announcement that Calnex would be terminating its reseller agreement with Spirent earlier this year, we have successfully onboarded new channel partners covering the Group's territories of North America, Europe, India and Asia-Pacific. The new partners are all now active, with the first orders and the sales pipeline into H2 filling well. Throughout the process we have maintained a positive relationship with Spirent and continue to work with them in a more focused way.

Market backdrop

The fundamental growth drivers across the telecoms sector remain. Investment in network complexity and the latest mobile infrastructure is essential to meet the demand for the global move to a higher bandwidth, and with these investments comes the need for trusted testing solutions. While overall spending levels across the majority of telecoms operators remain subdued, we have seen demand for 800Gb/s synchronisation testing, the next wave of high-speed interface telecoms testing, driven by emerging technologies continually increasing the need for higher bandwidth.

Meanwhile, newer markets such as cloud computing and defence continue to offer significant opportunities for Calnex. In the high-stakes environment of the defence sector, network emulation that enables customers to verify their network or application performance is increasingly important. Similarly, in cloud computing, the speed of advancement with the leaps forward in Artificial Intelligence and the rapid build-out of data centres means that reliable test instrumentation is more important than ever, not only at the network level, but also at the level of 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. With the broadest portfolio of Network Emulators in the industry, we are well placed to offer our customers solutions aligned to their specific needs.

Product innovation driving order growth

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. In the prior year, we focused R&D spend 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. We believe this strategy has been proven correct and will enable Calnex to remain at the forefront of its markets.

Our product expansion strategy is gaining momentum and the continued, targeted investment in R&D spend is benefitting the Group, as demonstrated with the early successes of our new products. 

Targeting growth in the telecoms market

In telecoms, the focus has been delivering our 800Gb/s synchronisation testing solution, the new Paragon-neo, which was successfully released early in the second half of the financial year, with first shipments commencing this month. 800Gb/s is the next generation of high-speed Ethernet and marks the next step of investment in higher speeds for the telecoms industry. We are seeing healthy demand for 800Gb/s synchronisation testing, having already received orders for the Paragon-neo product. In the context of the wider sector, this demand provides us with confidence that there will be a return to normality across the telecommunications sector, as customers look to make the necessary investments in higher speeds and advanced technologies.

Cloud computing and data centre markets

We are seeing good early progress within our newer markets of cloud computing and data centres, where there is significant opportunity in the context of the widespread investment into AI and cloud services. Performance across both product lines within our Network and Application Assurance business (Infrastructure validation and Applications testing) was strong in H1 and we expect to see these products continue to drive growth into the second half and FY26.

To take advantage of customer demand in the cloud computing and data centre markets, we have successfully launched the SNE-X with 400GbE interfaces, our high-speed, high port count platform designed to prove the performance of new, real-time cloud-based applications. This product is the first network emulator of its kind for AI infrastructure and other high-performance computing networks and feedback from customers continues to be positive.

NE-ONE, a product that provides a solution for engineering teams developing software applications to be hosted in-house or in cloud services, has seen solid demand in the Period, attracting a more diverse range of customers, with success across the Enterprise, Satellite, Defence and Government markets. Growth in these markets, particularly in the United States, has been strong.

Outlook

We have entered the second half with an increased backlog on the first half opening position and our new channel strategy is tracking well.  While the macroeconomic environment remains unpredictable and the challenges across the telecoms market are expected to remain for the duration of the year, good progress with our product expansion strategy provides confidence in a return to growth during H2 FY25 and into FY26. The Board is confident that the Company's performance in FY25 will be in line with current market expectations, including positive cashflow generation in H2.

As previously highlighted, 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.  The need for reliable testing solutions is synonymous with investment and advancements of network infrastructure in the telecoms sector and beyond and we remain well positioned to convert the telecoms sales pipeline once the sector returns to normal market conditions. 

With the diversification of our end markets, breadth of our customer base and strong balance sheet, we look to the future with continued confidence.

Financial Review 

Revenues for the period were 6% under prior period trading levels, driven by continued challenging end market environments.  Order and revenue performance steadily improved throughout H1, with a higher order backlog balance at the end of September compared to beginning of the Period.  Gross margins have remained robust and in line with the prior period and all cost control measures are tracking to plan.  We continue to benefit from a strong cash balance with the Period end cash balance of £8.6m growing to £10.3m in the month after the Period end.

Key performance indicators

¹ EBITDA after charging R&D amortisation.

