Concurrent Technologies Plc (CNC.L) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Concurrent Technologies plc Half Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll, and I would now like to hand you over to CEO, Miles Adcock. Good afternoon to you.

Good afternoon, and thank you all for joining this call. Next slide, please. So Kim and I will take you through the performance of Concurrent in the first half of 2025. Next slide, please. Let's remind ourselves what this company does. We design and manufacture in our own factory really high-performance computer boards and associated system-level products. We sell primarily to some of the world's largest OEMs, principally in the defense and increasing so defense industry. Our focus is very much bringing the latest technology to market as early as possible, ideally first, and we're getting a good track record in doing exactly that. That's underpinned by an obsession of developing, retaining and hiring talent. Some 80% of the business started after I did just 4 years ago. And we've developed some really good, much more strategic relationships with customers, which we'll cover in a bit more detail later. Just to talk about the progress we've made, we've more than doubled the size of the business in the last 3 years, grown more in that period than we had in the previous [indiscernible], clearly hired a lot of people, but onboarded a significant number of new customers and a fun metric, but it points to us as an employer, we've gone from some 700 followers on LinkedIn to an excess of 10,000. Next. So here are some of our products. The key takeaway here is, yes, we continue to launch brand new products, often the first to market. But had we looked at a chart similar to this 2 or 3 years ago, it would have been roughly half the number of current products, and it would singularly have comprised of things called single-board computers, so the computer boards that we design and make in the U.K. They are supplemented now by boards that do other things, which we secure through genuine partnerships such as GPGPUs, that's graphics cards or FPGAs, field-programmable gate arrays or switches. And then there are our new systems, which we are able to design and make, thanks to the acquisition we made exactly 2 years ago of Philips Aerospace in Los Angeles. Next. So primarily servicing defense as a sector. Defense is highly regulated, very concerned with long-term deep trusted relationships with technical experts. They have some unique requirements around the robustness of product and adhering to some of their architectural requirements. They also require things quite uniquely to defense such as the product you sell on day 1 of a 7-year program has to be identical in every sense of the word to the product that you'd sell them in year 7 of that program. So we clearly have configured ourselves to map very much into the needs of that customer base, and that's going very well for us. Next. So the first half, a record first half, GBP 21.1 million of revenue in 6 months. That's larger than -- would have been the largest year -- full year ever just a handful of years ago. So that's very pleasing. Our systems business delivered GBP 3.2 million of revenue. Recall that in the full year of 2024, they did GBP 1.1 million. So we're at almost 6x the run rate inside that business where we were a year ago. We intend for similar performance to follow through in the second half. That's very good. Record profit, that's despite some challenges around foreign exchange, which Kim will cover. It's all about the work that we win. So we've been designed into a lifetime value of around GBP 90 million of the work. So that's work that we expect to be contracted for over the next, up to a decade, very useful leading indicator. Two weeks ago, we won a GBP 4 million order into the U.K., largest ever U.K. defense order. Earlier in the year for also VME product, we won GBP 3.4 million into the United States, very good. And most importantly, perhaps is the order intake for the first half is a record at GBP 22.3 million -- that's despite the fact that orders from the United States were sluggish during the first half, singularly due to the fact that Department of Defense budgets were not signed off in autumn last year and instead had to wait for the so-called Big Beautiful bill. Now that has been signed off, activity is really picking up now in the U.S.

Good afternoon. Financial performance for Concurrent half one 2025. Miles has alluded to some of the numbers already, but a very strong half for us and a few key numbers to note. Gross profit remains strong at about 51%. That's despite even having a mix of systems and products business in there where the systems is a much lower gross margin. So we're very pleased with gross margin holding. Operating profit GBP 2.7 million, would have been GBP 3.3 million on a constant currency basis, which would have represented a 43% increase. I get asked a lot about what we're doing about foreign currency. So we've had a complete banking refresh since we last met in April and we are working very hard with the bank on the FX. And we're looking at hedging both one-off large dollar contracts, but also we're looking at hedging some of our short-term in the company revenue. Closing cash we'll come on to in a minute. It declined from GBP 13.7 million at the end of the year to GBP 7.8 million at the half, purely down to timing. Next, please. So this shows our half performances over the last 5 years, practically on every level. The numbers just show that we are delivering the growth we said we would and that it's reflective of all the things we're doing. So we are investing in product development. We will do about GBP 4 million this year. We've done GBP 1.8 million in the half and that investment in product development is what's driving the revenue as well as increased sales and business development. We do have and are onboarding more and larger customers constantly. That is really important to this business. It gives us more intimacy with customers, much bigger programs with customers and Miles will talk a bit later about some key contractual frameworks that we're getting on to with our large defense primes. We are selling systems not only to supplement the plug-in card business because selling a system means our cards can be sold into that system, whereas other systems integrators wouldn't use our cards. They'll have their own preferences. So that's important. But it also takes us up the value chain in terms of getting closer to the customer and more intimate around their technical needs. And we are developing partnerships that are enabling us to really fulfill the content of the systems business. Next, please.

