Calnex Solutions plc (CLX) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Calnex Solutions Plc interim results investor presentation. [Operator Instructions] Before we begin, I'd like to make the following poll. I'd now like to hand over to Thomas Cook, CEO. Good afternoon, sir.

Thank you. Good afternoon and good afternoon, everyone, and thanks very much for joining Ashleigh and I today, and we'll go through the results from H1 FY '23. So before I do that and kind of hit the results, let me just take a few minutes to step back over who Calnex up is and what we do just for anyone that's new to us. So Calnex develops test solutions for the telecommunications industry. We primarily make test instrumentation, so it's instrumentation that's used to verify performance of critical infrastructure within the telecoms industry. So we've been successful at selling to all the subsets within the telecoms industry over the years and been successful to establish a global market as well in all corners of the world. And to date, we've sold product in 68 countries around the world and through to just under 700 customer sites. In terms of where we fit in the whole life cycle in telecom, the main area we focus on is what we call R&D design validation, conformance testing. So this is when our customers are developing new pieces of equipment that are going to be used in the new networks in the world and they have to really put that new design through its pieces to make sure it meets the specification they are promoting to their customers, but also make sure that it complies to the various standards that our aim before equipment can be deployed. So this is very much an area where it's a high -- it's a low volume but high-value equipment and our equipment very much is used to enable their new revenue streams. So if they design -- our customers, the R&D engineers can prove their design quickly. Quickly, it means both short time but also robustly that they know it is well -- the design will work rightly, then they can get it into manufacturing, which means you start a new revenue stream. So fundamentally, our equipment allows our customers to generate new revenue streams in a timely manner. We also look at the high-end maintenance market as well, not so much in terms of installation and first level maintenance, which today in telecom networks is a lot about just simple back-to-back tests, simple continuity test. It is more of it once there is a problem, that's something to do with the network. They need to look into the network to understand what's going on to allow them to understand how they can trace the problem. And that ties into the deep insight that we give the engineers, our customers back in the R&D phases as well in terms of giving added value to our customers. So our customers sets really fall into 4 broad categories. First of all, you've got the equipment -- telecom equipment vendors, the top left. So these are the big names that you've heard of, like Nokia, Ericsson, Juniper, Huawei, Cisco. So this is very much into that R&D design phase where the seller R&D teams are using our products to qualify their new designs. And that represents roughly 55% of our business. Then we've got the network operators, bottom left. These are the BT, AT&T, China Mobile, the world that build their tech networks. They represent a small part of our business, more like 15%, but a key part from a value chain, from the point of view, when they are doing testing of new equipment, which would be the equipment from the equipment vendors, the vendors want to ensure that they test it in the same way if they're using Calnex equipment to prove it, then it encourages the vendors to buy Calnex equipment to prove as well. So a little bit 15% of our business. And then the above part of the telecoms chain is that the component manufacturers. So these are Intel, Qualcomm, Broadcom that make very sophisticated chipsets that they sell to the vendors to build into their products. They represent single digits of our business, more like usually 6%, 7% of our business. Small part but an important part because, again, it's really close like the whole [ supply ] chain there that we sell to the component people as well as the vendors and the operators. And the final group, which is an interesting group are the enterprise hyperscale. So to us enterprise, we are talking about very large enterprises that run their own networks or the hyperscale, Google, Meta, Apple as well that actually run the data centers. And we'll talk more about them how these are an opportunity for us in the future. And today, that represents now 20% of our business of 22%, 23% of our business. So that's really the customer set that we sell to. So let's talk about H1 and how we get on in H1 this year. Well, it's really been a robust financial half for us, and we are really pleased with where things have gone in the period. There's a lot of kind of macroeconomic effects happening at the moment from as we see kind of the way the financial effects of inflation, et cetera. It doesn't seem to have affected us too badly as the component shortage issue, which we'll talk about a bit more that we've managed to navigate the way through. So we are pleased that we've actually delivered a healthy set of results in that sort of environment with 38% growth in revenue and 34% growth in profit. And year-on-year, our cash balance has gone up and we've decided to increase our dividend this year by approximately 10% up to 0.31p as the interim dividend that will be paid in December. We've also managed to protect our margins, as you'll see when Ashleigh gives you the results. We've been able to put a price increase in our products that the customer base has accepted and also managing costs internally to ensure that we've kept the margins up. And [ wireless ] short-term issues that we talk about, we still feel that the long-term growth drivers are in our business and are strong in our business, and we feel confident as we look forward to through the year that we can continue and meet the guidance set in the market space. So if we kind of look at some of the highlights, the kind of key things that have been happening over the last 6 months. First of all, the kind of macroeconomic effects, the biggest thing that's affected us is, it's affecting every technology company out there is the shortage of components. What I would say is it's getting better. It is definitely not bad. It's not solved and it's not better. It is getting better. So some of the worst scenarios we had maybe 6, 9 months ago, is where we, for example, all of those we get canceled at the last moment to us for components, that seems to have stopped. So there seems to be a level of predictability coming back in, although we're still getting pretty long lead times from component suppliers. So we feel that we're getting into a better place. It's still going to be a problem. We do hope that through this next period, some of the excess backlog that we've been carrying to do for the last few periods, simply down to the fact that we can't get units to ship will start to reduce, but we still expect there'll be an element for us by the time we get to the end of this financial year. But we do feel as if we're starting to see a light at the end of the tunnel, but nobody is expecting us to come out of it quickly. It will still be a major focus for the operations team, working with a contract manufacturer to manage the shortages and our teams are pulling the R&D team in where we have to go and buy alternative components to make sure these alternative components are a true drop-in replacement and/or if we need to do minor changes to the software, whatever that we're doing them to make sure we can meet our customers' needs. The other thing that's happened is inflation across the world that's happening. We're seeing wage inflation, and we have been hiring. But through the hiring, we've seen that it's not quite as bad as the headlines have been putting out there. We have been successfully hiring people. We are having to pay slightly more than we have paid a year ago to get the same people in, but it's not -- it's definitely manageable and it's definitely -- we feel it's within the plans that we have for increase in salaries as we go into FY 2024. So again, we feel it's a manageable situation where we are at the moment. And as I mentioned, we have been able to put our pricing -- a less pricing, to say, into the market as well. So that's going to balance and to ensure we maintain margins. At the start of this period, we acquired iTrinegy, a company based in Stevenage. We'll talk a little more later on about what we do for us. But really, the focus through this period, as we explained in our last broadcast in May was about really the integration bringing them into the fold making sure they're well settled and the team are brought in, but also to build out the team because we felt that really we needed more people in our R&D team, both engineers, verification engineers as well to basically have a more systematic approach to product verification. And importantly, what we wanted to do through this first period was really build out a route to market and understand how to really maximize the potential of this product. So really, the challenge in this period was to understand how we're going to get a broader footprint to the market and a broader customer base. So we've actually signed new contracts with distributors in the U.S. that are starting to work now. We've actually increased -- we have brought 2 business development team members on to the Stevenage team. One is already here, the second will start in January, and that's really to have a stronger bandwidth to basically support our channel partners and to obviously support customers out there as well. So everything going to plan there. We said this year, we were setting realistic expectations looking for more growth next year because we wanted to make sure we got the integration right. We've got the sales channel right before we started pushing up to see what we can achieve with this product. The data center opportunity continues to be something that's a key opportunity and a strategic focus going forward. We -- you'll see when we come to our product slides. We've got a new product coming out that's better aligned to the needs of the data center market across Sentry, but we've also been continuing to build relationships with the hyperscale customers. I think we've talked about before. These guys can be a bit tricky to work with at times, you need to really build relationships with them, getting the insight and it's a long process, but it can be a valuable process if it works. And so we're continuing to do that and making good progress at getting in understanding the needs and using our expertise to show how we can add value and we can help them understand how they can enhance the effectiveness of the data center by bringing in accurate time across that. So again, we're pleased with the progress that we've made there. And last by no means least, in the telecom world as we reported, there's a lot of new standard activities going on, in particular, the O-RAN, which has created a new set of standards that's trying to break the inner network into kind of smaller blocks that allow more companies to come in and create greater competition. More companies mean more companies need to do more testing, which is good for us. And so we've continued to work that opportunity and we're seeing good progress. What we've also seen is that in the standards world, which has always been a key part of our business, and in the early days when I started the company, I was a guy who went to the standards for a few years. We've had another well countries in that world. [ Tim Frost ] who was our lead standards person. Then he came to the point that he retired this year and we've hired a new person, [ Stefano Ruffini ] based in Italy. [ Stefano ] is really well known in the standards community. He leads, he chairs one of the key groups within the IT but really, it's a good time as often, we were sorry to lose Tim. But quite often, when these things happen, it's a chance to review what you're doing with -- in that area, and we've realized that from the standards activities, there's a lot happening in a lot of standards bodies that we need to have a better visibility. Not that we're necessarily involved in all these things all the time, but a visibility and awareness so that is certainly to start kind of a conformance testing in areas that affect us that we are aware of that and then can get involved in both the conformance along the lines, a bit easier for us to engage with, but also just see that opportunity earlier as much as anything. So [ Stefano ] has been with us a few months. He's already started to show his value in the organization, and we're going to build that team more as we get settled in and we see what we need to do to keep really good connections with the industry, which is key for our whole fundamentals of our business model. So at that point, I'm going to hand over to Ashleigh, and she's going to give you a bit more detail on the financials.

