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206. Bull, Bear & Beyond – Calnex Solutions: executive interview
8 Plays12 days ago
In this interview, Tommy Cook, Calnex Solutions founder and CEO, discusses how the company's synchronisation and emulation solutions play an essential role in validating the performance of critical network infrastructure. He highlights the product roadmap as interface speeds increase, with demand increasingly driven by AI-related data centre build-outs alongside ongoing telecom requirements and a growing defence opportunity. CFO Ashleigh Greenan describes a model led by hardware and software sales, complemented by growing support and maintenance income (shifting towards an c 80/20 split), and explains that the group’s capital allocation prioritises maintaining a strong, resilient balance sheet with surplus cash, while keeping some capacity for small, bolt-on M&A without taking on leverage.
Calnex Solutions designs, produces and markets test and measurement instrumentation and software used to validate the performance of critical network infrastructure. Its solutions support network synchronisation (timing) and network emulation testing for telecoms and cloud/data-centre environments, sold internationally to equipment vendors, service providers and other network operators.
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Transcript
Introduction to Calmex and its Focus
00:00:06
Speaker
Hello and welcome to Edison TV. Today I'm speaking to Calmex, the AIM-listed provider of network instrumentation and solutions with a particular focus on synchronization and emulation.
00:00:21
Speaker
Tommy, many thanks for joining me today. It's a pleasure to be here, Dan. Thanks. And could you start by introducing Calmex and in particular discussing why your solutions are needed and and and who the products serve?
00:00:35
Speaker
Sure. So we make instrumentation for prove to prove performance of critical infrastructure. So that's primarily pieces of network equipment that's going to be used to build networks around the world. But it could also be applications, software that's going to run over the the the networks, or even monitoring networks are already in place to ensure they're working. So fundamentally, in terms of that proving performance, it's primarily engineering teams that need to, building a new switch or specific equipment, you need to prove it's going to work correctly and it's going to work correctly under all conditions once it's deployed in the many topologies around the world and and at times it needs to prove that it meets standards as well. So that's really what they're using our equipment for is to prove performance of their designs to ensure that once it's released into production it's gonna they're going to get the good but a good yield and it's going to work when the customers get it into their hand.
00:01:30
Speaker
Thank
Calmex's End Markets and Global Reach
00:01:31
Speaker
you. And can you talk about the end markets you serve and also look at your your routes to those markets? Sure. If you kind of think from a history point of view, we started in telecoms very much. That's where most of the the networking comes from. and So very much you're talking about the network ah equipment manufacturers, people like Cisco and Nokia that we would sell to. and We also sell to some of the component chip people, so yeah Broadcom, Intel, and the network operators, BT, AT&T, etc. But the biggest part is the equipment manufacturers. So again, it's that these design teams that we're were selling into that making and different different new pieces of equipment come to market. And we are providing them solutions that are testing both what the the new stuff they're developing, but like in all networks in the world, yeah it's not not everything's new. There's a lot of legacy equipment, so the new has to work with the the legacy as well. So we're proving performance of the new alongside the legacy.
00:02:28
Speaker
And so very much we sell in about 68 countries in the world. Telecoms, as you can tell, is is a true global industry. Our big market spaces are North America, Europe, India, China, or Japan, Taiwan. But in fact, we sell in many countries in the world, South America, Australia, and many other places as
Products: Synchronization and Emulation
00:02:50
Speaker
well.
00:02:50
Speaker
So CalMix focuses on two key areas, synchronization and emulation. That's right. um For those less familiar with the story, can you explain um what each of those products do, what what they actually do for your customers? And then looking at your development pipeline, um you know what are the key leading edge developments now that that will will eventually go mainstream and and and and support your revenues for a longer period of time?
00:03:14
Speaker
Sure. So synchronization is quite simple. It's it's passing time through a network. So the basically there's a protocol that's called PTP that's used to transfer time across a network.
00:03:25
Speaker
The telecom guys started it using it seriously for the date for the mobile base stations. So basically all the base stations you see at the side of the road, they don't interfere by each other because they relate at different times and they all need accurate time so they can do that.
00:03:42
Speaker
but the accurate time that we are testing is to a billionth of a second and that's what makes it tricky. So basically what we are doing is transfer an our pieces of equipment fundamentally trans send them a timestamp, the equipment locks that timestamp, locks our internal timing, generates a new timestamp on the output. and We look at that and tell you how accurate it is at generating the time.
00:04:04
Speaker
And really what we're doing in terms of the waves of synchronisation that are coming, it tends to get it's following the the interface rates, so it's basically moving up and up to higher and higher rates. So in terms of where we're focused at the moment, there's a lot of work in the standards activities going on in terms of how to transfer time, different topologies, and we follow that all the time. In fact, we have one of our employees, kind of leads the ITUT t standards group that talks about these things. But at the moment in terms of where our technology is going, last year we brought out 800 gigabits, its support for the 800 gigabits interfaces and we're now working on 1.6 terabit.
