Concurrent Technologies Plc (CNC) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Concurrent Technologies Plc Final 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 welcome to this, the full year results for Concurrent year ending 31st December 2024. I'm joined today by Kim Garrod, our Chief Financial Officer; and Brent Salgat, our Chief Revenue Officer. I know people want me to talk about tariffs, and I'll do that later in this presentation. As a reminder of what Concurrent is, this is our 40th year of operating. And for all of those 40 years, we have designed and manufactured primarily Intel-based single-board computers currently mostly for the defense sector. We recently added capability to also deliver systems, which are the things that the single-board computers plug into alongside other cards that do other things, which we can now also supply either directly ourselves or utilizing third-party partners. We're experiencing a period of growth. That growth is driven and fueled by our obsession for putting the latest technology into customers' hands as quickly as possible, ideally first, and we're developing a good track record of that, which we shall describe later. We're also passionate about culture and talent. Some 80% of my colleagues in the entire business have joined after I did. And so it's terribly important that culture and talent is something that we take very seriously, and it is that, that fuels our ability to be first to market whenever we can with our products and services. Next.

Through in-house development and partnership, we've expanded our product portfolio, adding the highest performance and latest technology CPUs, GPUs, FPGAs, networking and storage technologies. With this product portfolio, we are pursuing and securing larger, more complex projects. We are providing customers with increased content and even full systems, all at higher average sale prices. Historically, our VMEbus and CompactPCI computer boards were in the GBP 3,000 to GBP 5,000 range. Our newest VPX plug-in cards are greater than GBP 10,000 with some as high as almost GBP 30,000. Our rugged systems, they start off in the smaller systems GBP 50,000 and go up on average. Our combination of plug-in cards, development chassis and rugged systems and services allow us to work with our customers across the full life cycle of their programs from the very early proof-of-concept phases with our highly configurable Vulcan development chassis, all the way to full deployment of rugged systems like our second-generation Helios. We are focused on getting the newest and highest performance products and technology to market first to support our customers.

In 2023, we broke through the GBP 30 million revenue -- per annum revenue threshold, some GBP 10 million greater than a typical prior year, which was excellent. In 2024, we broke through the GBP 40 million per annum threshold, which is superb, with profits at 40% higher than prior year, underpinned by order intake of GBP 41 million itself also a record. We track the number of design wins that we secure, i.e., how many times has our product been baked into a long-term customer program where we can expect year-on-year repeat purchase orders to supply that program. And we won 22 of those in 2024, a record number. 10 of those we classify as major design wins, i.e., we are confident that when the customer program ramps up, we will secure better than GBP 1 million per annum purchase orders. It was a year in which we restructured to be a business unit focused group with new and talented leadership teams for each of our 2 businesses, products and systems, liberating some more of my executive committee's time to pursue strategic interests such as mergers and acquisition. R&D is the most important thing we do as a business. We will repeat several times here that getting product into customers' hands before other people is what we strive for. We rebranded last year our new brand, Concurrent, reflecting a more modern and progressive approach in line with who we now are as a company. People and culture. We have established a target culture. At the top level, we define that as get things done, no spectators, ambition and buzzing. Beneath those top-level statements, we've identified a whole series of observable behaviors that we would expect our colleagues to strive for as we unify a culture capable of being first to market. We have utilized a third-party tool called Culture15 to help us do this. One of the things that Culture15 does is it gives us analytical and free text narrative about how we are doing developing our culture as a group and at team level. So for example, the text on the top right-hand side of this slide is an artificial intelligence-generated top-level perspective of our culture based on a survey. This gives us a third-party independent assessment at this top level, but also in much more detail of our culture and where we need to focus. Having just spent a reassuringly significant sum on a third-party financial assessment called an audit, I contend it is just as useful to have a lens on our cultural development. An interesting metric that we also get is a trust index. Our population have a trust index of 77%, 60% is viewed as very good. So we have an organization, despite many people being recent joiners who are very trusting of their colleagues, which you need if you're going to work at pace. Next. The defense sector is by far our largest market. It's 87% of the revenue that we enjoyed last year. That's up from some 75%. So defense is for us growing fast. That's primarily because we are securing market share from competition. So that's where our growth is coming from. We're securing market share from incumbent competitors where we are winning in competition against them. The defense sector has a number of key requirements. They want deep long-term support. They need expertise. They want suppliers to adhere to the standards they care about, and they operate in a strict regulatory environment. Therefore, we design our business to satisfy those needs in every way possible, and that is going well at the moment. In defense, it's not just about creating the electronics for brand-new platforms. Indeed, most of what we sell into is when platforms undergo an upgrade of the electronics to enhance capability. Next.