Thanks, Tommy. So before I take you through the next slide, I thought it would just be useful to briefly remind you of our revenue model. So Calnex generates revenues through the sale of bundled hardware and software as well as software support and extended warranty programs. A typical customer will purchase one of our hardware products with a number of software options included at the time when this is invoiced as 1 bundled sale to that customer. They can then come back for upgrades or additional options that are added to the existing hardware that they've already purchased through the provision of a license key. And we sell these as standalone software sales or upgrades. Bundled hardware and software sales pricing can differ for each order as it depends on the hardware product being purchased and the numerous software option/choices each hardware product can offer. And each customer purchases different combinations of software options for each hardware product depending on their need. As a result of this variability, the average price per product can vary from order to order, as you might expect. So that revenue is recognized for and dispatched if it's the hardware item or delivery of the software license key if it's stand-alone software, and that makes up about approximately 90% of our total revenues. And you'll see that from the graph on the income statement coming out shortly. Each of our products comes with a standard warranty period, which can be extended for an extra fee, and we also sell software support programs and that makes up the other 10% of our revenues. And that revenue is recognized over the life of the product that's purchased because [indiscernible] for a number of years. And as you've seen from what Thomas showed you on the previous slides there, our customers are some of the largest in the industry. And over the last 3-year rolling period to March 22, if you're looking at our latest annual report for the last year-end, our top 10 customers contributed 50% of our total revenues. And in addition to that, the average length of relationship we have with those customers is 10 years, which just helps to demonstrate the repeat nature of the business that we do with them. So we see customers coming back to order from us frequently as they might want to either add those new software options or upgrades that I was just talking about or they might want to buy multiple bits of kit for multiple sites. They might want to grow their testing requirements or they might want to move on to some of our newer products and functionality as we really send to the market. Repeat revenue demand is a metric we measure across our core customer base as well as the top 10. And again, if you're looking at our annual report, a 3-year -- the 3-year rolling profile shows that repeat revenues generated were on average 79% of total revenues. And that metric has continued, while our revenue-generating customer base has also grown. So our revenue-generating customer base is 139 in FY '18, and it is now 233 as of March end '22. And that repeat change has continued into this half year as well. So just moving on to the performance in the period. Just to give you a flavor of how our revenues have been split. So we experienced growth across all our geographies in this half year. Our Rest of World region saw a strong revenue in order performance with [indiscernible] in particular, contributing to the robust growth in the period. North Asia saw healthy growth in revenues and orders compared to the prior half despite the challenging backdrop of the U.S.-China geopolitical tensions, which remain in the region. And the Americas revenues also experienced strong growth in the period. Revenue from the hyperscale order we booked in FY '22 recognized through this region, and the growth is bolstered by these revenues. Shipments for this order will span over H1 and H2 as was planned. We also experienced healthy growth across our product lines. Lab sync growth has been driven by the time for release as well as underlying growth in existing platforms. Network sync, which includes our Sentinel and Sentry products has performed very well as a result of the diversification of the customer base within this product line, which now includes the data center opportunities that Tommy was just talking about. Cloud & IT saw good organic growth from our SNE product sales as well as incremental growth to our newly acquired product, NE-ONE. So just on to the income statement itself. Revenue as you just heard in the first half of the year was GBP 12.7 million. That's a 38% growth from last year's revenues of GBP 9.3 million. The drivers behind that are very much the regional and product line performance, as I just mentioned. And additionally, we did see an incremental beneficial foreign exchange effect to the total group revenues as a result of the strengthening of the U.S. dollar over sterling in the period. 80% of our revenues are U.S. generated and approximately 1/3 of the revenue growth on the previous half year came from these positive currency movements. Sterling has started to strengthen against the dollar in recent weeks. We don't anticipate this currency benefit to be extrapolated for the full year. In addition, we closed the period with a much higher backlog -- order backlog than we would usually carry as we continue to manage the component supply chain delays and has it not been very supply delays, we would have been able to unwind this order book backlog a lot quicker. [indiscernible] designed on the supply chain delays easing and expect that order backlog to begin to unwind over H2. Gross margin in the half was 76%, as you can see from the table, and that's in line with the prior year margin. And just as a reminder, that gross margin is net of commissions payable to our channel partners, and it can also fluctuate 1 to 2 percentage points either way just depending on the mix of our products and the mix of hardware and software bundles shipped. It's because of the high value, low volume model that we have. Tommy was talking about before as well, we saw a rise in costs as a result of increases in component prices and general inflation over the period. However, our discussions around increasing pricing with our distributors and our customers will help us maintain those margins going forward. So just moving then to underlying EBITDA just now before, I then talk about the cost components within that. This is -- just as a reminder, this is EBITDA stated after charging R&D amortization to that line. And that is because our R&D amortization is such a large component of the P&L, we pulled this out as an alternative KPI, just to ease understanding of our P&L and its drivers. So underlying EBITDA grew by GBP 1 million against the last half year, and that was driven by the strong revenue performance