Spirent Communications plc

Hello and welcome to Spirent's 2021 results. Please take note of our safe harbor statement.

I'm delighted to say that our strategy is absolutely working. We have strong market drivers across our business.

5G remains our major enduring growth driver as we'll further demonstrate today. We're market leaders in 5G test and assurance and we won over 800 5G deals this year.

Lifecycle Service Assurance was a highlight again maintaining their solid momentum and growing revenue by double digits during 2021. They also successfully integrated the octoScope acquisition.

We saw significant demand for our products so we invested in our sales team to expand our geographic market reach. We pivoted successfully to solutions-based selling, including our services portfolio which is producing great results.

And the major headline, we delivered another year of sustainable profitable growth. Revenue was up by 10%, 7% organically.

In addition, our 18% growth in bookings drove a very healthy 30% increase in our order book greatly enhancing our visibility into 2022 and beyond. With that, I'll pass it over to Paula to go over the numbers in more detail.

Thanks, Eric. Good morning all.

So let me take you through our '21 results. Again we presented a set of financial results showing robust growth.

We believe our progress relative to similar peers is strong and evidence that our strategy is indeed working. So looking at the key metrics here.

Order intake is now well over $600 million and up 18% in the year, 14% once we exclude the recent acquisition and revenue at $576 million, up 10%, 7% organically. We had a super busy final quarter to the year and with orders ahead of revenue meant book-to-bill was 111 for the year with substantial growth in our order book, which I will cover in more detail shortly.

Operating profit at almost $119 million was up 14% on 2020 and resulted in an improved operating margin at almost 21%. And with further EPS growth being delivered, we are proposing a 12% growth in the dividend, which is 14% in sterling.

So how does '21 look against our recent trend? And we can see from this slide, clear consistency of delivering growth.

We don't see any technical cyclicality impact and we do see that we managed to deliver growth through a challenging period impacted by COVID. That's not to say we didn't experience any supply chain challenges of course, we are indeed managing these very effectively as we have price rises and delays that are real-time matters we are working through.

So despite this landscape, we can see strong progress and delivery of a strong track record of revenue growth, superior gross margin and operating profit has increased over 150% since 2016 when it was $46 million. Now as I mentioned, we have again increased our operating margin as we grow balancing benefits from increased revenue with investment in support of sustainable future growth plans.

So looking at the full year figures in a bit more detail. I've already mentioned the strong order intake and top line growth.

What you can also see here is the order book size and its growth is up 30% in the year to almost $270 million. I'm delighted to report gross margin of 73.7%.

And as I had explained before growing our services business which we did by 15%, being a lower gross margin business stream was offset by strong growth in software content from our service assurance offerings. And looking forward, I do see gross margin headwinds as we also carefully manage supply chain cost increases.

OpEx was up 9%, including inflation, our acquisition and investment to support our growth plans. Profit before tax at $103.6 million is shown here following acquisition costs in the main.

Tax was in line with our guidance and looking forward, we estimate slight increase over time simply due to regional profit weightings. Cash remained strong positioning us well as we continue with our growth agenda.

So turning to the performance of our segments. We can see progress across the business, both segments delivered revenue growth and increased operating profit.

So let's look at each of them in turn. Lifecycle Service Assurance on the back of a strong year of achievement in 2020, we are delighted with the ongoing momentum.

Revenue up 19% to almost $262 million with a strong uplift in operating profit. We saw double-digit growth in both of our lab and live solutions and with 5G continuing to be a strong driver.

We absorbed the Connected Devices segment into this Lifecycle Service Assurance area and it continued to make good progress. We've also been busy merging our acquisition with our own Spirent WiFi business and addressing our routes to market, integrating our sales and technical approaches.

The market growth potential remains very positive. Order intake for the acquired business showed strong growth year-on-year.

Revenue was broadly level as we experienced a few delays in supplier parts. Turning to Networks & Security.

We delivered 4% revenue growth in the year as demand for high-speed Ethernet and security solutions picked up. Our GNSS positioning business has also been very busy breaking into new customers and we've seen some pickup in government business as well.

We got good order book as we commence the new financial year. Corporate costs were down year-on-year as some of our initiatives with full year costs in 2020 came to an end during the year.

As there are many new compliance matters facing us, which we are proactively managing including investment into ESG, developing corporate reporting on climate-related matters and investing in our controls framework as we face the U.K. SOX type environment; so we expect these costs to gradually increase going forward.

A bit more coming here on the makeup of our revenue. Diversification remains robust.

Top 10 customers equated to 38% of revenue and broadly consistent with previous years. By geography, growth was seen in absolute dollars in the Americas and EMEA with APAC broadly level and as a result, the proportions have remained fairly consistent with the previous year.

The last chart here shows the services proportion here in green, which grew strongly at 15% during the year. And as we move forward, growth in software and services is our key focus areas, but of course, we will always retain a fair chunk of hardware to support our assurance methodologies.

So let's look into the order book in a bit more detail and as you can see here, the step-up in absolute size here is noteworthy up $63 million or 30% year-on-year. So why is that?

Well, there are a number of drivers in play here. We secured many more contracts spanning multiyears and this is due to 2 factors.

In some parts of our portfolio, increasing Lifecycle Service Assurance where we used to sell one of test solutions, the customer is interested in much larger business solutions, much larger deal size spanning more than 1 year of work. We are also selling more and more of the support contracts.

We are the critical partner for 5G rollouts and our customers want and need the support we can give them. In addition, we also benefited from a strong pickup in orders in the last quarter of the year across the whole of our portfolio.

So how is the order book unwind? The chart on the right-hand side here shows that we are building revenue for future years beyond 2022.

Indeed, 20% of our order book is for delivery beyond 2022 and this compares to almost 0 just 3 to 4 years ago. So we are building strength, visibility and resilience in our business model.

So I wanted to share this information with you trying to give you a feel on just how much Spirent has changed in recent years. This graph compares the number and value of deals greater than $1 million in 2017 to 2021 and we have grown from 28 deals worth $67 million to 57 deals worth $138 million.

And indeed, these larger deals represent 22% of our total orders compared to only 15% in 2017. And in particular, if you look at the orange box, we delivered 21 deals in the $2 million to $4 million category and that compared to only 5 in 2017.

Now this transition is mostly from our Lifecycle Service Assurance segment and it's because of how we work with our customers and what we are selling them is radically different. And over the last few years, we have invested on sales force to build a new skill set to partner with our customers in this new way of doing business.

So this is actually quite a good segue to our next slide on operating costs. We keep a tight rein on all of our costs as we grow and we invest with a very targeted approach.

The total increase in spend in the year, of course, includes annual inflation of around $9 million, our acquisition of approximately $8 million of OpEx and as you can see here, we focused on sales investments to underpin our growth. Our desire to move into new markets, regions and customer types.

We've also developed our digital marketing activities. So clearly with an order intake growth of 18%, then the investment was justified.

We again invested 20% of our revenue into R&D and the increase was mostly in our Lifecycle Service Assurance segment as we develop our assurance methodologies to become more scalable globally. We kept the admin costs tight in the year although we are now developing plans to support the growth agenda in the area of IT and of course ongoing supply management.

A quick look at cash. We closed the year with $175 million of cash thereby maintaining our strong balance sheet and have the firepower to support our M&A plans where targets can help accelerate our strategy.

This graph demonstrates our cash movements in the year. We generated almost $103 million from operating activities and we paid out $84 million in dividends made up of $38 million in ordinary dividend and a special of $46 million.

We paid $51 million for our acquisition investment. Other movements include of course the usual spend on CapEx and share purchases.

Cash conversion was strong in the year at 91%. We did see some increase in trade receivables right at the end of the year due to the very strong sales in December.

So let's just take a recap on our stated financial objectives here. We target 5% to 6% revenue growth and we have nudged this target up from 4% to 5%.

Gross margin, as I mentioned, software sales create tailwinds and services offsetting headwinds, but managing component cost increases are real as we manage in the short term. Operating margin expansion is clearly possible as we grow with the caveat that we retain choices to increase investments where we see good returns.

And M&A remains a key focus area for us where we can find the right strategic deals. So to summarize, we are delighted with another strong set of results.

We continue to invest and reshape for the future looking to build scale for our growing customer base. Our financial focus on cost and cash management remains resilient.

We are very busy managing supply chain challenges effectively and we are well placed going into the new year with a strong order book and balance sheet. So with that, let me hand you back to Eric.

Thank you, Paula. While the numbers speak for themselves, I'd like to give you some more insight into our strategy.

As I said earlier, I'm delighted that our strategy is absolutely working and it is driving results. On the left-hand side of the slide, you will see the Spirent of yesterday where we sold mostly products and hardware to primarily service providers and network equipment manufacturers.

We were predominantly leaders in lab tests. Even the casual observer ought to notice that by delivering consistent and meaningful improvement in each of these dimensions, we have fundamentally changed the company.

By executing on our strategic pillars, we successfully transitioned the business from selling onetime hardware-based deals to longer-term solutions that include software and services. We sell to a much more diverse customer base both regionally and vertically and we successfully leverage our lab leadership position to solve problems for our customers in their preproduction and live networks.

We managed this transition while delivering on both short-term revenue and profit targets and building much better visibility for the future with an increased order book. This transition is also evident in our increased deal size.

5G is the enduring driver for Spirent. There have been many well-publicized 5G deployments already, but if you look at the global picture, the technology is still in its infancy.

New releases of industry standards throughout this decade will gradually allow more of 5G's potential to be realized, providing us with a strong and sustainable growth driver. The majority of 5G networks deployed to date are nonstand-alone meaning they use 5G radios, but not 5G core network.

The objective has been to deliver 5G faster speeds and to build our 5G coverage as rapidly as possible. The deployment of stand-alone 5G is just getting started with more upgrades to core networks and more networks being hosted in the cloud.

Rapid growth in 5G private networks will support new enterprise use cases. Looking out further, we'll begin to see the true power of 5G with advances in artificial intelligence and machine learning bringing us closer to the goal of fully autonomous networks.

By then, 5G will be enabling transformational technologies such as virtual, mixed and augmented reality and 6G technologies will be ramping up. Be sure to check out our 2022 5G report for more on what's new in 5G and what to expect in the coming years.

If we look at the key 5G trends, Spirent really is the critical partner to our customer base across the entire ecosystem. We're the world leader in 5G core network testing and we're addressing new opportunities presented by open networks including O-RAN.

The higher data rates enabled by 5G are continuing to drive rapid traffic growth, requiring upgrades that benefit our high-speed Ethernet business. As the network becomes more disaggregated, there are more opportunities for major hyperscalers to enter the telco space and the resulting complexities drive new test and assurance needs.

We see significant opportunity to expand our addressable market into 5G private networks and new use cases where our WiFi test leadership also benefits us as more private networks employ both 5G and WiFi to optimize coverage. We're well equipped to be the critical partner to our customers across the trends shown here and they all contribute to an expanded 5G ecosystem that broadens our addressable markets and creates exciting opportunities.

As I stated earlier, we are the world leader in 5G core network testing and we have more than 800 new 5G deals in 2021. We're working with all the Top 10 5G network operators along with many more.

This slide gives just a few examples of the ways we are supporting our customers across the 5G ecosystem. For example, we're helping customers such as DISH and Telefonica test and deploy their 5G networks on the public cloud.

I'll talk in more detail about our DISH win in a moment. We've been helping to accelerate our customers' progress from the lab to preproduction network rollouts not only for 5G public networks, but increasingly for private networks, which we believe represent a significant growth opportunity for us moving forward.

We're partnering with key customers to help assure one of the main differentiators of 5G technology, low latency. And we've been deploying our benchmarking service to help validate marketing claims for 5G low latency performance and to support ongoing planning.

I'm proud of all of the important strategic deals we've won this past year: deals that deepen our engagement with customers, expand our reach and solidify our position as leaders in 5G. Let's go into more detail on our particularly exciting 5G win from last year.

DISH Network is entering the U.S. wireless market as a new nationwide network operator.

They're attempting to rapidly disrupt the 5G market with a new network powered by the public cloud, open RAN and a groundbreaking innovation life cycle. DISH selected Spirent as their partner for highly automated large-scale 5G core network testing.

We enabled their labs and testing to be virtualized and spun up on the cloud far more quickly. We're also reducing DISH's vendors software delivery and innovation life cycles from years or months to just weeks.

5G brings with it the potential for disruptive technologies and business models and Spirent is here to help take our customers to the next level in terms of agility and speed. Our pivot to solutions-based selling is a key factor in our continued growth.

We moved away from selling features and functions to delivering value and outcomes. This has increased our strategic importance to our customers and driven large wins.

We continue to diversify our customer base both geographically and vertically. We successfully grew broader and deeper in our existing customers while expanding into new segments and markets.

Hyperscalers have been a very exciting highlight this year and presented great opportunity for us. 5G is a major entry point for hyperscalers into the telco space.

While they're experts at a lot of things, we're the experts in 5G. They're investing heavily to achieve their goals and they could depend on our portfolio and expertise to help them along this journey.

As Paula discussed, another proof point of our success is our growing order book. We're selling more multiyear support and services deals and are focusing on growing subscriptions.

We continue to evolve our go-to-market effectiveness and have adapted to the reality of the pandemic. To help support our growth, we continue to grow our partner base.

We also expanded our key account program. This program continues to deliver great success enabling us to move into new buying centers and thereby create a broader business impact.

Another key growth engine for us has been services. When we talk about services, there are 2 main types.

Support services is the biggest existing revenue stream while managed solutions also known as everything as a service or x as a service is the main growth engine. Our competition are fundamentally box sellers.

Their services are mainly support. Our managed solutions portfolio is a key differentiator.

We've developed a diverse array of turnkey programs that we've been delivering successfully. Many of our services are driven by the need to test and assure 5G.

We'll walk through a great example of that on the next slide. As we continue to expand our managed solutions portfolio, we are executing well and have invested in tools, processes and structures to scale it.

In addition, we've enhanced and further professionalized our maintenance and support services to deliver this important revenue stream more profitably. You may remember an earlier version of this slide from last year's first half results presentation.

It's a great example of how our services add value across the entire customer journey and expands our opportunities. In this case, we engaged with a Tier 1 service provider on a test as a service offering where we as the supplier own the business outcome to certify the virtualized elements of their new stand-alone 5G infrastructure.

This project was highly successful and that success continues to open the door to new opportunities. The glowing money bags on this slide are either net new or expanded opportunities compared to this picture from just 6 months ago.

As you can see from this visual, this strategy of selling solutions instead of onetime product sales is dramatically increasing our deal sizes and strategic importance. Building on the initial test as a service engagement, which by itself was several times larger than a traditional product sale, has continued to enable many more lucrative opportunities.

Lifecycle Service Assurance or LSA had another very successful year delivering on our strategy. Leveraging our market leadership in 5G core, we had strong orders growth.

As Paula mentioned, this resulted in a strong 2021 as well as a healthy order book entering 2022. Our strategy to push further into the live network while maintaining our leadership in the lab is very clearly working for our LSA business.

We had growth in both lab testing and live assurance. I'm especially delighted by our success with our live portfolio and outcome-driven services.

Much of the previous services example, meaning the moneyback slide, was driven by the LSA portfolio solutions. We're excited to be launching our next-gen assurance product coming later this year, which will make our solution even easier to implement and operate.

In addition to delivering and innovating our organic portfolio, LSA successfully integrated the octoScope acquisition during the year. The deal solidified our WiFi test leadership and we expect healthy growth as 5G WiFi convergence continues at pace.

In our Networks & Security business, we had several key areas of success. We sustained market leadership in high-speed Ethernet and we were first to market with an 800G solution.

We're leading the industry in 800G Ethernet validation with several wins, including with Intel. We saw demand growth in both 100G and 400G and we've continued to diversify our customer base.

We saw great growth in our application security portfolio. We had significant wins at service providers by leveraging our 5G leadership, including with our test as a service security offering.

Our positioning business continued to deliver and gain momentum in both government and commercial customers. We're expanding into new areas of positioning, navigation and timing or PNT.

This includes the low earth orbit satellite segment as hyperscalers are pursuing delivery of high capacity low latency broadband service from space. I'm proud of the tremendous work that we've done to make Spirent an excellent business.

I could spend a lot of time talking about the exciting things happening here, but I will focus on a few key ones that I think you'll be most interested in. Of course, supply chain is top of mind in all businesses in today's climate.

While we have been and are affected by the global challenges of material shortages and extended lead times, I'm truly impressed by the way our team has proactively and aggressively managed our supply chain. They've minimized disruption to our customer shipments and expanded our critical supplier base to be sure we can deliver on our promises.

We will continue to manage this risk very carefully as disruptions continue around the world. Here at Spirent, we take sustainability very seriously.

We've enhanced our future positive ESG program to ambitiously take responsibility for our global footprint. In 2021, we continued to source 100% of electricity from renewable sources and we reduced our Scope 1 and Scope 2 carbon emissions by 6.5%.

We achieved this in several ways. We consolidated several sites to reduce our real estate footprint.

We improved the efficiency of our labs, a major contributor to our power usage. We also have special projects to make our product packaging more sustainable and ecofriendly.

And that's just the work we're doing internally. Our products are doing even more to reduce our customers' carbon footprint.

As we continue on our sustainability journey, we have a target to achieve carbon-neutral status in 2022. You can find out more in our sustainability report that we will be publishing later this month.

As we all know, the battle for great talent is real. While there's certainly wage inflation pressure, we are doing an excellent job of managing this risk.

We recognize the importance of retaining our talented workforce and we've done a lot of work to improve our employee value proposition. We have a very engaged employee base and if you ask them why they love working at Spirent, you'd hear a few major themes.

At Spirent, we have the opportunity to work on cutting-edge technology. We take pride in our thought leadership and ensure that our employees get to work on meaningful projects.

We love our relationships with our customers, our connection and understanding of their needs and ability to solve their problems is very rewarding. Spirent is constantly growing and offers us great opportunities to grow with it and develop professionally.

I'm proud of the culture we built at Spirent In this highly competitive job market, all of our benchmarking indicates that we are doing a superior job of retaining key talent. Another major part of our culture at Spirent is our focus on diversity, equity and inclusion.

We've taken extra care to stay connected with our employees while many of us are remote. This includes our Spirent Celebrates program where we celebrate the many traditions and causes of our global employee base.

We quickly adapted our workforce to enable permanent flexible working arrangements for the majority of our employees. And we were really proud to launch our enhanced family-friendly benefits, our improved diverse talent acquisition process and early career development program during 2021.

We continue to strive to make Spirent a great place to work for all our innovative people around the world. In conclusion, we had another really strong year.

It's clear that our strategy is working. We continue to deliver on our promise of sustainable profitable growth.

We focused on selling more services, software and solutions to a more diverse customer base. Selling solutions instead of onetime hardware deals is increasing our visibility and deal sizes.

We continue to drive growth across our portfolio both in the lab and live networks. And our 5G leadership gives us a privileged position to continue winning in 5G over the next decade.

Because of our success, we believe we're winning more than our fair share in critical markets. We're growing faster than many of our competitors in relevant segments.

Our business is becoming increasingly resilient supported by our robust financial and operational platform. I'm pleased to begin 2022 with a strong order book and believe we are well placed to deliver another year of sustainable profitable growth.

Now with that, Paula, and I will be very happy to take any questions you might have.

Congratulations on a great set of results. I had a couple of questions actually.

One is on the increasing sort of combination of services and solutions that you're selling right now and how that is trending. So what proportion of your current sort of customer wins is a combination of both?

And is that mainly still on the live testing side of it? Or is there a market to combine the 2 in a sort of broader multiyear kind of solution even on the lab testing parts of your business?

And if you could give us any kind of a quantitative idea, you have put up quite a few charts on this topic. But typically, if you were to sell VisionWorks for X on a stand-alone basis, say, what would be the total value of that contract if it was test as a service or something like that?

And would that be like 2x? Or is it more than 2x?

And how much of that would be built in year 1, year 2? Any kind of clarification on that whole process would be great.

And secondly -- second question is on Ethernet testing. Clearly, that's going well.

I think in the presentation, you mentioned Intel as an 800-gig customer. I'm not sure if I heard that right.

Just wondering, are you -- do you think you're taking share in the Ethernet testing market? And clearly, there's an expanded customer base because you're going into cloud services, et cetera.

How is your customer base changing versus 2 or 3 years ago? What proportion is coming from new customers versus your existing customers who are mainly the equipment suppliers?

And my last question is how is the order trend so far this year? Is it continuing the kind of momentum you saw in Q4 as we stand today?

Okay. Thanks, Janardan.

Yes, let's start then at the top with the services and solutions. It's a little tough to give a direct answer is that just what percentage of deals and services or solutions attached to them.

But I can tell you, we fundamentally changed the way that we're selling, the way we're approaching our customers. It used to be more of an approach of selling the features and functions associated with our products.

And while our products are absolutely still our point of differentiation and where our critical IP rests, we're really selling value and outcomes. And it's a pretty fundamental shift.

And that focus on delivering customer value and focusing on outcomes on behalf of customers, I think, really aligns us well with the customer priorities, and it's made us much more strategic. It certainly increases the initial deal size.

We have some good examples, one that we've been commenting on for the last couple of years, the initial test as a service deal that we cited was a large Tier 1 in North America. And one of the slides that's in the presentation deck shows the way that relationship has evolved and how it's allowed us to continue to add value across the customer life cycle and the ensuing 2 years.

It's given us visibility and credibility into other customer business challenges that, frankly, we wouldn't have been aware of and that they wouldn't have considered us for in the past. So I think it's -- the initial deal size is one thing.

But the real upside potential is all the additional visibility and credibility. It depends, of course, on us executing well, but we have, obviously, or we wouldn't be entrusted to do more for future business.

I think the second part of the first question was, hey, is this a live-only phenomenon. Is it a lab and live?

It absolutely spans both. I mean usually, it often starts with a foothold in the lab.

But then as things extend and as the technology makes its way through the customer sort of life cycle, there's additional opportunities as it gets deployed into the live network. And we really want to leverage that incumbency that we've achieved in the early validation phase in the lab.

So it certainly spans both. The second question on Ethernet testing.

We're delighted about the initial success in 800G. It is early days still.

I think way too early to make a determination there around share gains, but we're really well positioned as 800G evolves. We invested, we think, appropriately and early to make sure we're ready to capture the market.

And it's -- there's 2 large players in that particular space. It's us and Keysight, the old Ixia part of Keysight.

And my view is we hold up very well relative to Keysight in that space. We're both market leaders.

And then, yes, I guess I can't...

On the orders...

I can't -- yes. I can't really comment about orders this year.

We're commenting this is all about sort of last year's ramp-up and full year earnings. I'll just reiterate kind of what I said in my opening remarks and what's in our presentation.

We came into the year with a really healthy order book and really nice momentum that we think sets us up well for '22 and beyond. Thanks, Janardan.

Congratulations to the entire team for awesome settled results. Maybe next if we can meet in person, please, that will be really good.

I've got a bunch of questions, but I'll try and do it in 2 parts. So I'll come to the end of the call, if I'm allowed to ask a second set.

So my first set just now, first of all, Verizon. So at the beginning of this month, they hosted Capital Markets Day.

They talked about Network-as-a-Service strategy, driving off that 5G mobility, fixed wireless access and mobile edge compute. In relation to this, it would be really nice to understand where these guys rank within your top 10 and where the other telco operators are in that journey relative to Verizon.

The second question is can you talk about your scope to pass on inflation to -- in terms of price increases to your customers? And then the third question, I'm particularly interested in the comment you made, Eric, about launching your next-gen assurance product later this year.

I wonder if you can sort of add a little bit more meat to the bones in terms of timing and addressable market. And I wonder whether the development for this next-gen assurance product is the key reason why there was a hump, if you like, in the product development costs in the second half for LSA and whether there's a hump or is this sort of new level to going forward.

Yes, sure. Well, John, I hope to be able to meet in person as well.

I think we're moving into a new phase. In fact, while I'm very hopeful we're going to begin to move more of our employee base back into the office, and we're going to make some announcements in that regard internally in the coming days.

As it relates to Verizon and their Capital Markets Day and some of the things they announced, I mean, Verizon, of course, has been known really pride themselves on network leadership and network superiority. It's been they're calling cards, I think, for many, many years.

We're proud to partner with them. They are a key customer.

They are amongst our top 10. I'll just say that much.

They're comfortably within our top 10 as are some other large North American service providers. They're very strategic and very important to us.

There's a good sort of battle amongst the large North American service providers for 5G superiority. T-Mobile, of course, went out with some pretty extensive coverage with some mid-band spectrum, some low-band spectrum that they actually -- they got that it gave them a nice start for 5G deployment.

But they're all very important to us. Our leadership in 5G is helping and support all of them actually.

So those teams at Verizon side are very relevant to us in areas where we want to help them and others. On inflation and price increases, while we did increase prices.

We were forced to really increase prices given some of the component cost increases that have come through the supply chain. It's not something that historically we were used to having to do, honestly.

But we made some targeted and meaningful, I'll say, price increases to really neutralize the increase in costs related to those inflationary pressures. Our goal, of course, is to make sure that we neutralize those cost increases and preserve the bottom line basically.

So I think there is the potential, given some of these cost increases to put a little bit of pressure on gross margins. We have several competing forces, some positive, some negative, as it relates to gross margin.

We obviously -- just given the results from last year, we obviously did a great job in managing those expanded gross margins a little bit last year. But this is one of those things that could put a little pressure on gross margin even as we work to make sure that we preserve the bottom line.

So -- and we're paying very close attention to it. If we have to take some additional pricing action in the coming weeks and months, we're going to do it.

But there hasn't been any pushback or anything like that to date? Sorry to interrupt.

No. Every instance is its own unique thing.

On one hand, we all see inflation in our daily lives, and I think this is a general acceptance of the situation from customers. They understand we're not being greedy.

It's not price gouging or anything like that. It's just that we run a for-profit business, and it's some necessary moves.

But, of course, there's resistance in some pockets, and it's -- there always was resistance. There's a constant sort of negotiation with our customers to try and make sure it's a fair deal for both sides.

But I think all in all, it's taken on balance. It's been pretty rational in terms of the way that's all gone.

And then finally, in terms of next-generation service assurance, yes, we're really delighted about it. We'll bring it to market around midyear.

And of course, it's a cloud-native platform that's going to be just that much easier to integrate and to adapt. We think the significance of that is it opens up just sort of the next tier of customers for us that doesn't have maybe the engineering depth or the will or the desire to wait and do an extended proof-of-concept and so forth.

So it will be a lot easier to show value and it should really reduce sort of sales cycle times for those products -- that product. So very excited about that.

We have made it a priority from a development perspective. I think it has been one of the drivers of obviously where we've been prioritizing spend for sure.

It's a critical priority for us. But as long as LSA is continuing to grow at a double-digit rate, we're going to continue to invest in that part of the business.

So it may not be this next-generation product, but it will be enhancements of that and other things where we see value for our customers.

I had a couple. The first one was just around the multimillion-dollar deals that you highlighted, big increase over the last years.

And I think we all understand it's more sort of solutions and products. But I'm just wondering kind of which product areas are they the most prominent and perhaps if you could maybe give us a few more examples of those large deals, that would be great.

The second one is around when you think about sort of profit versus growth sort of discussion. I think your margin is pretty healthy around 20%.

So I'm just wondering can these go up further? Do you think, in terms of the operating leverage?

Or is there maybe a view internally that maybe you should or you would prefer to invest more in perhaps new areas to drive future growth? That was the second question.

And the third one was around 800G. So I think you recently announced some products here, and I think some of the end customers talk about next year 2023 as that sort of taking off.

So my question is sort of do you think this could be, I guess, a sort of smooth technology handover? Or is there a risk that at some point maybe second half this year or early next year, we do see a bit of a drop-off in demand?

Yes. Very good.

Thanks, Kai. Yes, we're really -- we're happy to share the detail on the deal size increases in the contract over the last couple of years because we think it's a real proof point that our focus on solutions is working.

And yes, I think it's a great example in the investor deck and in the DISH deal that we talked about that we closed earlier last year is a great example of public use case, but it's -- there's many of them. There really are many of them.

I think often, they are around our LSA family of products. It is a lot of times where these deals start.

And one of the really key things that is at the heart of most of these big deals is our automation framework. We've got world-class products.

If we can put forward a proposition to our customers of really helping them move technology validation through their process with higher quality and better speed at lower cost, it obviously checked all the boxes. And automation is really key to helping to do that.

So I think we've revolutionized sort of the, that part of the process for a lot of our customers. And it's why it's been such an exciting sort of change in approach in a while that gets other opportunities for us as well because it really binds us with our customers' ultimate goals.

So hopefully, that helps a little bit on that one. Relative to profit and growth, I mean, of course, we want both.

And I don't -- and I think we're able to strike a balance to achieve both. We come into the year with nice momentum and visibility, increased visibility.

And as long as we continue to do a good job of keeping our cost base under control, which we plan to do, there ought to be a continued opportunity for operating leverage. There are some more cost pressures for sure, probably just given the world we live in and some of the -- what's going on with supply chains, labor cost pressure.

I'll make just a comment around labor costs. We've got, I think, a really, really strong employee value proposition.

And I think that's a really critical ingredient for us in terms of retaining our key talent. I think people aspire and love what they do.

We try to get great opportunities for people to do meaningful work. But at the same time, of course, we have to be competitive and we are, and we do what it takes to retain key talent.

But all of our metrics to us indicates we're far better than any industry average in terms of retaining our key talent. So yes, I think there is opportunity for continued operating leverage if we keep the top line moving up at a good rate.

Around 800G and sort of the transition between peak port speeds and high-speed Ethernet testing, yes, we're delighted that we've already won first commercial deals in 800G. It's just the beginning.

It really is just the beginning. But yes, I think any concern, any historical concern around drop-offs as we transition from 1 max port speed to the next, I'm not terribly concerned about it.

I'm really not. I think those concerns are maybe overblown.

Or if they were appropriate in the past, I just don't think they're such a big concern as we look forward. So I think we'll be able to manage that pretty nicely.

So I have one quick follow-up and then to other questions. The one is on the 800 gig that you just mentioned.

How should we think about the adoption? I mean it's -- if you look at the past being the first to market is a significant advantage and you seem to be for the 800 gig, which is helpful.

And how you should -- you think about the adoption of 800 gig? Do you think -- when is it going to be material in terms of adoption?

Is it more like end of the year '22, '23 or '24? Just your perspective on the adoption and the interest of this market.

The second one is on DISH Network and more generally on the Open RAN. So the deal that you mentioned is definitely interesting.

And I was wondering how your wallet versus incumbents' is evolving in an open run architecture versus the -- all the traditional infrastructure, if I may say. So what is the opportunity or addressable market?

How is it evolving? Do you have more to offer in an Open RAN?

And how is this with the discussion with all the Open RAN vendors, the likes of Rakuten, of course, but other projects that you may have with incumbents that are also looking at the technology? And the last one is on M&A.

How should we think about 2022 M&A.? Is it still in your radar?

And more importantly, in which areas you are looking at if you do? That would be helpful.

Yes. Great.

Thanks, Francois. Yes.

So for 800G ramp and adoption, I mean, it is, as I said, early days. We're delighted to have first commercial wins in that space.

I think it is going to take a little time before it becomes, let's call it, mainstream. So I think there will be growing interest over the course of 2022 and with it getting more mainstream really out into 2023 and beyond.

So it is important to be there as these trends happen to be well positioned, and we believe we are well positioned in that regard. The DISH win really is significant.

And I think we're aspiring one of the things that really delights me is we've got customers that have been with us and know us and trust us, where we've got long-term incumbency. And of course, we work hard to continue to win their trust every day, and they add more value every day.

And then there's new entrants and disruptors like the Rakuten of the world and like DISH Network. And when they select us as well, it's really good validation that our products are really well positioned for new and different approaches that are being put forward by these new service providers.

And so DISH is a kind of new entrant to the wireless space. They know they need to be disruptive and different.

And so they're coming with a totally cloud-native approach. They're putting their entire network in the public cloud, want to push early to O-RAN.

And so they're really pushing the envelope in many, many dimensions, including the way in which they want to test and validate new technology. So to be their partner in that regard is really exciting.

And I think we're going to do a lot of innovative things together in that regard. For O-RAN particularly, I think in the same way, the core network has been disrupted by having it be virtualized.

It's created a lot more possibilities but with it a lot more complexity. There are a lot more players that can be involved in some various parts of the core network.

And the same thing is going to happen with the radio access network with Open RAN. Interfaces that are now proprietary and closed are going to be opened up.

It's going to allow new competitors to come in and it's going to create new testing opportunities and so forth. So of course, we see it as an exciting opportunity, one in which we absolutely plan to have a leadership position within, and that we think is going to create new opportunities for us.

And then on M&A, yes, we're delighted to done the octoScope deal last year. We're continuing to be very focused on M&A.

We are optimistic about our future prospects. So we want to continue to invest in the business, both organically and inorganically.

It's -- but at the same time, we're trying to stay disciplined and make sure that we do good deals, deals that first and foremost, fit with our strategy, but then deals that make good economic sense and that we can operationalize and drive the value from. And that's -- if things take a little bit of time to execute and make next moves, it's simply good, but it's just about being disciplined, really.

So there's no particular growth vector. We've talked in the past that deals could be tech bolt-ons that give us a critical piece of new technology that we think it's more advantageous to buy rather than to try and build even as we invest a significant amount in R&D.

It gives us a time-to-market advantage and gives us some critical new IP. It could be consolidated in certain markets, growing market share where we've already got a presence.

That was true in both dimensions really of octoScope. We had some WiFi test capabilities.

But together, we've really got a much more robust set of capabilities, and they really enhanced pretty greatly the capability that we had previously. So there's a few different angles that could be looked at for M&A, but suffice it to say, it continues to be a priority for us going forward.

Impressive set of results given the inflationary environment. Congrats.

I have 3 questions actually, if I may go one at a time, if that's okay. Clearly, the multiyear order book is quite impressive.

Just trying to understand what drove the need from your customers' perspective to make these multiyear solution space orders now? What's different compared to before?

And do you see this enduring in the future as well? I'll go one at a time.

Yes, I think in terms of what drove it -- yes, okay, fine. Yes, it's really our method of selling.

I mean we're taking more of a services and a solutions mindset and approach. And in many cases, that does include longer-term deals, more strategic deals, bigger projects in some cases.

And so in some dimensions, it's -- a multiyear deal could actually be a support and maintenance contracts. So the traditional kind of work that we would have always done.

But if a customer is willing to sign up for a multiyear commitment with us, we think it's just great evidence that they view us as a strategic partner and they're adding a lot of value and they've got a lot of trust in our continuing ability to add value in the business. So I think it's a good validation in that regard around sort of a more traditional way of doing business, but it's also reflective of new commercial models and new approaches that we put in place with our focus on services and solutions.

Sure. But from a customer perspective, what do you think in your perspective is -- what do you think in your view has changed from their perspective to be more keen on these multiyear solution-based orders?

Yes, I really think it's the way we're approaching them. It's -- if we're -- if in the past, if I make it really sort of mundane example.

If we sold a piece of test gear, that was sort of looked a lot more like a retail transaction, right? It was a onetime sort of you sell a piece of test equipment, you deliver it, they pay us.

It's a transaction. But if we are providing business outcomes, if we say to the customer, we're going to help you validate this much technology.

We're going to get this much through your process in a given period of time, then we're much more embedded in an ongoing way in their technology validation process, right? And we're much more of a business partner.

And the nature of that relationship is ongoing, not one time. So I think that is the fundamental difference.

All right. My second question is you mentioned investment in your sales force to focus more on the solutions space selling.

Could you provide a bit more color on that? And how has the traction been with regards to growing your accounts with hyperscalers?

Yes. I mean we obviously made a pretty significant investment in sales.

If you see where the actual dollars went in our cost structure, we ramped up sales and marketing expense pretty significantly because we believed that there was an opportunity with our customers. One of those prime focus areas was absolutely hyperscalers.

And I'm delighted with the progress we've made with hyperscalers, but I feel like we're just scratching the surface as well. I think there's so much more potential ahead with that category of customers.

If I just look at one particular theme, hyperscalers, the big cloud providers, they very much want to host the 5G core elements on their cloud infrastructure. And these are big behemoths with amazingly smart engineers and a deep, deep bench.

But one thing they're not really expert in today is 5G. And we are experts in 5G.

And so there's a great opportunity for us to partner with them. Our Landslide product is far and away the global leader in core network emulation and validation.

It's the best. It's the best tool set in the world in that regard.

And so it's something that they all need and value and want. So it's a great foot in the door relative to their strategic priorities and our strength.

And so we're leveraging that. But -- so hyperscalers is one area.

The world is a big a vast place. And we continue to invest and extend our reach with our direct sales force into new geographies as well as those new customer segments like hyperscalers.

My last question then. What proportion of the multiyear deals are to do with networks and security?

And could you please remind us that -- what is the $60 million of revenue in the maintenance and support services within network and security? What does that entail exactly?

Paula, do you want to jump in on that one?

Yes, sure. Yes, the multiyear contracts were mainly around the Lifecycle Service Assurance segment in the main, but we do have some high-speed Ethernet multi-support contracts in there as well.

So it's -- that would be the weighting in that regard. We do find -- in terms of -- you mentioned high-speed Ethernet for the most years for equipment.

Could you repeat the second part of that question for us?

Yes, sure. No worries.

With regards to the $60 million of revenue in the maintenance and support services within Networks & Security, what is that and deal exactly, what does that involve?

All right. Yes.

Yes. So that's covering our Positioning business as well, where we also provide support and maintenance there as well.

So you've got both high-speed Ethernet and the GNSS side of the business. And so that's not the real area of passion for growth, where we've been providing those sorts of contracts for a number of years.

It's the Lifecycle Service Assurance, the deal that Eric's been talking about where the growth can generate in a recent year. So we do have support contracts with some of the large network equipment makers and high-speed Ethernet and those will continue to progress.

Yes. Just had some investor questions in recent days about the 5G cycle and the extent to which growth on the infrastructure side can grow after this year.

Obviously, a number of U.S. telcos, for example, are set to grow their spending in 2022.

But how should we be thinking about next year? One of them, in particular, has talked about the decline in CapEx.

But at the same time, you know that equipment doesn't always correlate that well with overall CapEx, and then there are some other U.S. players where we would expect growth.

So I wondered if you could give us a bit of a perspective there. And secondly, we've seen that at the Mobile Congress, DISH talks about a use of ServiceNow to get end-to-end visibility in their network and to get alerts as to real-time issues such that field technicians could go and fix those issues at the right location.

I just wondered if you had any thoughts on this and the extent to which that's actually a competitive solution to what you offer in terms of service assurance. Obviously, you're evolving your solution in service assurance that you've talked about today, but it would be good to get a bit of perspective on that particular announcement.

Sure. Thanks, Al.

Yes. So the 5G cycle, we see an opportunity for us to continue to drive value for many, many years to come, certainly through the balance of the decade.

And the network deployment will evolve, and networks will get rolled out. I think we're still early days.

There are very, very few still stand-alone 5G cores as an example. And it's an area where we've got a lot of strength with our Landslide product.

So there's going to be a lot of work that needs to continue to be done to test and validate the new stand-alone 5G core. But even after that's sort of fully deployed and up and operational, there's ways of the standard that will continue to evolve in sort of an every 2-year sort of clip.

O-RAN is just coming on to the horizon and it's going to be pretty disruptive and create a good amount of opportunity. There will be significant needs to try and get the performance benefits out of 5G through low-latency use cases that will require assurance and loss of continual network reconfiguration.

We think there's a big opportunity that's going to emerge that we can participate indirectly around 5G private networks where more and more enterprises drive their actual lifeblood of their business on to 5G, and things like network slicing enable those dedicated private 5G network instances. And so those customers are going to put mission-critical applications on their private 5G networks, but they're going to need to be tested and assured.

And so they'll have service level agreements with service providers and both sides of those relationships are going to want to manage the quality of service around those engagements, a great opportunity for us to participate. So even as the network rollout where billions of dollars in capital get deployed in the early days to get coverage and to roll out cell sites and so forth, the ability -- the need to sort of operate and get the value out of these networks over time creates a lot of continuing opportunity for Spirent in the future years.

At Mobile World Congress and DISH in terms of having end-to-end visibility and seeing issues in real time, I mean, this is the kind of stuff that we're very involved with them. It's why we're delighted to be partnering with them.

And we're a big part of the solution set for, I think, how they're going to achieve that vision. So I won't pretend that Spirent is the only player, the only partner they're relying on, in that regard.

But that win for us, it's very much related to these sort of issues with the sort of a vision. So we're right in the middle of it.

Most of my questions have been asked, but I just wanted to ask a bit about pre-silicon chip design verification. I noticed you've got something called the Technology Innovation Program.

I was just wondering who are the leading players you're competing with here. Are you seeing a bigger opportunity dealing directly with silicon players?

And do you need to partner up with EDA guys? And just what the opportunity is here?

By partnering up directly with silicon players?

Yes.

Is that the question?

Yes, correct for [indiscernible], et cetera.

Yes. We -- I'll say the chipset kind of segment, in general, is an important one for us.

I mean one of the unique things about Spirent is we've got a set of customers that spans, well, sort of the full breadth of the technology ecosystem. Started with chipset makers, handset makers, network equipment makers, traditional service providers, increasingly hyperscalers, governments enterprises, so it's pretty broad.

But one of those areas that maybe we haven't talked about as loudly as we should have, but we do see increasing opportunity, is with the chipset makers. And so we've actually invested a little further with our sales resources to get some better coverage in some additional geographies, in fact, to make sure that we're fully leveraging that opportunity.

So it is in focus, and we've kind of ramped up our sales and support around that category of customers.

And is it you up against Keysight? Or is there other players that you see in that domain?

Not just Keysight. I mean certainly, Keysight plays in that domain.

I think Keysight has a lot of strength in sort of the early technology validation of protocols and so forth. But yes, it's not just Keysight, but certainly Keysight as well yes.

Okay. And I just had one other question, which was on the backlog.

I don't know if you've addressed this, but I was just wondering how you expect the backlog to evolve in the current year. Do you expect it to continue to rise given the sort of longer-term deals you're signing?

Or you don't have a view at the moment?

Paula, do you want to take that one?

Yes, sure. Yes, we were delighted with the closing order book position, as you saw with a book-to-bill of 111.

And of that backlog, the $270 million, 20% of that is for delivery beyond 2022. So that's great news.

I mean a few years ago, that visibility for the future years would have been negligible, if anything. So that's the new trend that we've got there.

And in terms of during the course of this year, well, it's always healthy to have a book-to-bill number over 100. So we would strive to do that during the course of this year.

And I would expect the long-term visibility to continue to grow as we keep building on more multiyear contracts. So I think that's a general direction of travel.

So hopefully, that gives you a bit more color there.

Just a few numbers questions, if I may and one to do M&A. I mean I'm a little bit surprised that there hasn't been anything announced for a year now on this front.

May I just ask, could you sort of come close and then you walked away from a particular deal? I'm not interested in finding out what it was, but did you sort of reject something?

Just to see if -- just to sort of talk to your sort of price discipline and all that sort of stuff, please? And secondly, numbers.

Tax rate, I note what you said during the prepared remarks, Paula. Does that sort of mean we should sort of for the spreadsheet assume 50 bps, 100 bps per annum going up, the tax rate going up by?

Just some sort of number guidance would be helpful, please. And then the third and final question on admin costs.

I note everything that you said during the presentation also including corporate costs. Should we expect admin costs to keep pace with revenue growth, given everything that you've said this morning, please?

I'll let Paula handle numbers 2 and 3. Just regarding M&A, I'll just say we're constantly on the hunt.

We're always looking. I mean I don't know that I want to comment on how close we may have come to us to do a given deal and so forth but just know that it is continually in focus.

And there are some things that, of course, valuations sometimes are difficult for us to justify. And we think it's important to stay patient, to stay disciplined and to really make sure that it checks the right boxes for us, but it continues to be a serious priority for us.

Paula? Thanks, John.

On tax rate, John, I mean, we're very privileged to have the low tax rate that we have. There will be a slight increase as we step forward simply due to the regional profit weighting.

I would suggest about 0.5% per annum might be the right order to model there, I would suggest. In terms of administration cost, they were just slightly down year-on-year, as you observed.

I would expect in the short term to see that -- some small increases there. We are investing in the infrastructure of the business to support our growth plans, really around IT and supply and management.

But of course, over mid- to long term, one would definitely expect operational leverage. So they should not grow as a percentage to revenue at the same rate forever.

But in the short term, I think we just want to put a little bit back into some of the infrastructure departments.

Yes. Thanks very much.

So thank you all for your attention, your questions, continued interest in Spirent. I hope you can tell we're excited about the future potential for our business and the momentum we have as we enter 2022.

I want to make just one other comment on something we haven't touched on yet today, but just regarding what's going on in the Ukraine. On one hand, we're fortunate as a business to have almost no direct impact from what's going on there.

We have no employees in either country. We don't source any material from either country.

We don't transit anything through the country. But we're troubled by what's happening there, obviously.

As a company, we've made -- we just announced we're going to make a meaningful donation to the Ukrainian Red Cross and the UN Refugee Agency to help those that have been displaced and affected. But the real shout-out I wanted to give is to the people at Spirent.

Our employees are unbelievably generous. And even though we don't have any direct employees there, we had a couple of contractors who are doing some work for us, people organically just spontaneously went into their own pockets to try and provide assistance, financial assistance to some of those folks that they're aware of.

We've had another group here in the U.K. that organized a collection of household goods and so forth.

They packed up a van. That van is on its way across Europe, to provide some assistance.

So I'm just really proud of the way that the people at Spirent have jumped in to try and support those in the time of need. So with that, I'll wish you all well, and we'll talk again soon, and hopefully, see you all again soon.

Thank you.