2024 financial performance. As Miles has already alluded to, an exceptional year on practically every metric. So revenue up at 27% at GBP 40.3 million, of which GBP 38 million of that was our traditional products business and just over GBP 2 million was our systems business. Gross profit is holding at a good margin of 49.5%, with the actual products achieving around a 50%, 51% margin. Operating profit, exceptional at GBP 5.2 million, a 40% growth on prior year, and that is after charging a GBP 1.1 million loss in our systems business as expected. Next, please. And across the 5 years, you'll see that this is a record year against any point in the previous 5 years. A 90% increase in revenue across the 5-year period, 48% increase in profit on our best ever prior year, which was in 2021. Orders doubled in 5 years, up to GBP 41 million, GBP 1 million investment in the systems business, very important. We'll come on to that shortly. And we're closing out with a backlog of around GBP 24 million, of which GBP 5 million of that is in our systems business. Next, please. So on the left-hand side, we have our systems business, GBP 2.1 million of revenue, GBP 1.1 million loss. This is absolutely where we expected it to be with a significant investment for growth. So we needed to put the enablers in to help this business get to the place where it can prosecute the work that is then being delivered by the sales team. And you'll see we've closed with a $5 million backlog, all for delivery in 2025. This business was traditionally a $1 million to $2 million business. So this is a significant increase on any prior year. And also a key part of 2024 is we had some first early design wins in the systems business, which will provide future production revenue. On the other -- on the right-hand side is our products business, a very well-run business after the last few years of investment, GBP 38.2 million of revenue, GBP 6.3 million of profit, which is a 16.4% profit margin. We have a very efficient run factory. There's always scope for that small improvement. And we're at the point now that this is really business as usual and at normal investment levels. Next, please.

We had solid revenue performance in all the geographies that we service. Our home markets of U.K. and U.S.A. did very well, 38% and 41% year-over-year increases, respectively. The defense and aerospace market continues to be our biggest market segment. Given the current estimates of defense spending in the countries that we sell to, we're in a strong position moving forward. The shape of our revenue and pipeline continue to evolve toward a greater number of larger customers, i.e., design wins. All service geographies have multiple customers represented in our top 20 customers, putting resilience and strength into our growing customer base. Our largest customer, accounting for 14% of revenue, is the start of design wins moving through their life cycle phase toward production. We expect to see this pattern continue into future years. Next, please.

So 2024 cash movement was positive, which is good. We're building up our cash reserves. A couple of important points to note on this slide. Inventory did drop by about 10% despite a 27% growth in our revenue. So that's a really important metric. We said in 2023, we've built an inventory base that was quite high for what we needed because of the components crisis period. We are now showing that we're using those inventories at the same time we're growing. So at some point, it will cross over and the growth will take over again. Underneath those inventories is a largish end-of-life purchase we made of Enpirion that we signed and posted in 2023. We bought circa GBP 3.5 million worth. We thought this would be at a level of around 5 years. We're actually down to GBP 1.4 million left to use on future orders. So you can see we're using it quite quickly. Another point to note, capitalized R&D is at GBP 3 million, which on the face of it looks as if we're about GBP 800,000 down from last year. That's not actually the case because the rest of the amount, which is in line with last year, was actually customer-funded R&D and has gone through the top of the P&L in revenue. Receivables quite high at year-end, but that's because of the nature of the pattern of our delivery. So we had a very strong quarter 4. Next. A few key points to note on our balance sheet. So we're relatively simple. We are dominated by intangibles. That's the [indiscernible]. We currently have about GBP 12.4 million in our product development intangibles, of which GBP 3 million are those that are products still currently in development. Inventory, we've touched on. Trade receivables, high, but as I said, no issues with anything there. The debtors are quite good and trade payables is just representative of where we are in the year. We often buy in quarter 4, being ready for the future the following year.