initially. The margin was 27%, which is also in line with the prior year. And despite inflationary increases and external cost pressures, we've been able to continue our planned investment in our teams and infrastructure to support the growth of the business whilst also maintaining those profit margins. So the largest component of underlying EBITDA costs, as you can see, is administration costs. Those admin costs in this table here exclude depreciation and amortization just for -- just because they're further down the table. They totaled GBP 4.7 million in the half year, and that was an increase of GBP 1.4 million on the prior half. And those increases include those planned investments that I was just talking about around the management, sales and support teams across the business, which are very much in line with our growth strategy. We also saw an expected increase in travel costs as COVID-19 restrictions have been lifted across the majority of our regions. And we also have a small, again, expected incremental increase in overheads relating to the Stevenage site after our acquisition of iTrinegy in April. There's a slight offset -- a partial offset in savings from foreign exchange translation costs there. There is a couple of things to put like from the acquisition and admin costs. You've got GBP 0.1 million one-off legal and professional fees, GBP 0.1 million, sorry, of legal and professional fees for iTrinegy acquisition sitting in those admin costs just now. And then another point with GBP 1 million relating to the accounting for the iTrinegy earnout, which will stand for this year and into next year. The majority of our overhead costs are sterling based with our -- with the exception of our overseas sales teams. And as a result, the group's overhead cost base has been affected slightly by FX movements because of the overseas element, but hasn't been as material as the beneficial effect to the rates. And as you know, we capitalized 100% of our R&D costs and amortized these to the P&L over 5 years. So amortization of R&D costs is shown separately here in the period, it was GBP 1.6 million of a charge, and that's versus a cash cost of GBP 2.3 million, which you'll see on the cash flow in next slide. An increase on the prior period is due to the continued ramp-up in R&D headcount to support our growth strategy and our project plans. Profit before tax was GBP 3.1 million, as you can see. And the margin for that was 24% compared to 25% last year. And that margin differential on the prior year is driven by the increase in intangibles amortization, and that's about GBP 0.1 million for this half year, as we brought on our new intellectual property intangible into the balance sheet as part of the iTrinegy acquisition and that balance sheet number was GBP 1.3 million that was added. And we expect that PBT margin to align back to market guidance by the end of the year as the order backlog starts to unwind into H2. The effective tax rate was 21%, which is very much in line with where we thought it would be, what we have aligned our effective tax rate calculations with the planned increases in the U.K. corporation tax rates from 19% to 25%. And we've measured that calculation in line with how our deferred tax assets and liabilities drop through from our obtaining difference perspective. Our earnings per share still get through with increasing -- increases across both our EPS metrics and that's coming from a very strong performance in the period as well. So just going to the cash flow. As you can see from this next slide, although the group saw an overall GBP 0.9 million cash outflow in the half year on the bottom line in the cash flow, this total cash flow figure includes the net GBP 2.3 million effect of the acquisition of iTrinegy, which demonstrates the strong underlying cash generation in the period. So cash generated before acquisitions was GBP 1.3 million in the period, and that compares to GBP 0.9 million in the prior period, and that reflects the strong P&L performance in this period. Net cash from operating activities was GBP 4.2 million. The main things like there is working capital movements. We're an outflow of GBP 1.3 million in the half. And that's predominantly as a result of the timing and the volume of shipping and invoicing to customers. We had a large shipment month in September. We're seeing [ proven interest ] in debtors for the half, but we're already seeing the cash coming in from our customers for these shipments as our customers are very, very good peers. Just moving down this capital summary table, just another couple of things to pull out before we talk on the acquisition. Cash spent on R&D activities I talked about a minute ago. That's a capitalized element there. And that's, again, as I mentioned, amortized over 5 years to the P&L. And then the dividend cash outflows, that represents a dividend that we paid in August. That was our first ever final dividend, which you can see is coming -- came in just under GBP 0.5 million. And then just moving down to the last part, the cash flow. And just a quick summary of the iTrinegy acquisition. So we completed this deal on the 12th of April 2022, and that was on a cash free, debt-fee basis for an initial consideration of GBP 2.5 million, and that was fully funded from group's free cash. And the net cash effect of the transaction was GBP 2.3 million, just taking into account an element of cash that was left over on the balance sheet of acquisition. And we acquired 2 entities, iTrinegy Limited, together with its wholly owned subsidiary, iTrinegy Inc. And as I mentioned previously, and there's more detail on this in the RNS. The fair value adjustment that's been calculated for the intellectual property that's been brought on as part of that acquisition is GBP 1.2 million. That's a new addition to the balance sheet. And another new addition to the balance sheet is GBP 1.6 million of goodwill left over as part of that calculation, which represents the accelerated R&D to development time line and cost and sales channel synergies that we expect to come from the combination of the 2 entities together. And then just moving down to the cash flow here. So closing cash at the end of the half, and that includes cash that we keep on fixed-term deposits as well, was GBP 4.4 million. That just gives us a robust cash balance to take us into the second half. So in summary, before I hand back to Tommy, a strong P&L and cash performance for the first half of this year, the growth across all regions and product lines with some additional benefit gained from FX movements. We continue to manage the supply chain delays with higher-than-normal order backlog. And looking forward into H2, we expect that order backlog to start to unwind. And together with our pipeline of orders, we expect continued strong performance for H2.