So in terms of revenue breakdown, 90% now is into defense. That's up for about 2/3 when I started. So defense is where the growth is at and is the focus of both our product development and our business development activities. This year, nearly half of our revenue is derived from the United States. So a big step up there. We are growing globally, but it is the U.S. where the most significant growth is occurring. Of note, the U.K. historically, we would win about GBP 1 million per annum. Last year, we won more than GBP 5 million. And as I said earlier, just 2 weeks ago, we won a single GBP 4 million order. In terms of customer concentration, it's interesting to note that this year, our 10 largest customer is roughly the same size as the largest customer we had 4 years ago. And back then, that customer was significantly larger than anybody else. So as Kim has just said, we're doing a good job at onboarding more larger customers. Next. So the systems business in dollar terms stepped up to $4.2 million. It was $600,000 loss-making as planned. And this is because we resourced the team upfront to be a team capable of safely and efficiently prosecuting what is fairly complex work. As we enter the second half, become profitable in that systems business with the intent of getting near to breakeven by the end of this year. So great progress in the systems business. The products business, so our plug-in computer cards business, highest ever output for the half. You can see that without the dilution effect of the systems business, the profit there goes from strength to strength, very pleasing. And in the period, we implemented a new ERP system in that business, which I'll talk a little bit more about in a minute. Both businesses are supported by an increasingly strengthening pipeline of opportunity. It's worth noting that the model we have here is that the same salesperson is capable of selling both systems and product content into the same customers. So it's quite efficient. Next.

So, in terms of cash, opening cash on the 1st of January was GBP 13.7 million. The big movers are very much around inventory where we've grown by GBP 2 million, which is solely us getting ready for the end of this year and into next year. At some point, I did say -- I've said regularly that inventory would have to reverse the growth again because we're growing, it's as simple as that. So there's nothing underneath inventory that's of concern. It's just timing, and we'll see that unwind in the next 6 months or so. Increase in receivables, it is simply timing. We had a good second quarter and that left us with quite a lot of receivables taken across the half point. Another big driver was the net cash used in financing activities. That is basically the dividend payment, which last year was just the other side into half 2. This year, it happened to be just before the end of half 1. So it's as simple as that. Closing cash GBP 7.8 million, and we expect that to go up significantly by year-end. Next, please. Just a reminder of the big items from our balance sheet. We are quite simple as a business on the balance sheet. The big driver there is intangible assets, which is predominantly our product development. We have about GBP 13 million in product development. That's the heartbeat of this organization. Without that product development, we wouldn't be driving the top line. There's about GBP 700,000 for our new ERP system, which is really important to us because the last one was terrible. And that went live in August 2025, so a few weeks ago, and we are now starting to amortize that. An important point to note is, there was no impairments of our product development in the half. We do our impairment reviews twice a year and they are pretty strong everything we're carrying at the moment. The inventory, the other big one which we've touched on, there is a bit of about GBP 2 million of end-of-life components underneath the inventory. That's quite normal in this business. That's where our supplier has decided to discontinue the use at the sale of a certain component. We often choose to buy a higher level of that component to see us through a period of time whilst we design out that component of our board, so we're in control of it. A big chunk of the GBP 2 million that end-of-life components is that, that we bought in 2023. We bought that GBP 4 million worth that was going to last us 5 years, but we've only got about GBP 1 million left. So it's obviously going quite quickly and is not going to last us for 5 years. But we are all actively designing that component out of our product. Next.

