Calnex Solutio. Regulatory News (CLX)

23 May 2023

Calnex Solutions plc

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

FY23 Final Results

Calnex Solutions plc (AIM: CLX) provides test and measurement solutions for the global telecommunications sector and is pleased to announce its audited results for the 12 months ended 31 March 2023 ("FY23" or the "Year").

Financial Highlights

1 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

· Revenue growth of 25% to £27.4m (FY22: £22.0m).

· Growth in profit before tax of 21% to £7.2m (FY22: £6.0m).

· Closing cash position, including fixed term deposits, of £19.1m (31 March 2022: £15.4m).

· Proposed final dividend of 0.62 pence per share, making a total of 0.93 pence per share for FY23 (FY22: 0.84 pence).

Operational Highlights

· Successful mitigation of well-documented supply chain challenges, delivering all orders as planned.

· Growing relationship with hyperscale customers, securing one significant contract and seed unit sales into two other hyperscalers during the year.

· Encouraging early uptake of Sentry, our Network Synchronisation product launched in H2.

· Full integration of iTrinegy, expected to be an important contributor to future profit.

· Increased staffing levels across business development, sales, R&D, and support roles, to support growing customer demand, new product development and maximise exposure in new and existing territories.

Outlook

· Trading in Q1 FY24 has continued as anticipated, and the Board is confident in delivering results for the year in line with market expectations as revised in March 2023.

· Whilst customer budgets continue to be restricted in the near term, customer engagement levels remain high and Calnex's mid-term order funnel has strengthened during Q1 FY24, although the timing of conversion of these opportunities into orders remains unclear.

· The breadth of Calnex's customer base across multiple regions, expanding product portfolio and strong balance sheet, alongside the market's structural growth drivers, provide continued confidence in the future.

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

"FY23 was another year of solid progress where we executed on our strategy, increasing our addressable market, whilst successfully navigating the supply chain challenges, achieving revenue and profit growth, in line with market expectations.

"While customer budgets remain restricted in the short term, customer engagement levels remain high, and we have been encouraged to see the early signs of a more stable macro environment.

"We are confident the market's structural growth drivers will continue to drive long-term growth opportunities for Calnex. These include the need to build out new mobile networks to support the transition to 5G, and ongoing data centre investment to support the demand for cloud computing coupled with the need to be more energy efficient.

"The breadth of our customer base across multiple regions, expanding product portfolio and strong balance sheet, mean we look to the future with continued confidence."

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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

It gives me great pleasure to present my first statement as Chair of Calnex Solutions, following my appointment to the role in August 2022, post the Company's AGM.

Upon joining the Board as a Non-Executive Director in January 2022, I found a company with an innovative product offering, highly experienced leadership, an expert and dedicated team, long-standing blue-chip customers, and strong partner relationships. These factors have enabled Calnex to deliver strong profit and revenue growth since IPO, which have in turn provided the means to invest in its people and offering, while maintaining a strong balance sheet.

A positive performance in FY23

The Group successfully delivered results in line with market expectations. This was driven by the growth in cloud computing and the roll out of 5G along with the introduction of new standards for the telecoms industry, driving demand for the Group's products.

There was an improved performance in H2 as expected and for the year the Group achieved revenue growth of 25% to £27.4m (FY22: £22.0m) and profit before tax increased by 21% to £7.2m (FY22: £6.0m). We closed the year with a strong cash (including short term investments) figure of £19.1m (FY22: £15.4m).

Calnex's relationship with its long-standing partners deepened during the year with key highlights being the renewal of the contract with Spirent, the Company's principal distribution partner, as well as the successful management of supply chain issues with our contract manufacturer, Kelvinside Electronics. We also made good progress in data centre activities and the integration of iTrinegy has gone to plan.

ESG

The attitude of Calnex towards caring for its people and the communities around it has always been a key feature of the business. As a business and Board, we are committed to having a positive impact on our society, the environment, and our team.

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.

Within product development, our focus is increasingly on delivering platform products that enable software upgrades in line with customers' aspirations. Thanks to our dedicated team, their in-depth knowledge, and market insight, our customers enjoy hardware longevity typically between 10 and 15 years, thereby reducing the impact our products have on the environment and providing long-term expert support through cutting-edge upgrades that anticipate customer requirements. Where possible, we look to work locally. Our product packaging is manufactured by a local supplier with a comprehensive environmental policy and our company HQ, and the majority of our operations are based in serviced premises leased from Oracle in Linlithgow.