Strategy update. In 2024, we secured 22 design wins, demonstrating a strong product portfolio and customer engagement plan. The expanded products, the system offering and the increased content, along with the increased average sale price, all contributed to the $12 million of purchase orders in these 6 example design wins in 2024. Being first to market with the highest performance, latest technology, as we mentioned earlier, is one of our key goals. And the design wins on the far right and the far left, both over $1 million is exactly what happened there. We were able to get evaluation products into these customers' hands several months before our competitors committed to. So we were able to go through the entire evaluation process of performance and testing, software testing and finish that along with quoting before the competition could get into those accounts, securing the wins. The systems wins, the rugged system, was our first design win system. That was with an existing plug-in card customer. So this is a customer we've been doing business with for many years successfully. They had a high level of confidence in us. And when we came in with the systems capability, we were able to compete it against the incumbent supplier and win that business going forward. That will include production business in future years. Our largest purchase order for the systems business was $3.7 million out of APAC. This is a very complex system with multiple computer boards, GPGPUs, network switching in a rugged box. In this instance, we had a partner -- a distributor conference. We actually sell through a sales partner to this particular country. We had all of our sales partners come to Colchester in the summer and do -- and participate in a conference where we explained our ambition, our strengths and where Concurrent was headed on the systems business. This gave them the confidence to go back, put us in front of a Tier 1 prime defense contractor in their country, and we competed against -- we were down selected and competed against another company based -- that was in country -- down sold in country, and we're able to secure that design win. Next, please.

So our Products business unit had a fantastic year. In terms of R&D, being good at being early and first to market is what drives the significant growth in order intake in that business. We secured our largest ever single contract win of $6 million, which we delivered in year, much to the customers' delight. And we had the highest output ever from our factory in Colchester. The photograph on the right-hand side is incredibly important. At the world's largest embedded computer show, Embedded World, the Intel booth profiled -- showcased our product. The reason they showcased our product on their booth is because our product in our market is the only one truly incorporated to their latest chipset. So on the same day that Intel launched their latest industrial chip, we launched our product, and we were already several months into the design and development of that product on the date of launch. We are now receiving purchase orders for that product from this point onwards. Nobody else has launched a similar product, and it's our expectation that they may not do so for some months to come. Next, please. So focus for 2025. This is where I'll talk briefly about tariffs. There's clearly a lot of uncertainty around tariffs in the world. As we give this presentation right now today, last weekend, the White House issued 20 import codes. One of those codes, 8471, is a code under which we have always shipped our product. So assuming that remains the case, we would hope to enjoy being tariff-free. Additionally, for a number of large U.S. primes, they flow down terms from government called DFARS. On the occasion where that is the case, and as those primes are now starting to remind their supply chain, if suppliers fulfill the necessary admin work, then they can claim tariff-free export for import into the United States because it is a federal, i.e., governmental program. In the event that we are subject to, say, a 10% tariff, which we hope is unlikely, then for the purchase orders that we currently have in hand for delivery to the United States, which is somewhere between 1/4 and 1/3 of the full year's commitment to that region, then we would incur a 10% tariff as we ship our products to Concurrent Inc., i.e., ourselves in the U.S. That would represent a several hundred thousand pounds profit headwind, which we would look to offset with sensible cost and budgetary controls for the remainder of the year, i.e., it's inconvenient, but manageable in profit terms. From that point onwards, we would look to pass that cost on to customers. We are competitive in our market. Our customers are supportive of us. We've had a number of conversations with them. And at this point in time, much of our competition, even if they're U.S. large companies, manufacture their products outside of the United States. In reality, a medium- to long-term application of tariffs slows things down. So ultimately, for everybody, it becomes a pipeline issue. But to repeat, right now today, if nothing else changes, we are hopeful that we are not subjected to tariffs for what we do. The rest of the focus then, which matters indeed much more, is about continuing to be first to market, continuing to work really hard on R&D, developing talent and prepare for increased capacity. We recently announced that in the second half of 2026, we will move to a new facility near the one that we have in Colchester. You can see from the diagrams on the right-hand side. The top one is the layout of the new facility, which includes space for doubling manufacturing capacity with new machines, which is superb. And below that, you see some of the design layout. We are well developed with planning. The move will be very well planned. We'll bring up the new lines to operate before we -- in parallel with our existing lines before we move anything. We're really looking forward to it. I welcome any questions on that at all. Next. So our systems business then is all about mobilizing a start-up. When we bought Philips Aerospace, a fantastic small business, that was the catalyst for us to rapidly create a start-up. As Kim said, we finished 2024 with a backlog of $5 million, all for prosecution this year. We continue to win work that we also hope to prosecute this year. So assuming we successfully mobilize a brand-new team, which we consider we are doing well, then if we achieve better than $5 million at breakeven, which is what we're striving for, I would consider that to be a small business, well mobilized with a very strong future. Next. We remain acquisitive. So the left-hand 3/4 of this slide, I have presented several times before. Concurrent, for many years, on the left there, provided single-board computers and occasionally storage. We then, 2, 3 years ago, introduced to our customers the ability to buy from us other cards in the system that do other things such as graphics, FPGA, storage, position navigation and timing, to begin to move towards us being a systems provider. We also provided systems integration services. And these cards plug-in to a chassis, a box, which we call the system, and we used Philips Aerospace as our subcontractor to do just that. Then we acquired Philips Aerospace, and that makes us much more authentically the system integrator. So customers can now come to us for their custom, but quite demanding requirements at system level where we now deliver that system with significant amounts of content, and it is us that manage the trade-off on performance between those elements. And it is us that manages the programmatic and engineering risk to make sure that we give the customer exactly what they want, when they wanted it. Our M&A strategy to date has been to look to secure ever more of that content. There are a limited number of companies that fit that bill. So we've supplemented that scope with also looking at a pipeline of companies that are adjacent to what we do. They're nearby either technically or in market terms or they physically deliver product that is also delivered into the exact same customer platform that we deliver into. It's a list that is ever growing. We're managing it quite closely. And we recently retained a third-party chief exec from exactly this marketplace to act as our independent contractor of candidate companies to explore with them whether there's a discussion they would like to have. People always ask, so when is it going to happen, and how big will it be and what does it look like? How long is a piece of string? The point is, we're actively managing that possibility.