Revenue

Revenue generated in the first half of the year was £7.4m, a 6% decline on H1 FY24 revenue of £7.8m, driven by the continued challenging environment within the telecoms industry.  Q2 order and revenue performance improved on Q1, leading to a stronger order position at the end of the Period.

Gross Margin

Gross Profit for the Period was £5.4m, £0.4m lower than the prior period as a result of the lower trading volumes.

Gross margins remained robust and in line with the prior period at 74% (H1 FY24: 74%) driven by a strong product mix. Gross margin is net of commissions payable to our channel partners and can be affected by product mix and timing of the hardware and software bundles shipped in a Period.

Underlying EBITDA

Underlying EBITDA is EBITDA stated after charging R&D amortisation.

Underlying EBITDA was a £1.1m loss in the Period (H1 FY24: £0.4m loss), £0.7m lower than the prior period driven by the £0.4m reduction in trading volumes flowing through from Gross Profit and a £0.3m increase in R&D amortisation in the Period. Underlying EBITDA margin was -15% (H1 FY24: -5%). 

Administration costs excluding depreciation and amortisation were held in line with the prior year at £4.5m (H1 FY24: £4.5m) as a result of the continuation of cost control measures put in place across the business during FY24. The Group has continued the pause on headcount growth, excluding graduate and key replacement hires, as the challenging trading environment continued and, as a result,  headcount was slightly reduced to 157 by the end of the Period (31 March 2024: 160).

Whilst cost controls have continued 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.   Excluding graduate hires (of which there were two in the Period), there have been no headcount increases in the R&D team in the Period. 

Amortisation of R&D costs in H1 FY24 was £2.1m (H1 FY24: £1.8m). 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.

Profit before tax

Loss before tax was £1.3m in the Period (H1 FY23: £0.6m loss), with the variance on the prior period due to the Underlying EBITDA drivers detailed above.

Tax

The Group's loss-making position resulted in a tax credit of £0.3m for the Period (H1 FY24: £0.2m), based on an effective tax rate of 25% for this point in the year.

Earnings per share 

Basic earnings per share was a loss of 1.13p in the Period (H1 FY24: 0.42p) and diluted earnings per share was also a loss of 1.13p (H1 FY23: 0.42p), with the movement compared to the prior period attributed to the higher loss-making position in the current Period.  

Cashflows

The Group experienced a cash outflow of £3.3m in the period, reflecting the loss made in the Period and movement in working capital.

Working capital in the period increased by £1.3m (H1 FY24: £3.3m) driven predominantly by an increase in inventory to support the previous order expectations and increased levels of semi-finished products to increase responsiveness to order intake and net movements of receivable and payables balances. 

The Group paid £0.8m in tax in the prior period based on the profit generated in FY23.  £1.1m has since been received post Period end in relation to this refund, including an additional cash receivable balance from the FY24 R&D tax claim.

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 £2.6m, in line with the prior period (H1 FY24: £2.6m), with cost control measures offsetting a graduate headcount increase of two. 

The Group places surplus cash balances not required for working capital into high interest deposit accounts, either overnight, weekly or notice accounts. As at 30 September 2024, the Group was taking advantage of higher rates on overnight accounts, so did not hold any cash in notice accounts at that time.

Closing cash at 30 September 2024 was £8.6m (30 September 2024: £13.5m; 31 March 2024: £11.9m). Closing cash balances increased to £10.3m at 31 October 2024, driven predominantly by the receipt of the £1.1m HMRC corporation tax monies and positive working capital movements. 

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 on 16 December 2024 to those shareholders on the register as at 29 November 2024, the record date (FY24 Interim dividend 0.31p). The ex-dividend date is 28 November 2024.

Calnex Solutions plc

Consolidated Statement of Comprehensive Income

For the period ended 30 September 2024

Calnex Solutions plc

Consolidated statement of financial position

For the period ended 30 September 2024

Calnex Solutions plc

Consolidated cashflow statement

For the period ended 30 September 2024

Calnex Solutions plc

Consolidated statement of changes in equity

For the period ended 30 September 2024

Calnex Solutions plc

Notes to the interim consolidated financial statements

For the period ended 30 September 2024

1.    General information

The interim consolidated financial statements cover the consolidated entity Calnex Solutions plc and the entities it controlled at the end of, or during, the interim period to 30 September 2024 ("the Group").

Calnex Solutions plc ("the Company") is a public limited company and is domiciled and incorporated in Scotland.

