Concurrent Technologies Plc (CNC) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Concurrent Technologies Plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Miles Adcock, CEO. Good afternoon, sir.

Hello. Thank you all for joining us today for the results for the first half of 2026 for Concurrent Technologies Plc. Next slide, please. So we have myself, Chief Executive Officer; and Kim, our CFO. For those of you that might not know, Kim is retiring after 4 excellent years. So this is her last session. In addition to this presentation, we have now also commissioned research from Equity Development, so you can find their research paper on their or our website. Next slide, please. So as a reminder, Concurrent Technologies is a business that has been trading for more than 40 years, one of the longest listed stocks on AIM. We are now over 200 people based in the United Kingdom and the United States, although we sell all around the world with something over half our revenue going into America. We design and make embedded computer system products. For a long time, we just did computer boards, typically postcard-sized boards, but we now do a much wider array of systems and related services. Next slide, please. So the market that we address is absolutely enormous. There's some substantial figures on this slide with America spending more than $1 trillion on defense. NATO as a group spending around $1.8 trillion. The defense electronics market globally is itself over $190 billion. These are all absolutely enormous numbers. And generally speaking, when we win work, we're displacing very large competitors. Next slide, please. So our first half has been very good on pretty much every metric, our best ever, with revenue at GBP 23.2 million and profit at GBP 3.2 million, excellent. Standout figure is the order intake at GBP 46.9 million. So that's in line with the entirety of last year's order intake, which was itself a record. So that's very pleasing. We have said for many years that it will be 2026 where we start to see the order intake associated with design wins that we secured now many years earlier. That is starting to happen. So of that GBP 46.9 million, very roughly, about 2/3 of that is associated with prior design wins, including a substantial GBP 17 million order, which was actually a design win from many, many years ago, clearly going strong. Worth knowing on the order intake is that a lot of that, most of it happened in Q2. And of that, a lot of it happened in June. So our order intake, whilst large, very back-end loaded in the half, that did constrain our ability somewhat to generate revenue. So revenue would have been stronger if the order intake profile had been more skewed towards the first half. Two primary reasons why it did come in a little later than otherwise planned. We saw continued hiatus of order placement activity out of the United States. So similar to Q4 last year, Q1 was very slow. That's picked up again now, although note, America goes back into its budgeting cycle in the next few weeks. So let's see what happens there. And then we were expecting a fairly substantial order at the beginning of the year for 1 year's worth of supply of a particular product of ours, but Intel launched a last time buy for the processor associated with our product. That's unheard of for Intel to cut life short. They cut life short by about 6 years. They normally guarantee 15 years. The end of life this product at, I think, 9. So we had to put our corresponding product into last time buy. And so our customer who didn't have time to redesign their own solution to accommodate a different computer did the work to assess how many units they had to buy for 4 years' worth of supply, and that was the GBP 17 million order that we closed in June. So we closed GBP 17 million in June rather than some other significant but smaller number at the beginning of the year. Just a note on that contract, substantially our largest ever. We've designed that to be a milestone-based performance contract. So the upfront milestone is the purchase of parts for which we've been paid for the cash. We're now purchasing those components, roughly GBP 6 million worth. And as we do, we can recognize the revenue on those parts, which is good. We recognize a relatively modest profit on those components and instead recognize the bulk of the profit as we deliver finished goods in years 2, 3 and 4. So for this year, that slightly dilutes our gross profit for the year, but will be very good in out years. That's why the expectations in the market, which increased at the beginning of this week, went up more in revenue terms than it did in profit terms, okay? Quite a lot there. And in terms of design wins, we've been designed into programs that are currently assessed by our customers to have an aggregate value of GBP 129 million to us. It's not a contract, but it is as a metric, let's say, a bright green flashing light for our next many years. That's typically revenue that won't start flowing for another 3 or 4 years, but is an excellent indicator for our continued growth. That's substantially our largest LTV for design wins that we've published to date, partly because we're now starting to see systems work come into that number where the systems into which our cards go, the systems are a much higher unit price than the computer cards alone, and therefore, the potential value of programs for systems is substantially higher. Other things that we've done as of now rather than the end of the half, but as of now, we have doubled the capacity of our factory in Colchester. Those machines are up and running. And thank goodness, they are because the size, the quantum of the order intake and the fact that it has come in late in the half means that our quarter 4 is going to be exceptionally busy. So that doubling of capacity is going to be going flat out at the back end of the year. But the machines are commissioned. We've got the staff. We've got plan. So that should be fine. Next slide, please. So a little bit of a case study to just illustrate a little bit how the business works, how it takes a long time, but how the scale of opportunity can exponentially grow with that time. So back in '21, '22, this is after I started, we were able to launch some products into the market that were first to market, really excited people. And in particular, it excited this distributor that I'm highlighting here in a country in Asia Pac. So we started to do work with them. In '23, we bought a very small business in Los Angeles. Phillips Aerospace as the catalyst for our start-up systems business. And in '24, we brought every distributor from around the world to Colchester for 2 days to educate them that the Concurrent they knew for 30-plus years was now capable of doing very much more. And in particular, here's what we can do with systems. That excited these guys a lot. And relatively quickly after that conference, they came to us with a potential opportunity in their country with an in-country prime and the opportunity was to displace an incumbent supplier to that prime. So we set about sending some of our best people to that country, and we worked up a solution with our distributor, but then also the prime contractor, which resulted in a $3.7 million order, which we communicated in January '25. We've now successfully been working on that order to design and then deliver 15 units. These units go into an amphibious vehicle for trials. So the end customer, the government is trialing these vehicles to see if they like what these computers do in them. And during that period, our prime contractor customer has been very pleased. And our distributor has introduced us to 3 other prime contractors also involved in vehicle upgrades in that country. And so we're now in discussions, not the same thing as an order yet, not the same thing as a design win yet. But since we're the incumbent supplier of this system that customer money has funded to develop, we're in exceptionally good position. And we're in discussions about potentially fitting 2 computers per vehicle for 300 vehicles. And at a unit price of approximately $150,000, that's a good sized program. This is not unique. We're in these sorts of discussions many times over. So this is one of maybe 10 or a dozen similar discussions with similar sized opportunities now coming into view. Another way of expressing that is all the hard work we've done to get to this point starts to give us permission and credibility to be allowed access to what is the next level of prize in terms of volume and value of work, which will become increasingly real over the coming years. Next slide, please. Kim?