This major design win example is the result of the plans and actions we have taken against the growth drivers you see listed over on the left-hand side of this slide over the last 3.5 years. In 2022, we were first to market with the then latest Intel processor, and we also supported the latest technology available on that particular processor, things like 100-gigabit Ethernet, PCI Express Gen 4 and 128 gig of DRAM. This provided us the opportunity to start working with the U.S. Air Force Advanced Research Lab and the partnered research institutes with the U.S. Air Force Lab on next-generation sensor applications. This collaboration was successful and created an engagement with a prime contractor, a Tier 1 prime contractor for a production program. We worked closely with the prime to deliver the products they needed in the time frame required. The PO value in 2024 was $6 million, and the program has a forecasted lifetime value to Concurrent potentially over $40 million. Our continued focus on investing in products, faster product releases, strong sales and business development, providing solutions and being customer-facing will continue to generate more and more opportunities like this major design win example. Next Slide.

Thank you, Brent. That fantastic example is something that would have been impossible to consider in this company 3 or 4 years ago, but we will see more and more examples just like that this year, next year and beyond. So we're in a completely different position to what we were. The doubling size of the company that we have enjoyed recently is the beginning of having laid down the foundations for growth. It is not the end of that growth at all. And indeed, the design wins that we talk so much about start to yield meaningful revenue in 2026, with each year providing another layering up of recurring revenue that we can expect to enjoy for typically 7 years as our customers prosecute their programs. So we're now at the start of a really exciting growth journey. We have done what we said we would do. Despite the current uncertainties in the world and the market, the Board fully expects to meet the market expectations for 2025. Thank you all very much, and we look forward to questions.

[Operator Instructions]. Now moving on to Q&A. We have received a number of questions, both pre-submitted and throughout today's meeting for investors, and I wanted to start off the Q&A session with these. The first one reads as follows. What is the management/Board stock ownership like? Will you be buying more shares?

Good question. So we have a new management team and a fairly new Board. So we probably collectively don't hold as much stock as you might expect for a company of our size and performance. I hold stock. Brent holds stock and I'm looking at -- and Kim holds stock. So we do hold some. And I know that members of the nonexec team hold stock as well. For me personally, and the same is true for other people on the management team, we are reaching the time where the first long-term incentive plan that was issued to me some 3 years ago matures now. So you might expect in the coming short period to see that those colleagues who are on the same long-term incentive plan might exercise some or all of that plan, but that's entirely up to them. But I'd anticipate, in the short term, you'll see more of us having more stock.