In FY22 the Board committed to build a Calnex Corporate Giving Scheme into our Financial Plan equal to 1% of the profits we generate. An employee-led team was created in FY23 to consider proposals from employees for donations or support for groups and events that matter to them. We used 100% of the Calnex Corporate Giving Scheme this year. We have two main initiatives in place to utilise this fund - 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. In FY23 Calnex donated £70,000 to 84 charities and organisations and social events across the globe through our Corporate Giving Scheme.

As a Board, we are also committed to high standards of corporate governance and oversight. The approach we take is set out in detail in the Principal Risks and Uncertainties, s172 and Corporate Governance sections of our Annual Report and Accounts.

As part of our journey to continually improve our performance, our focus remains on ensuring a diverse workforce with a good level of female representation on both our Board and executive management team. The success we have delivered since IPO is a tribute to the workforce's expertise and knowledge. Their energy and professionalism whilst navigating the supply chain challenges has been immense and on behalf of the Board, I would like to thank all our staff across the globe for their hard work.

Board updates

I am delighted to have taken up the mantle as Chair during the period and I have come to know Calnex's culture and structure well in my time so far. We were also pleased to welcome Helen Kelisky to the Board in 2023, who brings with her a wealth of cloud and data centre experience, which has already proven of immense value.

I would also like to take this opportunity to thank George Elliott who retired as Chair at last year's AGM, as well as Ann Budge, who stepped down as Non-Executive Director in February of this year. The importance of both George and Ann cannot be overstated, both of whom having provided significant guidance along the way on Calnex's growth journey.

Outlook

As described in our Trading Update issued in March 2023, the macro-economic conditions have prompted a more cautious approach to investment decisions by our customer base. While we are seeing signs of a more stable macro environment, trading in the current financial year has continued as anticipated at that time. Customer engagement levels are high, although the timing of orders remains unclear, consistent with wider industry dynamics.

The Board remains confident in the delivery of results for the year in line with the revised market expectations and believes the breadth of product offering, and the market's structural growth drivers, provide Calnex with a considerable long-term opportunity. 

Stephen Davidson Non-Executive Chair

22 May 2023

CEO's Statement and Operational Review

We have delivered a strong FY23 financial performance, reporting double digit growth across revenue and profit, in line with market expectations. Improved performance in the second half was driven by the successful conversion of our order book and we have continued to make considerable operational and strategic progress during the period. 

I am proud of the way in which the team has been able to deliver these results while dealing with well-documented supply chain challenges. The mitigation strategies in place enabled us to shield our customers from any impact, successfully scheduling all orders aligned to customer needs. We continue to benefit from the experience of our team and from the strength of the relationship with our contract manufacturer, Kelvinside Electronics, in this regard. We are optimistic about an improving picture and that the process improvements we have put in place leave us well-positioned to capitalise on the opportunities available to us.

Further execution of our growth strategy during the year has increased Calnex's market opportunity as we move into adjacent areas of the testing market. Relationships with hyperscalers continue to grow and we are encouraged by the early performance of Sentry, our newly launched Network Synchronisation product. We have also recently initiated discussions with Data Centre and Telcom Network operators for the supply of a Monitoring system for synchronisation quality across their network, SyncSense. Following the full integration of the recently acquired iTrinegy, we now see it as an important contributor to future profit. Following further investment into our team's capabilities during the year, we believe we have the right team in place to continue our journey.

Following three years of revenue and profit growth since becoming a listed business, we are now a considerably larger business (headcount and turn-over), with strong customer relationships across all territories. Although contending with near-term uncertainty and delayed customer spending, we remain a profitable, cash generative, well-managed business, with a diverse customer base in growing markets and strong balance sheet.

Customer metrics

The number of customers who ordered from us this year increased by 72 to 305 (FY22: 233 customers) and the proportion of orders coming from non-telecoms customers was 34% (FY22: 23%). The step change is primarily driven by sales of NE-ONE products to customers new to Calnex. Over a three-year average basis, our top 10 customers accounted for 47% of orders (FY22: 50%) and 74% of our orders were from repeat customers (FY22: 79%). Again, the impact of NE-ONE new customers accounts for this significant change compared to FY22. Our geographic spread of orders across the regions on a three-year average basis, shows Americas receiving 34%, North Asia receiving 27% and ROW receiving 39%.