Thank you. Good afternoon, everybody. So Miles has touched on a few of these numbers, but strong growth in all areas. Point to note on the gross profit, we have held gross profit at the same level as last year. That's actually really good considering we're in a period of getting more difficult supply constraints. And so we've all known about the DRAM pricing. But actually, that's affecting quite across the board now of most of the electronics components industry. And it's both pricing and availability. We're working very hard to hold on to that gross profit, and we've got a very good procurement team that we're continuing to strengthen. Profit before tax at GBP 3.2 million was after charging GBP 114,000 of exceptionals. And the other key number on this slide is closing cash, which we'll talk about in a minute, but it was 24% up on prior year, even though we've invested quite a lot of money in the first half. Order intake, amazing at GBP 46.9 million. And actually, at the 1st of September, that's now sitting at GBP 68 million. Next, please. Revenue split, this is just to show that we're still key in all major regions. They do fluctuate a bit between regions, between halves simply because of how we deliver our projects. It depends on when the program requirement is for the customer. So Asia Pac dominated by the top customer there. And then many of the other customers were actually concentrated in Europe. But that's, again, just a pattern that just moves around because our customers deliver all different times. Next, please. Business units. I'm delighted to say systems is now profitable. Compared to last year, it was about a GBP 400,000, GBP 500,000 loss last year. We're in a really good place. So even though the revenue hasn't gone up massively, it's up 9%. It's actually because of the mix of revenue, which we've always said. So in this business, you need to win the design win first, the design work first to then build up the production orders that come off the back of those designs. That's starting to happen. So -- and that's shown by the gross margin going up 13 points -- from 13.3% to 26.3%. That will continue to evolve over the next few years as we get that mix bigger on production side against a bigger revenue. Design work will always be there. That's how you live and breathe and move through the rest of the company. Headcount about 25 people in systems. That will simply grow now through more work. So we will hire more engineers as we win more work. Most of the functional people are in place. So it would just be business as usual in terms of further recruitment there. And pipeline of opportunity remains really, really strong in the systems business as it does in the products business. So products business, a good first half at GBP 19.8 million, 11% up. But as Miles has alluded to, that was actually probably quite restrained by the orders being quite late in the half. We will have a very strong half in the systems business and the products business and the systems business. There's a slight downturn on the profit margin against last year. That's solely because this side of the business carries all the cost of the whole group, basically that's nonsystems. And therefore, there's some additional costs in the first half that we just didn't get revenue up quite high enough to cover off. Some of those are one-off costs in terms of recruitment as you'll see my replacement, we had another senior recruitment earlier in the year, and they will wash through in the second half where profit will be really strong. Next, please. Cash. So just to show on cash, we have gone down about GBP 4 million since year-end, as I say, up against last half. That's very much because of the facility upgrades, and that's represented there by the GBP 3.3 million purchase of PPE. We also did a large amount of capitalized R&D. That is GBP 3 million, and that's our product development. That will probably run rate at GBP 6 million this year and probably beyond this year. So products, it depends on our road map, what we're doing. Some products are bigger than others. And at the moment, we're working on 5 very key products that should go across to manufacturing in early -- end of this year, early next year. In terms of the 2 big chunks there, increase in trade payables and increase in receivables, they are dominated by the same thing. So the increase in receivables includes a GBP 6.7 million invoice which was against that GBP 17 million order. That was raised in June and paid in July. So that dominates that number. And the increase in trade payables should say and liabilities because in that side of it, there's a GBP 6.7 million deferred revenue, which we will be working through most of that in the second half of the year. The other key point to note on this slide, net cash from operating activities was actually positive in this half. Last half, it was significantly negative last year. So really good cash performance. We are still in a very strong position, and we still remain with no debt, even though we have a debt facility of GBP 5 million RCF, which rolls for about another 2 years. Next, please. This is just to show the 5-year performance on the right there. And the left is just saying we're doing what we said we'd do. The strategy set out in 2021, and we've sort of developed into '22, '23, we're absolutely doing it, and we're staying very focused on it. And you can see by the numbers there, revenue is up 3x -- over 3x since 2022. Profit margin is coming up. We've always said that we want to get to mid- to high teens. We're currently sitting at 13.8% for the year -- for the half year. Next, please.