00:04:42
Speaker
And probably two or three years we'll working on 3.2 terabit and then whatever comes after that. So it's just a continuous thing. The other thing that we do is emulation. Again it's quite straightforward, we're emulating networks.
00:04:54
Speaker
So when you ever send things through a network, things go wrong, it's not perfect. You may have seen when you've clicked on ah a web link on a browser, it just spins for a while, nothing happens, and you click again, it works.
00:05:07
Speaker
Why is that? It's because it got lost, the packet, it just didn't happen. So very much we create that environment where things get lost, where packets get lost, where they take a very long time to go through, a long time to go forth in one direction, a short time in the other direction, of variable times.
00:05:23
Speaker
packets arrive in the wrong order and the reason to do that is to check what's going to happen to the equipment. Is the equipment you're testing just going to get confused and just crash or is it going to elegantly manage that by either retransmitting the message or ignoring what it should ignore? So we are allowing that easy emulation of real-world networks in a lab in a straightforward environment.
00:05:45
Speaker
Thank you and Looking at the structural drivers for for your products and services, there's been quite a big shift, I guess, over the course of the of the course of the last couple of years, but equally there's cycles within that. Can you talk about the structural the structural demand for your products and services and how that evolves?
AI Infrastructure Opportunities
00:06:02
Speaker
Yeah, the big change we're seeing at the moment and big opportunity is driven by the appearance of AI. So we're not testing AI as such, but it's the infrastructure that's being created to support the the the AI revolution that's coming. And so a lot of these, when people talk about data centres, in some ways to me it's like a network in a building, albeit a very large building. It's full of equipment that's networked together, huge amounts of data passing back and forth between it. and that's really what's getting tested and a lot of that technology came from the telecoms world or originally came from the telecoms world there's close correlation from a from a solutions point of view there's a close correlation for us developing a solution for telecoms to the to giving a solution into the the data center world albeit the end customers are quite different and what they need So very much at the moment we're seeing the drivers to go to higher and higher rates.
00:06:54
Speaker
They're up at 400 gig, 800 gig, 1.6, they're already talking about 3.2 terabits. So their speed is moving very fast. Traditionally that used that drive used to come from the telecom world.
00:07:06
Speaker
I've been, before I started Calnex, I worked in the same technology sector, so I've been here for a few decades. And every few years you've got the next wave and it feels like it just keeps coming and coming and coming. The driver now for the high rates is the data centre world. They the ones in a rush to get to the next rate. and So that's really where we've seen a lot of opportunity, growth opportunity. We keep very close connected to the telecoms world because that's still a big part of a market. There's not so much growth at this point know and and and because the the kind of deployment to move forward with the 5G and then into 6Gs slowed at this time.
00:07:42
Speaker
But very much says' there's a high commonality of what's going on in between them. So very much we want to continue to be strong in telecoms, but where we are looking for is into the data centre world, because that's where we see growth potential. Plus in the defence world, again,
00:07:56
Speaker
operating and you know an army these days or a defence situation, it's basically a network, albeit some physical, some through the air, of lots of complex pieces of equipment that are all networked together in very different environments. That's again an opportunity for us because you're trying to prove that all these pieces of equipment are going to work, especially if they're moving and there's maybe poor connection to different points. whether you're actually proving the the software works or you're actually running and an environment that the operators test and prove they can control everything when they need to control when they get to the real situation.
00:08:31
Speaker
that's That's very helpful, thank you. So so so expanding into into new markets, into defence, hyperscalers and so on. and Can you talk about your business model? You've obviously got technology leadership.
00:08:42
Speaker
how would you how How does that translate into sustainable growth for Calnex? They don't just buy an instrument from us, they're buying our expertise and in test and measurement. And we kind of form relationships because today when, first a large number of instruments, they're more like platforms. People buy the platform, they buy the capability they need today, they know next year they'll need something different the year after that.
00:09:06
Speaker
They don't actually know yet because it maybe it's not been designed by the standards or set by the standards. So they buy a product from us and then they come back and buy enhancements. And you know once they've built that, they take our equipment and build it into their test setup and lots of equipment, they'll write lots of software routines to basically drive and run different situations. So if we don't follow the technology waves, they have to take our equipment out and it's not just the cost of putting another piece in, they have to rewrite all their software. So really it's a partnership and very much we play on that and so we basically form relations, we try to be ah a valued partner to all our customers, not just by the technology and leadership we provide, but the way we support them, the way we help them understand how to get the most out of their product and be with them and follow them through these these times so that they see us as a valued partner and keep coming back time after time to buy upgrades or buy additional units or new types of equipment.
00:10:04
Speaker
Tommy, many thanks for joining me today. Thank you. And we're now joined by Ashley Greenland, Chief Financial Officer. Ashley, many thanks for joining me today. Thanks for having me.
Revenue Streams and Customer Base
00:10:15
Speaker
And can you start by um ah going into a little bit more depth on the business model and discuss the company's repeatable recurring revenue revenue profile and how that that evolves and how that works for the business?
00:10:27
Speaker
Well, it might be useful for me to just talk through the revenue model to to add to what Tommy was saying earlier around the um the of the cut the business model. um From a revenue model perspective, we um so we've got we've got two main revenue streams. The the um majority of our revenue comes from what we call hardware and software revenue. So that's when a customer will buy one of our boxes with software options included.
00:10:58
Speaker
um And that goes as our, aim as our ah that revenue is recognised when they purchase the hardware. We've also got um software support and maintenance revenues as well. um That revenue is recognised over the life of that contract that they take out. The um the the split of that um has been about 90% hardware software and 10% software support revenues in the past. That has changed slightly to become um more like 80-20, which just builds up a little bit more of a kind of recurring, ah a type of recurring revenue with an art within our P&L.
00:11:36
Speaker
within our p and l That revenue, that hardware and software revenue isn't necessarily a recurring revenue but we have a strong repeat revenue model. So um so our customers, particularly in the telecom space, um if ah if they're looking to buy our next our next generation of products that come out as part of our roadmap,
00:11:59
Speaker
um they will often be on a sort of repeat model with us. So if they've bought a box with us before, they might want to just add software upgrades as we um ah release them and to add to the hardware that they've got.
00:12:13
Speaker
Or if they want to test something different within our R&D networks, they will buy another one of our boxes and add software options to that. So we've we found that we've got a strong repeat revenue um relationship with our with our customer base which has helped and helped us understand how our so revenue growth will look like over the the years. it We also, alongside that, we've got, as Tommy was referring to earlier, we've got quite a good spread of geographical revenues as well. So across our three main regions, Americas,
00:12:51
Speaker
and North Asia and EMEA plus in India. and In the past, they have ebbed and flowed depending on what's happening geopolitically. Sometimes they can be 30-30-30 across the piece. In the past, we've in the last couple of years, we've seen um more of a weighting towards Americas and EMEA just because um of the sort of geopolitical activity happening in in North Asia and and the US. and but it just means that we can balance that risk out and and build resilience within our revenue flows as well. um
00:13:27
Speaker
We have seen quite a shift of our revenues um away from telecoms into the cloud computing data centre areas. So last year, in FY25, our revenues were split around 50% at cloud computing and data centres customer base.
00:13:47
Speaker
um High 30% for the telco with the remainder coming from government and defence as well, which has helped spread that end market customer base as well.
00:13:58
Speaker
um And we also have seen in the past that Because we're a low volume, high value business, our revenues tend to come from, 50% of our revenues have come from 10 to 15% of our, 10 to 15 customers um that that tend to come because of that repeat revenue nature have have come and ordered every year for different things. um So that's helped both to the revenue model as well.
00:14:31
Speaker
That's very helpful,
Capital Allocation and Growth Strategy
00:14:32
Speaker
thank you. And and can you talk about your approach to capital allocation, your capital allocation policies? Sure, absolutely. So ah so as the the board review our capital allocation approach on a regular basis, but as it stands at the moment, we've got a very strong balance sheet. um We have a good level of cash and within that cash balance is quite a good level of surplus cash.
00:14:56
Speaker
um Our working or working capital requirements don't don't require all of that cash, although like it can go through peaks and troughs like and like any other business within the quarter. and We have found in the in the past, in the recent and the recent and past, we found that surplus cash that were carrying and to have to have been really handy in times of more uncertainty, in this more from a geopolitical perspective. We found it um very useful during in times of the supply chain crisis to be able to to bolster our and our position um and give us a little bit resilience against um the uncertain um external environment. and in more recent times that's helped us when there was a little bit more uncertainty around and our in tariffs. So we found from a resilience perspective that surplus cash is very very um useful. and
00:15:49
Speaker
We do like to also um keep a little bit aside in case of any M&A opportunities that may come up, although we we we are relying on M&A for our growth over the next few years. and But it is because we have we don't have an endless list of M&E target opportunities, it is useful if we can keep a couple of million as aside for small acquisitions to to just do them do more quickly and more efficiently and to keep ourselves leverage free.
00:16:25
Speaker
Perfect. and And you mentioned M&A just now, but just overall in terms of the evolution of the business, what are the key things that we should be looking for over the course of the next 12, 24 months?
00:16:37
Speaker
So in terms, so our, are as I was explaining before, our M&A, there's not an endless list of M&A targets for us, but we are we are all constantly reviewing that and that that opportunity and for the for the business. but at the same time obviously concentrating on that organic growth so back to those end and new end markets we do believe there's opportunity for us within government and defense and more opportunity within the the data center world as as Tommy was talking about earlier whilst also um keeping really close with our telecoms customers to um be ready for for growth coming back in that area as well so So very much for us concentrating on that, if we can build it and the um organic growth, the M&A would be a nice addition to the side, and but but not something that we would be reliant on for that growth.
00:17:33
Speaker
Yeah, so it's giving you it's important to have that level of resilience and and and to be able to be nimble in terms of M&A. So that's very helpful. Thank you. Ashley, many thanks for joining me today.
00:17:44
Speaker
Thanks for having me.