Market backdrop

Many telecoms sector participants, including global equipment manufacturers, have recently reported a general softening of demand for their products and services in the short-term, albeit noting that the long-term structural growth drivers, including the exponential increase in network complexity and the transition to 5G, remain strong. 

Importantly, our customers remain committed to the delivery of projects which we know will rely on Calnex's test instrumentation and solutions.

Product innovation to support the transition to 5G and entry into cloud computing market 

Continued product innovation has allowed the Group to execute on its growth strategy to capitalise on the transition to 5G and expand into adjacent areas of the testing market, such as cloud computing and the data centre market.  

Launch of new product to optimise entry into cloud computing market

The need for hyperscale and enterprise companies to drive greater efficiency and performance in their data centre operations continues to drive growth in the testing market and Calnex's relationship with these customers has continued to develop during the year. In H2 we launched a new version of our Network Synchronisation product, Sentry, which heavily leverages the technology in Sentinel, Calnex's Field Sync solution, but with a form, fit and function optimised for the data centre environment. This new format enhances the ability to engage with potential data centre customers by strengthening its usability in the data centre environment. Following the large deal secured in FY22, our focus has remained on building relationships with other hyperscalers and this year we successfully secured seed unit sales into two other hyperscalers. We are now focused on using these early units to build relationships and develop further opportunities.

Engagement with both data centre operators and telecom network operators has identified an emerging opportunity to offer a monitoring system that provides an indication of the quality of synchronisation across the network. Calnex has recently launched its SyncSense product offering to address this need. Calnex's reputation as experts in synchronisation enables us to provide reassurance to network operators that we have the knowledge and insight to collect and interpret the data obtained across the network to identify nodes that are not operating correctly. For telecom operators, poor timing limits the customer connectivity that can be supported. For data centre operators, good synchronisation between servers increases processing bandwidth and reduces the investment required for expansion of their server infrastructure to meet the needs of their customers.

Cloud & IT, Infrastructure Verification (SNE, SNE-X & SNE-Ignite) 

Calnex's Network Emulation products, which target customers developing Infrastructure products (e.g. Ethernet switches, routers, SD-WAN equipment), continued to make good progress this year. O-RAN has also impacted positively on this product line. The O-RAN Alliance provides recommendations for equipment deployed in the RAN network. Synchronisation is only one element of the functionality specified. Calnex's SNE products are being utilised to verify performance to other aspects of these recommendations.  

This year, the Group expanded its portfolio by releasing a new SNE (network emulation) product, SNE-X, a multi-port, high-performance network emulator designed to drive product/application quality and reduce the cost of testing with rigorous, scalable test capability. In FY24 the Group plans to release a further product, SNE-Ignite, to target applications requiring performance and accuracy only achievable with hardware-based implementation. With the SNE family, Calnex now has a full suite of products capable of addressing the needs of all applications in the target market.

Cloud & IT, Applications Verification (iTrinegy acquisition) 

In April 2022 Calnex acquired iTrinegy Limited, a leading developer of Software Defined Test Networks technology for the software application and digital transformation testing market. NE-ONE hardware and software-based Network Emulation platforms provide organisations, primarily across the technology, financial, gaming and military / government sectors, with the ability to accurately recreate complex, real-world network test environments in which to analyse and verify the performance of applications, before deployment. The acquisition of iTrinegy's NE-ONE Network Emulation platform has enhanced the Company's position as a leading Synchronisation Verification test vendor, and we believe Calnex is the leading provider of Network Emulation tools for its industry segments.

The integration of the iTrinegy team is progressing as planned, with the focus during the period on building out the team and sales channel, which will continue in FY24.