So in addition to all the growth and the fun stuff, we have to take governance and in particular, the management of risk extremely carefully. So just sharing with you here 3 of the enterprise level risks that we take great care to manage well. Top of the list is cybersecurity. I have historically run a cybersecurity business. I know a little bit about it, and we need to be as tight as we possibly can. In addition to investing in good tools, good IT, good people and training people, we do lean into having third parties kick our tires and assess us. So for example, securing defense cyber certification Level 2 in the United States, we're one of the only companies of our size to have done that. That's the sort of thing you'll more normally see with a much larger, perhaps more mature, deeper pockets company. And we're about to issue all senior staff with a locked briefcase with complete brand-new bare laptops in non-Microsoft comms tools, plans and protocols for bringing back up all that stuff. So we're doing a lot of work there. Likewise, at the bottom of this chart, physical security, our profile is a lot higher than it was. We work in a sector that attracts attention, and we have a lot more dependency on parts, finished goods and machines in our Colchester factory. So as part of the renovation that I'll talk about in a minute, we have new doors, new windows, bars, bollards, electronic access. And in the new building, we're even designing the ventilation so that it can defeat people trying to listen through it or send small drones down through it. And then, of course, there's the supply chain. So Kim said this, supply chain is tough across the board. So we're managing it well, but it's certainly unusually slow and difficult and prone to short-term price fluctuations. So we're doing everything we can to manage that, including buying in advance where we need to. Next. So this is our family of products. And yes, we launched 5 new products in the first half. But the point now being really that this entire product range is much more diverse than it would have been some years ago. We have graphics cards in here. We have systems. We've got more storage. We've got FPGAs. We've got kinds of stuff, but it's also extremely current. So our customers would view our portfolio as very up to date, exceptionally up to date. So that's good, and we're starting to get that feedback, not just from our customers, but some of our core partners are saying they're experiencing us projecting technology into the market often quicker than anybody else. That's relentless for those of you that [ know ] Moore's Law, doubling of technology in 18 months. There's no room for complacency. But in our world, this set of products is absolutely fantastic. So in Colchester, we were running out of capacity to manufacture our boards, our computer boards. We've already doubled capacity by introducing 2 shifts a few years ago. And so the plan has been to -- in that building, half the space was taken up with office accommodation. We've removed all the people at desks and have instead turned those rooms into brand-new rooms that support the factory like a new large oven room, all of our products have to be thermally cycled. We've taken off of the shop floor of the factory test. So we have a new dedicated test room. That liberates then room in the factory for new machines. Some of those machines are pick and place, so the machines that literally put the printed circuit board together. We've got new inspection machines. And in that picture in the -- towards the right, not quite the right, the large gray block you can just see in the bottom right-hand corner is a new soldering machine. So that capacity is now installed and running. Next. And so we took the top floor of the building next door, which is an additional 14,000 square feet, 2 wings. The first wing is done. You can see pictures there, high end, appropriate to customers and employees, flexible accommodation. It's a really pleasant place to work. The second wing will open soon into which we will put a really substantial engineering lab, but also a number of rooms that help us to really grow the business. Currently, we've got a number of people in temporary office accommodation in car park literally demountables with air conditioning. That will all finish in the next very few weeks. So as we get into October, the whole thing will be done. Really first-class facility. The 2 buildings are literally next door to each other. So that works well. Next. Very simple strategy. I'm strongly of the view that most businesses can have an extraordinary simple strategy, and the focus should be developing the culture to enable operational excellence. And that's very much what we do. So our intent is to bring technology to market as quickly as possible, ideally first. And we do that with the capabilities we already have by, as I said, focusing very much on culture and operational excellence and trying very hard to put evaluation product into customers' hands before anybody else can. We will then grow that capability organically. I've given a couple of examples like thermal management, the latest Intel processor generates about 150 watts of heat. For those of you who remember what 100-watt light bulb felt like, that is an awful lot of heat to get rid of. Security matters a lot. So our next generation of products will have very novel and very competent security features on board, which I think will be really attractive to customers. And then we have said for some time that we are acquisitive. Our first acquisition was Phillips Aerospace. That's going very well. I did say we wouldn't do the next one until we could put a tick in the box of having mobilized our systems business. We have mobilized our systems business. And as Kim said, we spent GBP 114,000 on exceptional costs. There's really only one thing that can be, and we're working very hard on that. So watch this space. And then in terms of how we're developing the business over time then, we're going very much from a business that did one type of product only to an increasingly broad suite of products and integrated services, so we can become much more of a one-stop shop for our customers' embedded computing and related technology needs. Next. So in terms of outlook, great order intake, GBP 68 million year-to-date. Our backlog today includes GBP 35 million roughly of work to be prosecuted in 2027 and beyond, the bulk of that being in 2027. So by the time we get to the 1st of January, our opening backlog for 2027 could well be GBP 40 million or GBP 50 million. That's roughly 10x what it was this time 5 years ago. So building real momentum there, starting to get multiyear visibility. It's the first time our book-to-bill has been greater than 1. Our systems business has transitioned into profitability and will grow and in time, years, but in time will be larger than our products business, I'm certain, simply because of the value of opportunity there. And therefore, we, the Board, are extremely comfortable in exceeding this year's expectations. And indeed, the expectations for '27 and '28 have also been somewhat enhanced. Thank you. Back to Lilly.

