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quality performance SPEED AND innovation

RAKON Half year review 2012


SPEED AND innovation

quality performance

Despite increasing US dollar sales by 14% we were unable to convert that growth into a satisfactory New Zealand dollar profit. Our EBITDA of NZ$6.2 million was a less than satisfactory result as far as we were concerned. The vast majority of Rakon’s sales are made in US Dollars, a currency which has been depreciating rapidly over the past eight months. Despite our active currency hedging policy, the depreciation rate was faster than we were able to respond to. However, on the positive side we have used the high dollar to our advantage, by increasing our rate of investment in offshore product development, manufacturing and intellectual property. While we fully understand and share the disappointment of our shareholders with respect to profitability in this half, it is important to keep it in the context of Rakon’s stated goal to be a world leading global frequency products company. To achieve this and realise the resulting share value, Rakon must not only adapt to the short term environment, but stick to the long term plan, even during periods of global recession and uncertainty. With that in mind it is valuable to reflect on the results we have achieved so far in pursuit of this goal. Our Strategy At the time of our 2006 IPO, Rakon primarily produced frequency control products for GPS navigation devices. To enable us to become a world leading frequency products company we needed to build a more diversified business that addressed several key markets, and which was underpinned by world leading manufacturing cost. We were aware that GPS equipped cellular phones would emerge as a far larger opportunity than traditional navigation devices. We understood that the market size for these would be measured in hundreds of millions or billions, rather than in tens of millions. Furthermore we considered that while Rakon was smaller, it was better placed to win a significant share of the GPS phone market than its far larger Japanese

competitors. We also understood that focussing on one niche market would leave us highly exposed and would restrict us from significant opportunities for long term sustainable profit elsewhere. In particular the telecommunications, space and defence markets were highly attractive but were areas we were unable to fully address. We would never be able to achieve our end goal by organic growth alone, so we have embarked on a carefully planned growth strategy. Our first major step was in 2007 when we acquired the C-MAC Frequency Control Products business, which had design and manufacturing facilities in the United Kingdom and France. This was a business that we viewed as having very good core technology for telecommunications, aerospace and space applications. It also complemented, and diversified, Rakon’s existing business. Importantly we considered that under our ownership, revenue and profitability from this acquired business could be greatly improved. This has proven true and over the past four years this business, complemented by the joint venture we subsequently formed in India, has grown significantly and has become a major contributor to the Rakon Group. During the 2008/2009 global recession, revenue and earnings from our UK business alone more than offset the impact of reduced sales and profitability from our consumer GPS focussed New Zealand business. In August 2010 we made a further acquisition in France. This business, Temex, was formerly a competitor of Rakon in the space and defence markets and in particular viewed as extremely important in the French industry. The success of, and investment in, our earlier French acquisition was an important element in Rakon being able to acquire Temex. The acquisition has gone very smoothly and yielded some excellent management and engineering skills, as

well as intellectual property, that we believe will allow Rakon to continue to hold its lead over its competitors for many years to come. During the current financial year we have opened our new 12,000 square metre facility in Chengdu, China. This facility is focussed on the manufacture of high volume frequency control products. Rakon owns 85% of this business. Our Chinese partners with whom we have had a business relationship for many years, own the balance. Alongside this new facility our Timemaker joint venture, with the same partners, has also opened a new 20,000 square metre crystal blank manufacturing facility. Rakon is now unique among its crystal industry peers globally. It is the only company with a truly global platform, an ASIC design centre and a product range that stretches across all the key market segments. As a consequence we are gaining or holding market share in all the sectors we address. Our global strategy allows us to manufacture key products in the lowest cost countries, such as China and India, while utilising the research and development skills of key personnel elsewhere. Furthermore, China and India are now more than low cost manufacturing bases, they are also very fast growing and deep markets for the products and services that we supply componentry to. Consequently Rakon’s market and manufacturing risks are now well spread and we can focus on providing the growth that the markets we service have for so long promised. Markets Global sales of smart phones and tablet PCs are continuing to grow. This is a highly competitive market and one that is important for Rakon as we can leverage our brand and technology into significant revenue growth. As we expand manufacturing of these products into our China facility we will see increasing

returns from this sector. We estimate we hold a 10 to 15% share of the smart wireless device sector (e.g. smart phones) with significant opportunity to expand this share now that our China facility is established. The growth in smart phones and tablets is driving a massive increase in demand for electronic data, which in turn creates continuing opportunities for Rakon in the telecommunications infrastructure sector. Existing networks are at full capacity and will need to cope with a 1,000% increase over the next four years. This means existing networks must continue to be upgraded and new 4G (LTE) networks will continue to emerge. Each upgrade of the networks brings with it a requirement for more synchronisation and frequency control components, which Rakon designs and manufactures. We are regarded as a prime supplier by all of the world’s leading providers of telecommunications equipment. These companies have developed new products for delivering the new 4G (LTE) networks which are needed to meet the data capacity needed. Incorporation of femto or small cell solutions, alongside traditional cellular base stations or towers, are key elements of these networks. Rakon leads the market in share and product functionality for small cell solutions, so we are strongly placed to further grow share in this market. The acquisition of Temex has certainly enhanced our position in the high value space and defence markets. In the first half of this financial year this segment grew to 21% of our Group revenue. The business and team has been consolidated successfully into the Rakon Group and this has been received very well by customers. Design cycles in this sector are very long, which means it can take several years to see returns on the work being done now; however, once business is won it is very stable and provides a solid return for a long time and a very sound contribution for Rakon’s future.