Financial performance  

Calnex experienced another year of strong trading, achieving results in line with market expectations. We delivered double digit growth across revenue and profits with an improved performance in H2, as expected. The 25% growth in revenue to £27.4m (FY22: £22.0m) is a result of the continued strong demand for telecoms testing equipment across the Group's core markets. Three-year revenue CAGR is 26%, reflecting the solid performance of the business since IPO. Revenues from the Americas region increased 36%, whilst the Rest of the World experienced a 38% uplift. North Asia revenues saw a slight decline of 4% due to the ongoing geopolitical tensions between the US and China. Given the overall growth in revenues, Americas account for 35% of total revenues (FY22: 32%), ROW 41% (FY22: 37%) and North Asia 24% (FY22: 24%).  

The Group's adjusted profit before tax grew by 21% to £7.2m (FY22: £6.0m), in line with market expectations, reflecting the uplift in revenues and the Group's on-going investment in the business. This year saw the Group invest in additional business development resources, products, and inventory, such that we are in a stronger position to successfully respond to customer demands. The Group ended the year with a healthy closing cash position, including fixed term deposits, of £19.1m (31 March 2021: £15.4m). 

People 

We continue to invest in talent globally, to support and enhance the fantastic work of our team, whose commitment continues to drive the business forward. Such investment in talent, particularly within the R&D division, is part of the Group's on-going growth strategy. We have grown our headcount by 33 staff over the past 12 months, including the iTrinegy acquisition, bringing our total headcount to 155 as at 31 March 2023. We continue to be able to use Calnex's platform as a means to attract talented people and continue to use our overseas sponsor license to hire from outside of the UK in order to strengthen and diversify our teams.

In January 2023, we welcomed Helen Kelisky to the Board as Non-Executive Director. Helen brings over 30 years of technology sales leadership experience and a track record of driving top line growth, leading national and international businesses. Her experience across the cloud and data centre world is already proving to be of immense value to Calnex as we exploit the growth in the testing market, with the need for greater efficiency and performance in data centre operations.

Following nine years on the Board, George Elliott retired as Chair at last year's AGM. George was a significant source of support to me and the business through our subsequent growth and journey onto the public markets. Also, following 13 years on the Board, Ann Budge stepped down as Non-Executive Director in February 2023. Ann was an early-stage investor in Calnex and was pivotal in introducing the Discovery Investment Fund syndicate as seed investors when the Group raised capital in 2007. I would like to take this opportunity to thank both George and Ann for the valuable roles they played in Calnex's growth journey, helping to establish a solid platform to support the Group's financial and strategic ambitions.

Calnex is a people first business where we help and encourage each other, supporting the business and our colleagues in building on our successful achievements. During 2022, we introduced a range of programmes to support the development of our employees including the Leadership Development, Power Skills and Psychological Safety programmes, to ensure they can thrive in a safe and supportive environment. I am pleased to report that in the last 12 months, the Group's learning and development activities have led to 24 promotions and five cross-departmental moves.

During the year, we also worked closely with the UK Electronics Skill Foundation, supporting the future talent of Engineering in providing student placements and supporting STEM education and development.

Our continued success at Calnex, together with the diversity of our employees, enables us to make meaningful contributions all over the world. Guided and driven by what is important to our teams, we are committed to use the resources we have at our disposal and our platform to support events, charities, and groups to demonstrate our commitment to Environmental, Social and Governance responsibilities.

Outlook  

FY23 was another year of solid progress where we executed on our strategy, increasing our addressable market, whilst successfully navigating the supply chain challenges, achieving revenue and profit growth, in line with market expectations.

In our Trading Update issued in March 2023, we described how some customers had begun to take a more cautious approach to investment decisions in response to the macro-economic conditions, prompting a revision in market expectations for FY24. Trading in the first few months of FY24 has continued as anticipated, and the Board remains confident in delivering results for the year in line with the revised market expectations.

Customer engagement levels remain high, and we have been encouraged to see the early signs of a more stable macro environment. Whilst customer budgets continue to be restricted in the near term, we have seen our mid-term order funnel strengthen during Q1 FY24, although the timing of conversion of these opportunities into orders remains unclear, which is as expected and consistent with wider industry dynamics.

We are confident the market's structural growth drivers will continue to drive long-term growth opportunities for Calnex. These include the need to build out new mobile networks to support the transition to 5G, and ongoing data centre investment to support the demand for cloud computing coupled with the need to be more energy efficient.

The breadth of our customer base across multiple regions, expanding product portfolio and strong balance sheet, mean we look to the future with continued confidence.