Okay. Thank you very much, Ashleigh. So let's just take a few minutes and have a look at some of the kind of more strategic or the wider aspects that are affecting the business. So first of all, the market, I've picked up 3 quotes here I've taken from the trade place. The first is not so positive. You can see that actually suggest in the whole telecom market. In the 6-month period, first 6 months of the year is actually not growing as quickly as we [indiscernible] 7%. But actually, by the second quarter, the bit that we actually focused on, which is the build-out of the mobile infrastructures continuing to grow very strongly. And I think you've probably seen if you've looked at any of the releases from other test vendors in the sector, they've also kind of put a lot of cautionary there. I think it would be folly to assume that the macroeconomic effects that are happening in the world at the moment, the inflation effects, energy prices, that we can be completely immune to these. So it makes sense that we're all keeping an eye on what's happening on the ground and where that is happening. We feel that how can I, in particular companies, the companies that our customers announcing cuts, we haven't seen any impact directly on the programs that actually drive our business, but we're always keeping an eye on that. And I think the key thing for me is that underneath all these, the fundamental drivers that are driving the telecom market has not changed. The need to still lay the desire to grow out is still there. So there may be some minor bumps in the road, it feels to me like there are minor bumps in the road and it's just a [ fact of life ] these things will happen. But we kind of -- we do believe at the moment, we are in a good, strong position. And we obviously looked at from a business point of view, we're in a strong position that we can ride through anything that happens to come in the near term. But the medium, long-term outlook still looks strong for us. The data center market is exactly the same, continuing to grow. Again, there's been well-publicized reductions in headcounts and people at Meta and some of the other big players. I think it's too early to see what's happening there. From what we can see at a distance and it is arm's length distance, it doesn't seem to be affecting the parts that we have, which is the infrastructure build-out. But again, if you look at the demand, the need for cloud computing is definitely there. There are most companies getting into that sector. So I doubt that there's a fundamental shift that's happening. So we feel that the overall market remains strong for us. There's always bumps in the road, but the fundamental drivers remain strong, and we should be confident that we can continue to drive forward with our fundamental strategy. If you look at our product program, it's pretty much the same as you've seen before. There's 2 new things that we want to talk a little bit about there. I guess before I do, we will continue to release as we do in all our programs where our continuous release process of adding new functionality, new capability aligned to customer requests and/or things that are appealing and standards and recommendations that we offer capability for. The 2 new ones are the Sentry product that you see in the middle under the network sync and also the NE-ONE on the right-hand side, which is a product we acquired from the acquisition of iTrinegy. So in terms of the Sentry product, actually from a technology point of view, there's a huge amount of leverage of the technology of the Sentinel into that product. Because fundamentally, they're trying to do the same sort of tests in the telecom world which Sentry is in that, it's out in the field, literally walking about, I would say, doing testing whereas obviously in a data center, you're inside the building. And often, they want the equipment built into a rack. So we've changed the form factor, so it's more aligned to what is actually needed but it's more than just a new set of [ clothing ]. Again, because different sets of customers have different requirements in terms of the number of ports they want, the configuration of different interfaces, the telecom guys wants things slightly different to the data center. So it makes a lot of sense to create a different variant of the product at clearly is aligned to what the data center people want, and we can foster these positive discussions in terms of what they need in the future, and we've got a platform that actually aligns and can go to where our customers need to go in the future. So this product, we've just literally launched it in the last few weeks. And next year, we'll be pushing it and we'll continue to engage with the hyperscale customers. But really use it as a platform to try and engage with a lot of the Tier 2 data center companies out there to understand what their need is in the terms of timing and whether there's an opportunity with these Tier 2 people as well as for the Tier 1 players. And then we've acquired the NE-ONE product from iTrinegy earlier in the year. And just to recap, we have multiple network emulators. And through the period, we've been able to really sharpen up sales collateral information to really position these products clearly beside one another. The product we had at the bottom, in the past, we're really in that people building infrastructure. So these are people that are making switches and routers that will then be used to build networks. And when you speak to these customers, they want to know which interface this is for. This is for 1 Gig, this is for 5 Gig, this is for 100 Gig. Of course, our bandwidth can stress test each of these interfaces to what sort of combinations of packet sizes can you test. So they've got very specific needs. Whereas the iTrinegy product is more of a testing applications. There's people that are running applications across the infrastructure. So these can be your banking app that you use to do your banking, it could be gaming apps, it could be financial apps or any sort of app, we are -- they really care about customer experience. And I think the gaming one is always one we use because it's a kind of easiest to get your head around. If you're sitting and playing the game or -- if you're young and you're sitting and playing a game and you're playing against people in New York and in Tokyo and you feel it you keep losing because they got better network performance than you're getting. There's one -- there's only one thing you do and that's leaving, go and find another game to play. So these guys obviously need to prove that it doesn't matter where you're sitting in the world, what you're doing, doesn't matter what's happening with the network. And again, they don't know what the network is being used to run your application on, at least am I clear what speed our interface is so far it's going, how many routers and switches it's going through. So they want a kind of more conceptual view of what's happening on the network, what the kind of distance between places, what the latency is, the bandwidth that's being used. So the way it's presented to the customer and used is fairly different. And that's what our product is doing. It's very much aimed at a completely different set of customers. It seemed that people are building applications to run implied networks as opposed to the infrastructure people [indiscernible] building the infrastructure that cloud computing will be built on top of. And so we're really kind of through this first period focused on how do we get that -- how do we get to these new customers because there are a different set of people, and we've been dealing with before. And now we've got a right sales partner, so we've got right collateral to support them because it's not only ensuring that the customers are clear on which product they're after, but our sales partners are absolutely clear as well, and they don't take -- confuse the customers. And we've had a lot of good positive progress at this period. And we feel, as I mentioned, that we have -- we've hired more people into the business development team. We're signing contracts with new partners in the U.S. as we go forward into next year in a stronger position to really push this product to the market. We've also kind of picked a couple of tests -- of kind of case studies here to really explain to you how we build our customer base and build our opportunity. As we talked about how -- when we sell a product like we've shown in the left-hand side, our lab sync product, we continually work with that team to sell upgrades, additional units. But also there can be other dimensions of opportunities. So once you're in here as we should here where we're in, one of our Tier 1 customers that we've used for many years, I've worked with over many years and supplied with a product of many years. Through that engagement and close customer engagement, we actually find that a team that was working with them, another group of engineers actually needed a network emulation product. So we're able to go in and work with them, get an introduction -- sorry, an introduction to the other team and actually then by selling the product, showing them the value get another sale. But then also, we find that our customers get asked by their customers once they deploy the equipment, hey, should they test it once it's deployed. And so again, by having strong relationships with the equipment manufacturers, then they often will actually recommend the equipment to the network operators, you perhaps want to look at Calnex. At the end of the day, we need to go and convince them that that's a product they need, but we get recommendations. So there's multiple dimensions, say, we can expand the market by going sideways as well as going forward. The second one on the right-hand side is another example of where we were able to do that. We work with a software development company that we're developing a product for kind of a cloud type application and they need a network emulator, we're able to successfully sell them SNE. We spent time working with them to make sure [indiscernible] get the maximum potential of our SNE and obviously, hopefully, by follow-on unit. But through that, we realized that they actually were planning to introduce their equipment and claim standard conformance to the O-RAN standards right there or recommendations. Through these discussions, it seems clear that they actually were going to wanting to claim conformance to the synchronization elements of these standards. And so we actually help them how to figure -- how to do that because it's not straightforward. And actually through that discussion, realize that they actually needed to buy a lab sync product to actually prove performance of the synchronization part of that product. So again, you can see by that customer intimacy spend and time with their customers, it actually delivers value in many dimensions to stay in the road. And that's really what our business is built on, is building success with customers and continue working with them to get follow-on business. So our strategy is still the same as what I've told in the last few times. It's a 3-pronged strategy here. Our 3-pillar strategy continue to focus on the growth engine that's the build-out of the mobile network or a 5G as it's sometimes refer to and continue to look for opportunities in there driving the products we have there, but always looking for other dimensions where we can either come up with new products or new aspects of our products on new sets of customers within that sector. We also continue to focus on the build-out of the cloud computing both on the infrastructure side, working with the data center companies to provide that timing capability to the data center infrastructure, but now with anyone working with companies that are actually moving their applications into the cloud and providing applications that are going to run in cloud computing in the future. And hopefully, as that needs expand, we can expand the business. And we continue to look for M&A opportunities, whether it's partnerships or acquisitions. Nothing's changed, again, as I have described before, there are not thousands of these companies out there that we would look at, but there are a number of them. We've brought a new person on board that we've worked with in the past. He used to work with [indiscernible]. He was our relationship manager. He took time out for some personal reasons. He wanted to come back in and we've been working with him and he's really tried to create a more systematic approach to looking at all the companies out there that we can potentially continually looking for the company that's got the right culture, the right position, the right product and right opportunity to enhance what we are doing to get new business, new business being a new set of customers or something in addition to sell to the people that we are at the moment. And underpinning all that is to continue to carefully manage our cost structure, managing inflationary pressures we've seen out there and managing obviously the supply chain issues so that we can continue to have a healthy financial plan and meet our customer needs. So bringing all that together and closing off, we do look forward to the end of this year with confidence. We come in to this. We have had a good first half. We're pleased with what we achieved, going into the second half with continued strong order book. It continues to be stronger than we would want it to be because of the component shortage, and we do hope to see that starting to unwind through H2 [indiscernible] unwinds. Well, it really comes time to much we can get the components and get our lead times, but it's starting to go the right way. We do believe that the underlying growth engines in the industry are still the same as they are. There may be bumps in the road in the near term, and we'll keep an eye and manage that. But we feel we're in a strong position, good relationships, good spare customers that we can manage through these situations. And we continue to look for opportunities to expand our business, and we'll continue with our hiring program, as we've set out in this year and next year to build the team and to scale up for hopefully building the business moving forward. So at that point, I think we'll move to the Q&A session.