Next question is, could you give some more detail on the GBP 100 million lifetime value figure? Is this a conservative estimate?

Yes, it is conservative, but appropriately so because things can change. Typically, in defense, if a country has committed to a long-term program, for example, upgrading a fleet of aircraft to a new better standard of electronics or capability, then it is extremely likely that, that program will deliver over a period of time. The [indiscernible] be the annual schedule of that program. Will it get done when they said it would get done or will it take longer? So we can be pretty confident that those things will happen. It doesn't mean it's contracted. Contracts for us tend to have an annual basis typically in purchase [ volume ] terms, but we can have a high confidence that it will happen. Thank you.

And moving on to some live questions now. Do you expect the first half of 2025 revenues to be lower than the second half of 2024 revenues? If so, is this due to lumpy contracts or any seasonality?

Contracts can be lumpy. We don't typically have seasonality. The only seasonality we've had historically is the business has worked so hard to maximize execution in quarter 4 that we have to start from scratch in quarter 1 in terms of building products. So usually, this business would have a slow quarter 1. That's not been the case this year. We've had a strong start to the year, both in terms of delivery and order intake. I'm not going to answer whether H1 this year is more or less or the same as H2 last year, but it is a good start to the year.

And the next question is, how many design wins have you secured in the first quarter of 2025?

We update the market every half as to how we're doing with design wins. And a little bit like the last question, they can be quite lumpy. So if you look at last year, we won 8 in the first half, major design wins, and another 2 in the second half. That's just the nature of the market we're in. So even if I did give you a number, you probably couldn't read too much into it.

Next question is, can you allude activities you are undertaking to ensure you don't get hacked by some dodgy hostile actors?

Yes. We take cybersecurity extremely seriously. So we've invested in a very high-caliber IT team relative to the one that we used to have. And in both the U.K. and the U.S., customers increasingly require us to adhere to standards, which are assessed both by ourselves, but also independently. So we have a program at work where we're doing well relative to our peers, and we know that because we get scored as such. There is never any room for complacency. Rest assured, it's a priority. And as we get into larger and more sensitive programs, customers themselves will demand that we prove that we are sufficiently secure to be managing their data on their behalf.

That's great. How much software development do you do in-house?

Yes. So on the software development, we develop software that make our products useful for the customer. So this is low-level software, board support packages, firmware, modified BIOS and security type of capabilities or firmware that go on to the products. What we do not do is develop the actual application. That's what's done by our customers. So again, we're a hardware platform provider that provide -- that develops software to make the hardware useful to the customer.

And the next question is on competition. Which of your main competitors have you been winning market share from?

Across the board, really. Most typically, we compete against Curtiss-Wright, Mercury Systems, Kontron and Abaco. And I'm pretty sure we have examples of where we think we may have displaced them from long-term relationships for each of those companies.

How much will the new factory in Colchester cost? And what new equipment functionality will it have?

So we will -- in terms of capital costs, we'll spend a planning assumption of GBP 5 million in 2026 to both kit out the new factory, but also to buy the machines necessary to double our PCB assembly capacity. That's all doable from cash that we have already. The new facility will cost around GBP 0.5 million per annum extra to operate versus our current facility. So it is paid for by an additional GBP 1 million revenues broadly in revenue.

And we've got another question on competition, which I think you have addressed, but just in case you have anything to add, who do you see as your main competitors currently?

Typically, companies like Curtiss-Wright, Mercury Systems, Kontron and Abaco.

Perfect. Well, I can see that there are no more questions. So thank you very much indeed for addressing all those questions from investors today. And of course, the company can review all questions submitted today, and we will publish those responses on the Investor Meet Company platform. But Miles, before we redirect investors to provide you with their feedback, I know it is particularly important to the company. Could I just please ask you for a few closing comments?

Yes, of course. We're very proud to have done what we said we would do. There's much more to come. It's really exciting. If you have any queries, then feel free to submit them. We're very proactive. And thank you for your time, and thank you for your interest.

Perfect. Miles and team, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Concurrent Technologies plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.