Tommy CookChief Executive Officer22 May 2023

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.

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 we are working towards becoming an ISO14001 certified business by the end of 2023. Our recently established employee-led environmental, social & charity team have also had a very successful FY23.

At the end of FY22, the Board committed to build a Calnex Corporate Giving Scheme into future Financial Plans equal to 1% of the profits we generate. An employee-led team (with senior management sponsorship) was created in FY23 to consider proposals from employees for donations or support for groups and/or events that matter to them. The Calnex senior management team want to support groups local to our employees and offices and empower our employees to make a difference in their community by directing the Company to support activities/groups that they truly care about.

We also encourage employees to donate their time to make meaningful contributions. Group activities such as planting trees, re-planting local flower beds 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.

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.

We are pleased to report that we used 100% of the Calnex Corporate Giving Scheme this year. We have two main initiatives in place to utilise this fund - 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.

This financial year Calnex has donated £70,000 to 84 charities and organisations and social events across the globe through our Corporate Giving Scheme. Key charitable initiatives included:

· Donating 120 sleeping bags to a homeless charity in Belfast, as well as supplying 120 meals across our worldwide regions to those in need during the festive period;

· The Calnex September250 challenge where we encouraged our employees across the world to either walk 250,000 steps, cycle 250 miles, or take part in 25 exercises during the month of September to help support four worldwide charities - Mind, Sea Shepherd, Save the Children and National Autistic Society;

· Eighty employees from every region (UK, US, North Asia, India) accepted our challenge, which resulted in Calnex donating over £16,000 from our Corporate Responsibility Fund to split between these charities. During September our employees walked 13,877,757 steps, cycled 2,752 miles and took part in 230 exercise classes which not only raised a lot of money for charity but helped keep our employees and their families active;

· The Christmas Tree Gift Tag Appeal in our Linlithgow and Belfast office. In each office we decided to put up our Christmas trees early and attach gift tags which gave suggestions on toys to purchase for disadvantaged children. Our employees did an amazing job and brought in more than 100 gifts which were then donated to Cash for Kids Northern Ireland and River Kids in Scotland;

· The return of our Annual Christmas Charity Raffle in aid of HopScotch, which provide a much-needed seaside holiday for disadvantaged children in the UK;

· 24 large bug hotels were donated to nurseries and primary schools local to our employees across the UK, allowing the schools to educate and base projects around the wildlife that inhabit the hotels;

· All 3 UK offices took part in our charity bake sale in aid of Fare Share, who redistribute good food which would otherwise go to waste to almost 11,000 frontline charities nationwide. With over 30 home baked goods brought in by our employees across all 3 sites and with Calnex matching the amount raised through employee donations, we raised £1,795 for Fare Share; and

· As well as these activities organised by Calnex, 62 out of the 84 donations to clubs, charities and organisations were suggested by employees across the globe. A few key employee donations were:

o  £4,000 to SEAL Dunfermline, Scotland, who support the health and wellbeing of young people aged between 8 - 16 who are referred through social work and schools. As SEAL recently had their funding reduced due to council cutbacks, this money allowed them to continue their work; 

o  £1,000 to Stevenage Scouts Group, England, which was used to help enable disadvantaged children to attend a trip to Normandy;

o  £1,000 to Operation 143, USA, who support over 30 schools providing disadvantaged children with backpacks containing easy to prepare food to feed them over the weekend; and

o  £2,000 to Linlithgow Rose Community Football Club under 10s, Scotland. The money helped purchase new kit for all the young players.

This financial year Calnex has organised 7 Calnex in the Community days for our employees across Northern Ireland, England, Scotland and India, including:

· Fife Coastal Path Clear-Up: 22 employees from our HQ office in Linlithgow helped collect rubbish along Fife Coastal Path;

· Assisi Animal Sanctuary: 8 employees from our Belfast office volunteered with the sanctuary, clearing out and reorganising their donations container and giving the walls a fresh lick of paint;

· Five Sister Zoo: 17 employees from our HQ office in Linlithgow volunteered with the zoo to paint their large wooden ship play park and tidy up their Japanese inspired garden by clearing out leaves and laying new gravel;

· Akshaya Patra: our India-based team of 4 became our first overseas volunteering activity. The team helped package up and deliver lunchtime meals to disadvantaged schools in the area;

· Muiravonside Country Park: 20 employees from our HQ office in Linlithgow volunteered in the county park to help create a wildflower field as well as placing, filling and planting up their new planters, moving 8 tonnes of soil and stone in the process;

· Shepreth Wildlife Park: 10 employees from our Stevenage office in England volunteered to help scarify the large grass mound where the prairie dogs lived, removing all the moss to enable their resident donkey to move back home; and

· Ulster Wildlife Bog Meadows: 4 employees from our Belfast office volunteered to help plant the last of their one million trees for the year.