Tommy, Ashleigh, thank you very much for your presentation. [Operator Instructions] But just for the company to take a few moments to review the questions that are being submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. Tommy, Ashleigh, can I just ask you to read out the questions and give response to that just appropriate to do so, and then I'll pick up from you both at the end.

I'll start off. So just to start with Tom's question as to how have you managed the high inflationary environment, have you managed to increase pricing to your customers? I hope that was answered by what we talked about, I think you put that question quite early into the presentation, but just to -- just to go back on what we said in the presentation. So we worked very closely with our main distributor, Spirent, and in discussion with our customers to raise our prices at the start of this half year. And it was done very much in discussion with everybody's consent. So -- and that effect has started to come through. But with the sort of the relationship from our order to revenue flows, we'll start to see that come through a lot more into H2 so that will help maintain our margins. And then Stephen's question is all your manufacturing contracted? Do you have any financial interest in your subcontractors? And how is the relationship maintained in price? So answer to the first question is yes, we have an outsourced manufacturer for our product in -- for all our products, excluding that anyone that outsourced manufacturing arrangement is in precise, which is 40 minutes away from our main [indiscernible] site. For anyone, we've kept the existing contracted manufacturer arrangements that iTrinegy had, and that's an outsourced manufacturer based in Bristol. So everything is subcontracted. We don't have any financial interest in any of our subcontractors. And the relationship is very much -- so the main subcontractor we have, we've had since the beginning of Calnex. The relationship is a very close one. It's a daily interaction with our outsourced manufacturer and daily conversations on demand plans and future forecasts, et cetera. And pricing is very much discussed like that as well. So pricing is -- any price rises that are coming from our outsourced manufacturers will be discussed on a very regular basis and will be negotiated between the 2 teams.