So why are we so confident in the strength of our ongoing pipeline? We have now around 5 framework agreements in place. The framework agreement is where a large customer will say, we've worked with Concurrent for some time. We would like to make them a preferred supplier, and therefore, we'll invest the time in a detailed definition of the business relationship between us and the associated terms and conditions. Once that is in place, it's easier then to drop purchase orders through that framework. That's exactly what happened with the GBP 4 million order of 2 weeks ago. That's a framework contract with a large U.K. prime that we spent the summer establishing. So these are big folks of confidence. Prime contractors don't invest the time in a framework agreement if it's not something they intend to use for the medium to long term. Good. We are winning the work and growing the systems business, which transitions that business from something where we had good intent to something that is now proving its capable of growth, capable of winning. That's extremely encouraging. And of course, there's a certain amount of buoyancy in this particular market sector. Last week was DSEI, which is a significant defense trade show in London. We were exhibiting there, huge amount of interest on our booth. We were visited by well-known politicians, the Chief Scientific Adviser, lots of customers, lots of peers and a lot of activity at the moment. So very good. Design wins are a critical leading indicator. They're not a contract. This is where the customer has evaluated our product chosen it to be incorporated within their own solution to their customers with the intent then of buying that product perhaps over many years as they work through their program, which might be a refresh of electronics in some kind of military platform, for example. So the fact that we're securing more and more of what we're calling design wins is an extremely powerful big green light for our medium- to long-term future. We operate internally a 5-year forecast. That 5-year forecast is quite a significant spreadsheet effectively with many, many line items all pointing uniquely to these specific design wins, the timing that we think will be associated with them, the value that customers say is apportioned to them. And then we take a fairly conservative view of the output of that plan, and it's that conservative view that we then compare to expectation from people like Cavendish and we're pretty comfortable with our expectations currently set, so good strong pipeline ahead of us. Next. If you recall the business that we were a handful years ago on the left-hand side of this chart, we sold single-board computers and occasionally some storage. In 2021, September, I set out a strategy that said we'll revert to being really good at issuing latest technology through our products to market much earlier. Remember that in 2021, 80% of our order intake was for last time buy. So we had to transform the business around pace. We also said that we would strive to offer more of the elements of a system, not just our computer board initially through partnership, but then via hopefully acquisition, which is exactly what we did -- exactly what we did. So now we can legitimately position ourselves as a systems integrator, managing the technical and financial risk of getting all of the elements of the system to operate effectively in order to run the customers' application. Customers are increasingly wanting to focus on software and application and less and less on hardware. So the more we can present ourselves as a comprehensive hardware solution provider, the more work we will win as they strive to perhaps outsource more and more of what they have done historically. In terms of M&A then, it would be fantastic to secure through ownership, not just partnership, more of the content of the system. But these are -- there's a relatively small number of candidate companies and therefore, one might wait quite some time before an acquisition is possible. So we are also looking at a slightly wider scope of pipeline where if you were to look into any typical platform that we sell into, you will likely find other usually Intel-based computing equipment that is similar to what we do but different. A very simple example that's easy to understand is, it might be physically much smaller or physically much larger like a rack mount server. They are interesting businesses. There's quite a few of them that are founder owned and managed, tidy, well run, existed for 20, 30, 40 years, where perhaps they don't have a dedicated global sales team capable of selling their products, like I said, we potentially could be. And they probably don't have the titanium -- they won't have titanium status with Intel, which is hard to get, which gives us significant visibility in detail of Intel's future designs, enabling us to start designing our product much earlier and hence being early, if not first to market. So we are actively exploring that pipeline. Let's see when that yields a result, but we're certainly putting the effort in, Next, so capacity generation and facilities that are fit for purpose for our future is a focus. So later this year, we will move facility in Los Angeles. Took a little bit longer than we had intended, but we're in good shape now. There's a photograph of it there. First-class facility, capable of housing far more people than we currently have, lots of scope for growth there in a fantastic area called City of Brea. It takes us out of City of Industry, which was somewhat less favorable. Worth noting that the Los Angeles area is the second highest concentration of defense activity on the planet. So it is a good place to be located. Likewise, for our factory in Colchester, we continue to -- we intend to have around double the capacity for our facility there by the end of next year, making good progress there. That will be fantastic. Meanwhile, we're not capacity constrained. We operate just 2 shifts 5 days a week. So we could increase that. And we also have access to contract manufacturers who could take up any surge requirements should we have it. We implemented a few weeks ago, Microsoft Dynamics Business Central ERP system. That's a really big step forward for us. The first meeting I had in this business was associated with exactly that project. So it's taken us 4 years. Two days after implementing, we were shipping product. I've never experienced that with a new ERP system before. And I'm pleased for the first time in our life to sit here and say, I've just observed and been part of a really good ERP implementation. It's working well for us. We will, throughout the course of next year, roll that out throughout North America as well. It's currently constrained to our U.K. business. We are investing in people, continue to hire really strong talent, particularly of note in the systems business this year. We're up to about 22 heads, really good team there, very strong general manager pulling that team together. And we joined the IQ -- the OTCQX platform earlier in the year, which enables U.S.-based people to engage with our stock. We primarily did that so that our employees can buy and sell stock and participate in any LTIPs so that they might be associated with it. Next. So to wrap up, we are doing what we set out to do. We're focusing on innovation and technology, developing talent with a strong focus on a culture of performance and hence, we're very pleased to have been able to say that we expect by the end of this year to exceed the market's expectations for performance, a fair bit on revenue and a little bit on profit. But noting that we have a dilution this year, in the first half, certainly for our systems business, we do have some FX issues around us in the first half. It's very pleasing at a wrap up and say we're doing slightly better even than we thought we would do a few weeks ago. Thank you.