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.

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;

· 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.

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 duties 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.

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.

Despite being a low environmental impact business, a project is currently underway to gain ISO14001 certification. The ISO14001 standard defines a framework to formally manage the environmental impact of our business operations and products.

As well as the charitable giving activities mentioned above, other environmental initiatives include:

· We have initiated a Product Packaging Project to measure and improve the recyclability of our product packaging. 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;

· We are currently conducting a product design improvement exercise 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

· We have initiated an energy usage and business travel data collation project which will allow us to have visibility on our Scope 1 and 2 emissions for future reporting requirements.

People

Calnex is a people first company built on trust and respect. 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.

Respectful of each other, we consider how our actions, ideas and approaches impact others. 

We work as one team.

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, (each potential employee has a 'fit interview' as well as skills and experience assessments).

· 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.

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

· Training and Development Opportunities to further develop skillsets and/or secure educational qualifications.

· Group-wide 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, 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, a healthcare scheme available to all staff and income protection and life assurance polices.  

· 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.

· 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.

In 2022, partnering with Connect Three, we have introduced Leadership Development (LDP) and Power Skills programmes. Our LDP is a mandatory programme for managers which supports them in leading high performing teams, developing capability, effective communication and leading effective change. 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.

Our employee designed Power Skills programme provides all our employees with regular access to a weekly programme of skills sessions designed to engender confidence, understanding and awareness of a wide variety of skills ranging from Understanding Self and Others, Resilience and Change to Super Powering Communication and Influencing and Developing a Global Mindset.

The introduction of our new Psychological Safety programme also nurtures an inclusive, supportive and safe environment for our employees to thrive in, providing a work environment where we support each other through change and growth ensuring our positive, people-focused culture remains at the heart of everything we do.

In the last 12 months, our learning and development activities have led to 24 promotions and 5 cross-departmental moves. Structural development within the organization due to rapid growth over the last three years has created openings for 16 new management positions. Our focus on internal skills and leadership development has meant that we have been able to fill 60% of these positions internally, which is a major positive for both the business and the careers of those involved.

To actively support our employees' mental wellbeing, we have also partnered with David Beeney at Breaking the Silence to deliver interactive manager and employee workshops on managing our own mental health and supporting our colleagues in the workplace. Employees also have direct access to David for more personal support.

Calnex has also engaged a Chartered Financial Planner to provide financial wellbeing workshops for all employees and 1:1 free financial support to our UK team.

Our continued success at Calnex, together with the diversity of our employees, enables us to make meaningful contributions all over the world. Guided and driven by what is important to our teams, we are committed to use the resources we have at our disposal to support events, charities and groups to demonstrate our commitment to Environmental, Social and Governance responsibilities.

Tommy CookChief Executive Officer22 May 2023

Financial Review

Chief Financial Officer's Statement

The Group delivered a solid financial performance in the year to 31 March 2023, with growth in revenue, underlying EBITDA, profit before tax and cash in the year.

Financial KPIs

1 Refer to note 33 for explanation of the alternative performance measures calculations. A full reconciliation between Underlying EBITDA and the statutory measures is also shown below.

2 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 increased 25% to £27.4m (FY22: £22.0m), with growth across all of the major product lines compared to the prior year.   Revenues from the Americas and Rest of World regions increased 36% and 38% respectively. North Asia revenues experienced a slight 4% decline on the prior year due in part to the ongoing geopolitical tensions between the US and China. Americas accounted for 35% of total revenues (FY22: 32%), ROW 41% (FY22: 37%) and North Asia 24% (FY22: 31%) 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 delivered to the customer, with stand-alone software revenues recognised in line with 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. A customer can choose to use Calnex's products in the knowledge that a more consistent result may be obtained if a Calnex test solution had already been used on a particular product.

Sources of Revenue

Revenue streams

In FY23, 90% (FY22: 91%) of the Group's revenues were generated from the sale of bundled hardware and software products, with 10% (FY22: 9%) from software support and extended warranty programmes.

Geographical split of orders (average over 3 years)

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 39% for ROW (FY22: 35%), 34% for Americas (FY22: 35%) and 27% (FY22: 30%) for North Asia. North Asia experienced a decrease in the period reflecting the ongoing US-China geopolitical tensions.

Top 10 customer orders (average over 3 years)

In FY23, Calnex received orders from 305 customers, an increase of 72 on 233 customers in FY22.

The Group's top ten customers in FY23 accounted for 39% of total orders (FY22: 53%) and 47% of total orders on average over the last three years (FY22: 50%).  The step change in percentage in the year is primarily driven by sales of NE-ONE products to customers new to Calnex. 

In FY23, no underlying customer accounted for more than 8% of Calnex's total orders.

Repeat customers (average over 3 years)

The average length of customer relationship across the top ten customers in FY23 is 10 years (FY22: 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 FY23, using a three year order average, 74% of orders were generated from existing customers (FY22: 79%).  The impact of NE-ONE new customers accounts for this change compared to FY22.

During the last five years, 230 customers have placed repeat orders with Calnex (FY22: 199).

Telecoms v non-telecoms customers (average over 3 years, excluding NE-ONE in FY23)

Calnex's sales are predominantly derived from telecoms customers where the end-application is a telecoms (fixed and mobile) network. Non-telecoms customers include hyperscale/data centres and enterprise customers. On a three year average basis, and excluding NE-ONE orders (as these are a new set of customers in FY23 only), these non-telecoms customers represented 25% in FY23 (FY22: 23%).

Including NE-ONE in FY23, the three year average percentage of non-telecoms customers represents 26% in FY23 (FY22: 23%).

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 non-telecoms companies for use in telecoms applications as telecoms sales for the purposes of this analysis.

Gross Profit

Gross profit increased by 24% to £20.5m (FY22: £16.5m) reflecting the solid trading performance. Gross margin, which is calculated after discounts to channel partners are applied, is in line with the prior year at 75% (FY22: 75%).

Underlying EBITDA

Underlying EBITDA, which includes R&D amortisation, increased by 26% to £8.0m in the year (FY22: £6.4m), in line with market expectations, as a result of the strong trading performance. Administrative expenses (excluding depreciation & amortisation) were £10.0m in FY23 (FY22: £7.9m). This increase relates predominantly to the planned investment in the management, sales and support teams across the business in line with the Group's growth strategy, increases in travel costs as COVID-19 restrictions have been lifted across the majority of our regions, increases in US dollar based costs for our overseas sales teams as a result of the strengthening of USD over GBP and overheads relating to the Stevenage site after the acquisition of iTrinegy. Administration costs also include £0.2m of non-recurring acquisition related deal costs and £0.1m of a charge in relation to the contingent consideration accounting in relation to the iTrinegy acquisition.

Amortisation of R&D costs increased by £0.4m to £3.3m (FY22: £2.9m) due to increased R&D investment in recent years to support the growth in revenues.

Underlying EBITDA margin was 29% in FY23, in line with the prior year.

Profit before tax

Profit before tax increased by 21% in the year to £7.2m (FY22: £6.0m) driven by the growth in revenue performance. Profit before tax margin was 26% in FY23 compared to 27% in FY22. This slight change in profit margin is driven by the increase in other depreciation and amortisation costs as an additional £0.3m amortisation of acquired intangible assets was charged to the income statement in the Period in relation to the iTrinegy acquisition.

Tax

The tax charge in the year was £1.4m (FY22: £1.3m), representing an effective tax rate of 18% (FY22: 24%).

The weighted average applicable tax rate for FY23 was 19%. The difference between the applicable rate of tax and the effective rate is largely 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%).