[Operator Instructions] We have received a number of questions today. And if I may just start off with the first question here, which reads as follows. Why no interim dividend, especially given the GBP 9.7 million cash on the balance sheet? When can we expect this reinstatement?

Thank you. For a number of years now, we've had the policy of paying dividend based on full year in-year cash and profit. So that will remain to be our policy for the time being. Clearly, we have people who'd rather we didn't pay dividends at all and focus on growth. And then we've got people for whom dividends are important. So we think we've got the balance right, but it will be based on full year performance, profit and cash.

That's great. The next question we have here reads your design-in wins accelerated from GBP 100 million in the whole of 2024 to GBP 90 million in the first half of 2025 and GBP 129 million in the first half of 2026. How do you see the trajectory?

Well, you've sort of just laid out the trajectory. So assuming we continue to perform in line with how we expect and assuming we start to win an increasing number of systems-related design wins, which themselves carry a much higher unit price, then that number should continue to grow. It's quite lumpy. So the largest item in that GBP 129 million is $50 million. So clearly, whether there's $50 million in it or out of it changes the number quite a lot. But in trajectory terms, that should strengthen.

That's great. Just turning to the next question. Your total reported design in wins from 2023 to 1H '26 is GBP 474 million. Will you need further capacity expansion to deliver these wins perhaps in the U.S. What is the current value of your design and wins? Some of the GBP 474 million has converted into contracts and presumably, you've updated your forecast on other programs.

So very little of it has converted into contracts yet. Although in the first half of this year, we always said '26 that design win order intake would start to pick up and then revenue. So including the GBP 17 million, about 2/3 of it relates to prior design wins. So that will start to become revenue. The capacity for boards on a like-for-like basis is now running at about GBP 80 million per annum of output. We could do 3 shifts 7 days a week in principle, which would significantly increase that. Yes, we could and probably should at some point, consider capacity in the United States, and we're thinking about that. There's no urgency at the moment. And for systems, we've got plenty of capacity there for fairly low rate and modest production. If we get into high production orders, we will find a very simple low-cost space like a warehouse into which you need to recruit skilled labor to assemble. It's not the same thing as needing to buy very large expensive machines. So essentially, we've done the hard work to generate the ability to have the capacity we need for the foreseeable future.

That's great. What's your current view on the progress of the systems business and the outlook over the next 5 years?