[Operator Instructions] We have received a number of questions, both pre-submitted and throughout today's live presentation and I'll start the Q&A session. The first question here, which reads as follows. Has the expected pickup in the U.S. contracting environment begun to come through yet?

Yes. Yes. We do have a sensitivity to timing. There's clear difference between receiving an order in the middle of September and receiving it in the middle of December. But absolutely, yes, our customers are buoyant, the largest ever defense budget in the United States and people are working really hard to get contracting.

That's great. The next question here, is it still your intention to run systems at breakeven in 2025?

Yes.

Thank you very much. We have another question, which I think you have touched on. But do you -- or are you considering hedging currency exchanges?

Yes, absolutely. As I said earlier, we'll look to hedge individual large contracts. Absolutely, we'll do that. But we're also looking at how we can hedge our intercompany revenue over a short period of time, like 3 or 4 months worth of time.

Another question here. How many software programmers do you have? And how have they grown?

We have a handful -- 7 maybe. We don't do application-level software. The software doesn't have products, that things are the BIOS, which is the thing that we need to have the computer on. The BIOS informs the computer what it is, where its memory is, how it can talk to it, that kind of thing. So we do BIOS. We have security at board level. So it might detect tampering, for example, physically. But we don't just do application software. That's where our customers really like to focus. It is a key area. BIOS engineers are one of the hardest types of engineers to recruit. But nonetheless, we are recruiting and they're developing well with us. Thank you.

Another question here. Are you signing maintenance contracts with framework customers?

No, that's not really the nature of our business. We'll provide support, but typically, our products don't really need maintenance. They'll use them for the lifetime of the electronics in that vehicle. And then typically, they'll be upgraded maybe a decade after they were first installed.

We have another question here. What would be a reasonable expectation of sales growth per annum over the next 5 years?

I don't know to what extent people here see the Cavendish outlook, but that's all we can share. Have you got those numbers with you, Kim?

I think -- so the outlook in the market is GBP 46 million for this year, GBP 52 million for next year, GBP 60 million for 2027 and GBP 66 million for 2028.

That's as far as we can go. One thing I do regularly say though that a meaningful way point for this business will be exceeding GBP 100 million. That doesn't mean it's our target, but it will be a thing we celebrate when we get there. And that's comfortably achievable inside of our 5-year plan we operate internally.

Is Concurrent likely to benefit from increased European spending on defense? Could an acquisition in the EU be helpful?

We do benefit from growth in Europe. We are seeing growth in Europe. We sell by distributors, which is a model that works perfectly well for us. We are seeing demand for our products that directly relate to areas of conflict globally, which is a sad thing, but we're experiencing that. I'm cautious about owning a business in Europe just because it's another jurisdiction to govern and there are some challenges with being an employer in Europe. So we don't need to do that yet. But yes, we are seeing growth in Europe. A bigger trend that impacts us than defense budgets alone is the trend within defense, which is to upgrade electronics. If you are a country that needs to rapidly enhance your military capability, don't start designing a new aircraft, upgrade the electronics and the one you've got, and we are seeing that as a trend.

What new product development are you focusing on?

That's a good question. We have quite a detailed product road map that has many, many products on it. That road map is informed principally from two directions. One is Intel, where we know what new features they're going to be issuing and when, and we work very closely with Intel. An example is our Kratos products that we launched earlier in the year in addition to being a phenomenally powerful computer, has a brand-new capability from Intel, which is the ability to create and operate a 5G network. 5G million, as it's called military 5G, it is a big area of growth. And we knew about that when it was still under wraps in Intel a long time before it came out, and we're able to design the product and how we market it accordingly. So a big input for Intel. The other input then is, of course, from our customer community. We will always strive to have at least one, if not more, lead customers strongly engaged with us as we design new products so that we can have a stronger expectation of them wanting to buy it when it's ready. First to market is -- or early to market certainly is everything. Our biggest order last year, $6 million. Had we been just a few weeks later finishing the design of that product, we would have missed the opportunity to win that work. So being early is the most important thing.

Well, Miles, thank you very much for answering those questions from investors. Of course, the company can review all the questions that have been submitted today and will publish responses down on the Investor Meet Company platform. But just before redirecting the investors to provide you the feedback is particular important to you both. Miles, can I just ask you for a few closing comments.

Yes. Just to say thank you, everybody. Tim and I genuinely enjoy this. It's extremely pleasing that the things I set out some 4 years ago as the direction for this company, we haven't changed any of that. We've simply stuck to our guns and driven through on what we said we would do. So thank you for your support, you've indeed did support us, and I look forward to doing this again.

Well, Miles, thank you once again for updating the investors today. Could I please ask the investors not to close the session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations of management of Concurrent Technologies plc, we'd like to thank you for attending today's presentation, and good afternoon.