The weighted average applicable tax rate for FY22 was 19%. The difference between the applicable rate of tax and the effective rate of 24% was largely due to the following:

· 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 5.9%);

· Availability of R&D SME enhanced deduction (decreasing effective rate by 0.3%);

· Impact of the super deduction in relation to fixed asset additions (decreasing the effective rate by 0.3%); and

· Other differences, such as prior year adjustments, disallowable expenses and overseas tax (decreasing effective rate by 0.3%).

The 2021 budget proposal increases the corporation tax rate to 25% from 1 April 2023. This was substantively enacted in the Finance Act 2021 on 24 May 2021. 

Earnings per share

Basic earnings per share was 6.75 pence in the Period (FY22: 5.19 pence) and diluted earnings per share was 6.42 pence (FY22: 5.00 pence), with the increases in both metrics reflecting the strong performance in the year.

iTrinegy acquisition

The acquisition of 100% of the issued share capital of iTrinegy Ltd (together with its wholly owned subsidiary iTrinegy Inc.) completed on 12 April 2022 on a cash free, debt free basis, for an initial cash consideration of £2.5m, fully funded from the Group's free cash. An additional £0.5m was paid to the vendors in exchange for them leaving all available cash (£0.7m at acquisition date) within the acquired business. The net cash effect of the transaction was £2.3m. A detailed summary of the transaction is set out in note 13 to the financial statements.

Up to a further £1m is potentially payable to the vendors subject to the achievement of revenue growth targets from the NE-ONE product line in the year ended 31 March 2024. This "Earn-Out Payment" would be paid as a combination of cash and new shares issued in Calnex Solutions plc.

The Earn-Out Payment in relation to those iTrinegy vendors who have remained as employees of the new Group has been treated as remuneration, with the fair value expensed to the income statement (using current forecasts, the Earn Out Payment is assumed to be paid out at 50% of the maximum). This results in a charge of £0.3m related to post acquisition service, and this will be charged to the Income Statement over the vesting period. In the current year, £0.1m has been charged to administrative expenses within the Income Statement.

£1.3m of a fair value adjustment has been calculated as valuation of the intellectual property associated with the acquired technology, and customer relationships (offset by a £0.3m deferred tax liability recognised in relation to the fair value uplift on the intangibles balance). The goodwill balance of £2.0m represents an accelerated R&D development timeline, cost and sales channel synergies expected from combination, as well as intangible assets not qualifying for separate recognition, such as workforce in place.

£0.2m of acquisition related expenses for legal and professional fees, as well as £0.3m amortisation of acquired intangible assets have also been charged to the income statement in the year.

Cashflows

The Group generated cash before acquisitions of £6.0m in FY23 (FY22: £2.7m), reflecting the solid trading performance and working capital movements in the year.

Net cash from operating activities was £11.1m in the year (FY22: £7.4m). Working capital movements represented a cash outflow of £0.4m (FY22: £1.5m), predominately as a result of the timing and volume of shipping and invoicing to customers.

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 £4.5m (FY22: £3.9m), reflecting the planned growth in the R&D team as projects resource demands increased.

Cash spend on financing activities in the year was £0.6m (FY22: £0.4m), largely representing dividends paid in the year of £0.8m (FY22: 0.3m), which included the final dividend for FY22 of 0.56p per share, approved at the Company's AGM and paid on 30 August 2022, and the interim dividend for FY23 of 0.31 pence per share, paid on 16 December 2022. This was offset by £0.4m of cash received for the final tranche of the Scottish Enterprise government grant, which came to the end of its term in January 2023. The remainder of the cash spend on financing activities reflects payment of lease obligations.

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 is accounted for as a cash outflow within investing activities in the consolidated cashflow statement for the year ended 31 March 2022. It is added back in the non-statutory cash flow reconciliation above as we regard this as cash generated and owned by the Group in the year.

There is currently no debt on the balance sheet, leading to no borrowings related cashflows in the current or prior periods. Closing cash, including fixed term deposits, at 31 March 2023 was £19.1m (31 March 2022: £15.4m).

Dividend

The directors are proposing a final dividend with respect to the financial year ended 31 March 2023 of 0.62p per share. The final dividend will be proposed for approval at the Annual General Meeting in August 2023 and, if approved, will be paid on 30 August 2023 to all shareholders on the register as at close of business on 28 July 2023, the record date. The ex-dividend date will be 27 July 2023.

Ashleigh GreenanChief Financial Officer22 May 2023

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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