I can pick up a couple of here, Ashleigh, so there's a couple, kind of a related guy asked through our closest competitor to us. And Freddie asked, I guess, our biggest competitor for the hyperscale data center thing -- products is the hyperscalers themselves. If so, any feedback on the success? Let me just jump back to the slide on our products because it's easier when that's up in front to just talk about this. When you look at our competition, it's actually different for each of the product families. So if you look at the lab sync product, in the product on new or the high accuracy product, we are very dominant in that market. There really isn't anybody close to us. We do have a competitor in China who we've managed to keep [indiscernible] in China, and they haven't really been successful at sale outside of China. We really compete against Paragon-X, which is almost our kind of previous generation platform that we still sell and get a lot of repeat purchases for. But in terms of the high accuracy in the Paragon-neo, they haven't matched that. They have talked about 25 gigabits as 1 interface, but not really talked about the other interfaces. And then our market, people tend to fly very early when they've got new functionality coming. So we feel we're still in a very strong position there, and we continue to support other interfaces and potentially high-speed interfaces going forward. So we're in a very dominant position there. If you look at the Sentinel product, in terms of that maintenance product, again, I would say we have no competition and all our competitors say they compete against us. So what am I talking about? What I'm really saying is that there is a lot of installation tests, which are really more about multi-buffer tool kits that can do all sorts of technology but with limited capability. So people that have that team to tell the customers, no, no, no, you don't need a specialist. You've got enough [indiscernible]. And in the sales process, we need to explain to them why we need a specialist tool kit for -- while doing synchronization. And we've been successful with a number of customers there and as we move forward and the complexity of the -- in the kind of topologies of mobile networks with more and more radio heads, both the large, macro cell, base stations you see at the side of the roads and what we call small sales, which you can imagine is like a WiFi router sticks on the side of a building. There's a lot more opportunity for interference and that whole concept of needing something specialists to manage this. We hope will actually be valuable and allows to expand our footprint. When you go into the kind of cloud 19 network emulation situation, there are a number of emulators out there. We are the only company that have a full range of emulator as to whether you're working in the pure software domain, you're working in high complexity domain or you're working in high accuracy domain, we've got a different emulator that can actually meet your need. So we have a very strong competitive offering that we can tune the product to exactly what the customers need. And then lastly, in Sentry, Freddie asked about the hyperscalers they do it themselves. [indiscernible] claims themselves a tough challenge through these boys. They can and do like to do things and it's almost like one of these things where if the market and the opportunity is way too big, they will just do it themselves. And we did have one of them, which I would name who we thought were an opportunity. They needed a very simplistic approach to what they were going to do. And we thought we'd sell them to end up to say to do themselves. But we didn't take the offer anything. We basically said, "Okay, well, we'll work with you, we'll help you do -- we'll help you understand". We believe that our approach is too simplistic and they'll come back to us. So it is about getting in. It's building relationships with these guys, showing the actual value you can deliver and why it's better. They trust you -- I trust an outsider to do or rely on an outsider unless you trust them rather than do it themselves. So it can be a hard sale with these guys. And when they want to move, you need to move fast and you need to be flexible. So they're challenging guys to work with, but they're obviously, there's rewards that we have by being successful. Do you have any other questions Ashleigh?