The registered office is:

Oracle Campus

Linlithgow

West Lothian

EH49 7LR

The principal activity of the Group is the design, production and marketing of test instrumentation and solutions for network synchronisation and network emulation enabling its customers to validate the performance of critical infrastructure associated with telecommunications networks, enterprise networks and data centres.

The interim consolidated financial statements for the period ended 30 September 2024 are unaudited, and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. They do not therefore include all the information and disclosures required in annual statutory financial statements and should be read in conjunction with the Group annual report and accounts for the year ended 31 March 2024.

The Group annual report and accounts for the year ended 31 March 2024 were approved by the Board of Directors on 20 May 2024 and have been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement made under Section 498(2) or (3) of the Companies Act 2006.

The interim consolidated financial statements for the period ended 30 September 2024 were approved by the Board of Directors on 18 November 2024.

2.    Basis of preparation

The interim consolidated financial statements for the period ended 30 September 2024 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board, endorsed by, and adopted for use in, the United Kingdom.

The accounting policies and methods of computation adopted are consistent with those applied in the Group's consolidated financial statements for the year ended 31 March 2024 and have been applied consistently to all periods presented.

There have been no new standards or amendments to existing standards effective from 1 April 2024 that are applicable to the Group or that has had any material impact on the financial statements and related notes as at 30 September 2024.

The Directors do not anticipate that the adoption of any of the new standards and interpretations issued by the IASB and IFRIC with an effective date for the Group after the date of these interim financial statements will have a material impact on the Group's interim financial statements in the period of initial application.

3.    Going concern

The interim consolidated financial statements have been prepared on the basis that the Group will continue as a going concern.

In adopting the going concern basis, the Directors have considered the principal risks and uncertainties of the group, which remain unchanged from those reported in the Group annual report for the year ended 31 March 2024, a copy of which is available on the Company's website at: https://investors.calnexsol.com. The uncertainties arising from the macro-economic backdrop and inflationary pressures are covered by existing risks, and these continue to be closely monitored.

The Board has reviewed cashflow forecasts and availability of cashflow to fund the ongoing operations of the Group. Based on this review, along with regular oversight of the Group's risk management framework, the Board has concluded the going concern basis to remain appropriate.

4.    Operating segments

Operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers) in assessing performance and determining the allocation of resources. As the Group has a central cost structure and a central pool of assets and liabilities, the Board of Directors do not consider segmentation in their review of costs or the balance sheet. The only operating segment information reviewed, and therefore disclosed, are the revenues derived from different geographies.

5.    Revenue

6.    Finance costs

7.    Taxation

8.    Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of Ordinary Shares in issue during the year.

Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the total of the weighted average number of Ordinary Shares in issue during the year and adjusting for the dilutive potential Ordinary Shares relating to share options.

9.    Intangible Assets        

Included within intangible assets are the following significant items:

·      Intellectual property representing the cost of patent applications and on-going patent maintenance fees.

·      Acquired intellectual property from business combinations.

·      Capitalised development costs representing expenditure relating to technological advancements on the core product base of the Group. These costs meet the requirement of IAS 38 (Intangible Assets) and will be amortised over the future commercial life of the related product. Amortisation is charged to administrative expenses.

10.  Goodwill

The Group tests goodwill for impairment annually, or more frequently if there are indications that the goodwill has been impaired. The Group has an annual impairment testing date of 31 March. As at 30 September 2024, management has reviewed goodwill for indicators of impairment, and has considered the Group's trading performance, the Group's principal risks and uncertainties, and the other assumptions utilised in the value in use calculation. Management has performed sensitivity analyses on the key assumptions both with other variables held constant and with the other variables simultaneously changed. Management has concluded that there are no reasonable changes in the key assumptions that would cause the carrying amount of goodwill to exceed the value in use for the cash generating unit.

No evidence of impairment was found at balance sheet date.

11.  Plant & equipment    

12.  Leases

The Group has recognised a right-of use asset and a lease liability for the lease of land and buildings for its head office in Linlithgow, Scotland.

The Group leases IT equipment with contract terms ranging between 1 to 2 years.  The Group has recognised right-of use assets and lease liabilities for these leases. 

The Group leases office space in Belfast and Stevenage, as well as one motor vehicle. These leases are low-value, so have been expensed as incurred. The Group has elected not to recognise right‑of‑use assets and lease liabilities for these leases.

Information about the right of use assets and leases for which the Group is a lessee is presented below: