Concurrent Technologies PLC (LON:CNC), a world leading specialist in high-end embedded computer products for critical applications, announced today its interim results for the six months to the 30th June 2022.
Financial Performance
Component supply issues have delayed shipping of some of the Company’s products, such that a proportion of expected H1 2022 revenues will be recognised in a later period. However, this is a short-term issue and in no way relates to the quality of the underlying business. Demand for the Company’s products is higher than ever with a strong H1 order book (£14.2M) and record backlog (£20.3M).
· Revenue of £7.4M (H1 2021: £9.3M) – reduced solely as a result of components supply issues
· Gross profit of £3.7M (H1 2021: £5.1M)
· Gross margin of 50.4% (H1 2021: 54.3%) – reduced as the result of price increases of some components due to high demand and limited supply (-£0.3M against H1 revenue)
· Operating profit of £0.1M (H1 2021: £1.6M) – predominantly driven by revenue/gross margin variance of -£1.4M; net costs increased by c£0.2M, in line with investment strategy
· Profit before tax of £0.0M (H1 2021: £1.6M)
· EPS of 0.75 pence (H1 2021: 2.09 pence)
· Interim dividend suspended for H1 2022 (H1 2021: 1.15 pence per share)
· Cash Balance (including cash deposits) as at 30 June 2022 of £9.3M (31st Dec 2021: £11.8M)
o reduced due to lower cashflow from operations of £0.6M, and continued investment of £3M, in line with our strategy
o R&D investment will continue into H2 2022 at a similar level as H1 2022
Operational Summary
· Strong order intake of £14.2M as at 30 June 2022, with significant backlog of £20.3M compared to £15.6M backlog as at 30 June 2021, up 30%
· Defence is largest market sector at 76% revenue
· Global customer base is solid with exports generating 90% of revenue
· R&D costs (talent, improved process & analysis, materials) have increased by 50% to £2.4M (H1 2021 £1.6M), in line with stated strategy to enhance the number of product releases per annum and reflect the more complex nature of our offerings
· Three new products launched in H1 2022 and on track to launch eight new products during FY2022 (approx. double previous cadence)
· Component shortages have been exceptionally challenging, causing a significant limitation to our ability to ship product
· Major new order with a Fortune 500 medical company with a $2.3M purchase order in 2022 and similar sized orders anticipated for several years to come
· Experienced leadership team fully in place
· New office opened in Theale to attract and retain talent
· 20% increase in headcount, in line with strategy, to enhance new product delivery and support our path to growth
Miles Adcock, CEO of Concurrent Technologies, commented: “Short term component availability is resulting in constrained performance in FY2022, with limited visibility of exactly when it will ease. However, order intake is strong, and would otherwise reflect in a solid improvement in revenues. Order intake should strengthen further as strategic initiatives take effect in FY2023 and beyond. Post period end, total order intake has further strengthened to £20.8M, producing a current backlog of £24.2M as at 12 September 2022. After more than a full year now leading this business, I am even more confident in our ability to grow and develop a successful global enterprise.”
CHAIRMAN’S STATEMENT
Whilst it is clearly disappointing the component supply issue has impacted on our revenues and profitability in the first half of 2022, which will continue in the second half of the year, it is important not to lose sight of the improving underlying fundamentals of the business, demonstrated in our product development, new customers, order intake, backlog and management strength. The component supply issues will ease and, although we can’t be sure exactly when, when they do we are well positioned to benefit from all the underlying fundamentals highlighted, which will drive long term growth.
The cash position of the Company remains strong, which has allowed us to continue to invest in engineering and product development. The long term success of any technology company is bringing innovative new products to market first and that is, and will remain, our focus.
Given the strong balance sheet, paying an interim dividend out of historical retained earnings was considered. However, paying dividends from current year earnings is an important discipline we wish to maintain. We are committed to paying a dividend and our shareholders will see the benefit of this as we drive growth in the coming years.
CHIEF EXECUTIVE’S REVIEW
Financial Summary
The Company has continued to operate in a very challenging environment in H1 2022. The global component shortage impacts the entire electronics sector and has had a significant impact on short term performance. The delay in completing the full manufacture of certain products, and a consequent delay in their shipping, has resulted in deferred invoicing and a corresponding reduction in revenue in the period against the prior year by 20% to £7.4M (H1 2021: £9.3M).
It is important to note that the impacted revenue is delayed and not lost, and we continue to recognise an exceptional backlog. We have strong relationships with our customers and are driving the pace for delivery. It is recognised by the customer base that the issues are driven by external factors (which all our competitors are also facing).
Demand driven increase in the costs of some components has also resulted in a reduction in gross margin of c.7% from 54.3% to 50.4%. Both revenue and gross margin impacts are solely driven by component shortages and are not a reflection of the quality of our underlying business. We have delivered an unaudited profit before tax (PBT) of £0.0M (H1 2021: £1.6M), a net variance of -£1.6M, primarily caused by the reduction in revenue volume and gross margin, with underlying net costs having increased by £0.2M (as per strategy, this is predominantly driven by investment in talent).
The balance sheet remains strong with no debt and £9.3M of cash balances (including cash deposits) as at 30 June 2022 (31 December 2021: £11.8M). In response to the components shortage, there has been a substantial and carefully managed investment in additional inventory, with an increase of £2.8M, to £9.4M (H1 2021: £6.6M). As the global supply chain recovers, and components become available, revenue generation will accelerate as the business not only delivers normal run rate outputs, but also increases capacity to enable the processing of the now record backlog (£20.3M at 30th June 2022 compared to £15.6M at 30 June 2021). Whilst the backlog is to some degree inflated due to the challenges of supply, it is important to note that FY2021 order intake was at a record level (£25.2M), and an order intake of £14.2M in H1 2022 puts the business on track to secure another very strong year of customer commitment.
Review of Operations
Despite the headwind generated by short term components shortages, the business is making good progress with operational improvement and implementation of the strategy.
A refreshed leadership team is now complete, with the new CFO Kim Garrod, being the most recent joiner in May 2022. We have also recruited additional talent across the organisation in engineering and sales, as well as fully implementing new functions such as HR and Legal/Commercial, growing our headcount from 99 to 118 in the last 12 months.
We have previously stated that it is imperative that we deliver more products to market in a timelier fashion. Having set the challenge of broadly doubling our cadence of new product releases to eight this year, we have indeed released three new products in the first half of 2022 and remain on track to achieve the objective of eight for the full year. This is reflected in a 100% increase in the cost of capitalised R&D compared to H1 2021.
We said we would develop a Build to Print partner in the USA to better access that domestic market. We have now qualified Nextek, based in Madison, Alabama. The intent is to be able to offer to the market genuinely ‘Assembled in the USA’ products by the end of 2022.
In addition to designing and manufacturing single board computers, we committed to invest in developing a systems business. Having recruited specialist experts during H1, and engaging in business development dialogue with potential partners and customers, we will secure initial contracts with new customers in H2 2022. An example of another new customer relationship that we have developed is the $2.3M purchase order from a Fortune 500 medical sector business, with the opportunity for similar size purchase orders from the same customer for several years to come.
Current Trading & Outlook
With a record H1 backlog of £20.3M, and a record YTD Order In-take of £20.8M (as at 12 September 2022), the business is starting to benefit from the refreshed approach to operations and strategy. We have transformed from primarily relying on end of life products in recent years, to four fifths of our orders this year being for our current and new products, which are exciting existing and new customers. In addition to increased demand from the market, we have built increased capacity to deliver through additional shifts and a qualified build to print partner in the United States. Whilst the challenge of securing semiconductor components is frustratingly constraining everyone’s ability to ship completed product, we are well positioned for material growth as the situation resolves.