Yes, absolutely. So [ Fahad ] asked, in an earlier RNS, it was said that you expect to be an H2 weighting in terms of performance, do you still expect that to be the case? And that is, yes. So we've always -- in times when the supply chain is a bit more calm, we always do have an underlying weighting up from an H2 perspective, from an order perspective just because of the customer seasonality for me, it's a kind of 55-45 split H2 to H1 usually. In this current period and with the order profile that we have this year, it's very much to an H2 weighting in line with what we essentially previously said, so the clear answer to that one. And [ Malhose ] asked, can you put any numbers on size of your order backlog in relation to order intake and execution? So we don't publish our number for backlog or order pipeline. But just to give you a sense of where we're sitting right now compared to what we would usually sit but -- so our natural, but we always carry a natural backlog. Our backlog usually spans across about 1.5 to 2 months' worth of revenues. So we're sitting at a backlog that's a lot higher than that, so more than double of that number. And that's all due to the supply chain delays which we should hopefully see unwind over -- or start to unwind over H2.

Yes. A couple of questions. [ Melville ] again. A second one in here, an interesting question. A key attraction of Calnex, are your obvious high standards, and I imagine corresponding with strong company culture. Do you have a formal program for communicating these matters to new employees and importantly to new acquisitions? Yes, absolutely. And I think especially these days where it's hard to get people, we never forget that we've got a lot of talented people in our organization. And quite frankly, they can get a job anywhere to work if they wanted to. They choose to sit -- to raise our problem to -- or our challenge to make an environment that they wish to see and be committed to us. And you should never rely on the fact that it comes for free. So we very much when people join, we introduced them. We actually have quite an extensive induction process. I think there's like 30, 35 different training programs. We're actually going to rationalize them a little bit, but they all get attracted for me, I call it, attract. They probably think it's a lecture about how to behave and how to -- at the end of the day, if they enjoy working at Calnex, it's not because of the name of the badges, because of the people they work with, and that's the same for everybody around them. So we're very much trying to create an environment where people enjoy working and they feel motivated. If you are fulfilled, if you can be part of it. They understand what's happening in the dynamics. And I think more than ever, it's important to continue to do that. And our HR manager, Claire, and myself are very passionate about making sure that we hold that. And it's the same when we do acquisitions very much, when we look at acquisitions. A big, big question we speak in the early phases, can we work with these people? I used to start a group of people because now our companies can work with each other, and that's a fact of life and it's something we look at in all acquisitions we've done and very much work with them. And in day 1 or what's sitting down, we make sure they understand that the culture that we're looking to embrace and bring their ideas in. But obviously, making sure they understand our culture and that you get the positives from both worlds. So it's something we feel very strongly about, and I think as much as ever, it's important and we continue to do that and acquisitions very much. It's an element of our activity is to make sure we protect and enhance our position. There was another question but I've actually lost it. Have you got one, Ashleigh? You can jump on that.

Yes. So Scott just asked, do you envisage taking on any more hires this year, i.e., are there any gaps that we're filling in the organization? And so the answer to that is, yes, we do have a plan, and this is all part of our kind of plan at the start of the year to build that headcount. So we're sitting with 138 headcount at the half year, it's 138 heads. We're aiming to be mid-150s by the end of the year. And that's very much to -- a lot of that will be to bolster and to grow the R&D teams as required. So it's not necessarily gaps in the organization, but the need to kind of fill out our project teams to meet the kind of project demands going forward. So that's all planned at the start of the year.

I got question -- asking questions from the same people you do. Scott has got another question here with a limited pool of post acquisitions. Do you think it's lately that future acquisitions will be outside the U.K.? As a definite possibility, Scott, we don't -- we've never actually restricted it, although [indiscernible] if you have done a deal in the U.K., that's been more of a coincidence, to say. We definitely look at, say, the U.K., I think the culture thing, obviously, it's easier within a country. Different countries, absolutely different cultures. But yes, when we are looking at companies, we are looking all over Western Europe and to -- North America, and we would if we find a right one, be willing to acquire a company that was outside the U.K. And there's a question here from Stephen, actually he's got 2 parts. The second part is for you, Ashleigh, but I'll answer the first part. Two very general questions. Is there a fallout in your business from the ban on Ericsson in China? Not particularly, I would say, the whole China thing has been a bit of interest and even the kind of ban on Huawei in the world. What tends to happen is what we've seen because even before Huawei became -- got restrictions put on and there was previous restrictions on ZTE, also a Chinese company. And although our business immediately dropped for them, everybody else tried to steal the market and actually increase the programs. And in some ways, what's happened with this is whereas Huawei is limited to what they can sell outside China, but then the Western companies like Ericsson and Nokia are limited to what they can sell in China. So effectively, the business just moves around and for us, although you get canal ripples on where the business is, it doesn't really change. It hasn't gone away. It's just another one of our customers that's taking our business. So it hasn't had a material impact on us. It's just kind of changed our footprint now. Actually, this was -- [ Stephen's ] second part was for you. Don't you think you should be expensing all your R&D against revenue rather than largely capitalizing than advertisement?

So a few things there. So the useful life of our products in the marketplace is actually more than the 5 years that we amortize the cost to the P&L. So the useful -- the average useful life of our products is 10 years, if not more. So we choose a very prudent position to amortize our costs to the P&L. The message or the reason -- the reason behind capitalizing and then amortizing it to the P&L is to match that revenue generation with the costs associated with it. So we feel that's a better match. Also -- that's also why we bring in this sort of underlying EBITDA metric as well, just to bring that -- bring a little bit of balance between what sort of pure EBITDA would give you as a metric to what we call underlying EBITDA, to bring that sort of R&D costs back into the conversation when talking to KPIs. So -- and also we're very much couple them to the IFRS in doing things as well. So a bit about different mix of different drivers here. And there was another one I suppose to answer as well. Another question for Tom. So if I have understood correctly, roughly 1/3 of your revenue increase is due to the U.S. dollar rise versus GBP. If that's correct and GBP recovers to a stable 1.2 USD per GBP, what would volume increase -- sorry, what volume increase would you require to maintain steady state revenues? Is this exchange rate affects us to revenue growth? Or is demand a bigger risk? So answer to the first question is the way that we budgeted at the start of the year and the way that our plans are built at the start of the year is we -- so our budget rate takes into account or we are not relying on any further FX gains, and we don't see that FX gain that we have at this half to be extrapolated to the end of the year. So we don't -- we are already -- the plans that we have to meet the numbers at the end of the half don't include any sort of catch up for any risk for FX here, so our budget rates -- and take that into a case. So at least higher than what the stable 1.2 is at the moment. And exchange rate isn't the biggest shift because that -- so I would -- in a sort of general business model sense, demand for us is a much larger risk to exchange rate movements for the way that our business is built, if we're talking for holistic risks.

And my question, have you had any feedback on Sentry from customers and have you had any traction from other hyperscalers? Not a lot of direct feedback from Sentry because we just launched it now. At the end of the day, we collect a lot of input from customers before we do any product. So we've just internally launched it a couple of weeks ago, which means we're just starting to promote it into the market and going to other people. So been viewed by a couple of customers. We've had pretty good feedback from the 1 or 2 that have actually seen it and want to engage with us. So really through the next period is when we get -- we'll start to get more wider feedback on that. And here, we're speaking to all the hyperscalers at the moment, at different levels of discussions on a quite early stage, quite some -- quite developed in terms of basically having regular meetings with them and discussions about what sort of technology they may need in the future. So it's a kind of mixed packet there, but it is something that we're continuing to do, and we'll look to do continually over the next period until we develop this market opportunity for us.

And [indiscernible] asked, to what extent is the operational gearing within the business? Do you expect bottom line growth to track or exceed revenue growth? So we should expect some operational gearing in future years from an administration cost. If you take admin cost as a percentage of revenue, at the moment, we're sitting at kind of mid-30%. We wouldn't expect and we are still going through a period of ramp-up. The company is still growing at quite a significant rate. So at the moment -- and support staff that are required and the support structures that are required behind the business. And the costs will -- over the next -- if you're looking at the kind of numbers for the next couple of years, there won't be any sort of material operational gearing coming out of that period. But as the company starts to kind of go into the kind of next phase, you should see some operational gearing from that cost base. However, the R&D amortization model and the fact that we'll continue to build our R&D teams to meet future project needs. And you'll see less of our sort of operational gearing effect on that number as the teams grow to kind of meet revenue demand in the future years. So we haven't done any of that -- any operational gearing in for the next couple of years due to the ramp-up that we're currently going through.

Okay. And maybe I'll take this last question, and then we'll wrap up. I guess from Jennifer is with [ PTP ] as a part of upgrade for 5G [indiscernible] recommend to your customers? Well, I guess most of our customers actually developing equipment that we don't directly recommend. And I guess in terms of networks, we -- I don't know how to build a network, I know how to test it, but I don't know how to build it. So again, we provide insight there. But really, in terms of summaries, the whole O-RAN is creating new requirements. There are customers who are building equipment. They're both building to confront the ITU-T standards. There are some new customers who have had building to confront the O-RAN but actually, even the original customers that are doing ITU-T standards are also wanting to show that they are aligned to the O-RAN standards as well. So the more of these sort of standards recommendations are, inherently, it's better for us because it means there's more people involved, and there's more customers looking to do qualification, improve performance standards, which means they need [indiscernible] which is good.

Tommy, Ashleigh, I think you've actually addressed all those questions from investors. And of course, the company will review all the questions submitted today and we'll publish those responses on the Investment Company platform. But just before redirect investors to provide you with their feedback, which is particularly important to you both, Tommy, can I just ask you for a few closing comments.

Sure. Well, thanks very much, everyone, for coming today. We look back through the period. In some ways, it's unremarkable and nothing particularly exciting and it was business as usual, but maybe today business as usual is exciting. We feel we made steady progress in our areas and all our programs. We've made steady progress in our geographies. We made steady progress in the integration, the alternate teams made good progress. So things are going well. We think we're in a good position at the moment. We feel confident looking forward to the end of the year that we can hit the guidance that's in the market space. As I said, there may be still macro challenges, whether it's a component, whether it's inflationary effects around the world that we all have to deal with, and they make all some minor bumps along the road, but we still feel that the market is strong that we're in. The drivers remain in place that are actually going to create growth in the markets that we're in, that hopefully, we can then deliver growth going forward on a sustainable value. So thanks very much for your time today.

Tommy, Ashleigh, thank you very much for updating investors today. Could I please ask investors not to close the session, as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This only takes a few months to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Calnex Solutions Plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.