Production Rakon leads the industry with its globally based frequency control manufacturing facilities in New Zealand (1), the UK (2), France (3), India (1) and China (3). As mentioned, our Chengdu facility opened this financial year. It is now operational and beginning to ramp up in volume. We shipped over 100,000 units in November which we plan to grow to over 5 million per month early next year. China provides us with a much needed low cost base and natural hedge against the US Dollar for our products targeted at consumer markets. We will begin to realise the benefits of this investment in the last quarter of the current financial year. Chengdu complements well our other ventures in China where the factories manufacture over 100 million quartz blanks per month. Chengdu is rapidly becoming the world centre of consumer product manufacturing. Directly across the road from our facilities is what is today the single largest consumer manufacturing facility in the world, the 2 million square metre facility of Foxconn. With our Chinese facility, Rakon now has the scale and capability to allow us to move from being not only a technology leading supplier, but also a first quality tier one supplier to the largest manufacturers in the world. Our Indian venture has undergone significant expansion this year, just three years after being established. In this time frame the initial capacity we established has quadrupled. We now truly have an operation of scale and low cost of manufacturing backed by technical expertise. In partnership with our R&D efforts in France, the revenue from this business has expanded consistently to establish Rakon as one of the largest participants in this market. Research and Development Rakon has ongoing R&D centred upon laboratories in New Zealand, France

RAKON Half year review 2012

and the UK. This ongoing research is necessary to ensure that new profitable products are continually being developed and released to the market ahead of our competitors. One example is our VCXO product range. This range enables us to enter a US$200 million market that was previously closed to us. It is also a higher value product which is less price sensitive and well suited to the infrastructure, equipment, and labour costs we have in New Zealand. In the last month we have begun to ramp up production volumes of this range and we expect it to deliver a solid contribution in the next financial year. Also this year we released a world leading technology, the result of years of development in partnership with GPS and cell phone industry leaders. It is a new temperature-sensing crystal aimed at the high volume consumer market. Rakon is one of only a handful of companies capable of supplying this type of product worldwide. It will be manufactured in our Chengdu factory and presents a significant opportunity, as these products are likely to become the standard for use in higher volume GPS cell phones. Our ASIC team in the United Kingdom has also made further progress on our chip development programme. No other frequency control company in the world has direct access to this type of development and it is enabling us to develop world leading products for some more niche and high value markets. Rakon’s Share Price Rakon’s share price recently traded at 43 cents per share, an all time low. Reasons given for this by market traders were largely twofold; 1. The European Economic Crisis and the fact that Rakon has a large amount of business there. 2. That one or 2 institutions were readjusting their “book” to de-risk from certain equities and move more into cash

and bonds in these uncertain times. In any event we regard this price as significantly undervaluing the Company. Your Board’s confidence in Rakon’s long term prospects is illustrated by the recent acquisition of shares in the Company by some of the Directors which were disclosed to the market.

Revenue NZ$ million





Directors’ Review The Board recently undertook a review of the Board’s functions (especially with its expanded global reach) and succession plans. As a result the Board has decided to seek another Independent Director to add to the Board in the New Year. It is anticipated that this person will be able to bring global business skills and knowledge from a similar industry to the one that Rakon addresses, and form the first step in our succession plans.


0 1H–07 2H–07 1H–08 2H–08 1H–09 2H–09 1H–10 2H–10 1H–11 2H–11 1H–12

EBITDA NZ$ million






The Immediate Future While the Northern Hemisphere markets and currencies remain volatile we are focussed on maximising returns and achieving our year end forecast EBITDA of NZ$14–$18 million.


-3 1H–07 2H–07 1H–08 2H–08 1H–09 2H–09 1H–10 2H–10 1H–11 2H–11 1H–12

Total Assets NZ$ million

300 250 200

Brent Robinson Managing Director

150 100 50 0

Bryan Mogridge Chairman

1H–07 2H–07 1H–08 2H–08 1H–09 2H–09 1H–10 2H–10 1H–11 2H–11 1H–12

Operating Cash NZ$ million


8 6 4 2 0 -2 -4 -6 -8 1H–07 2H–07 1H–08 2H–08 1H–09 2H–09 1H–10 2H–10 1H–11 2H–11 1H–12

RAKON Half year review 2012




Six Months ended Six Months ended Year ended 30 September 2011 30 September 2010 31 March 2011 ($000s) ($000s) ($000s)



94,957 189,314

EBITDA (look through)


13,518 24,840



12,102 21,941



Depreciation, amortisation and share based payments







Finance Income (net interest)




Net (loss)/profit before income tax











Income tax credit/(expense) Net (loss)/profit after tax 1

EBITDA (look through) includes Rakon's share of EBITDA from associates and joint ventures.


EBITDA includes Rakon's share of net profit after tax from associates and joint ventures.


of Cash Flow

Six Months ended Six Months ended Year ended 30 September 2011 30 September 2010 31 March 2011 ($000s) ($000s) ($000s)

Net cash flow: - Operating activities




- Investing activities




- Financing activities







Foreign currency translation adjustment




Cash and cash equivalents at the beginning of the period







Net increase/(decrease) in cash and cash equivalents

Cash and cash equivalents at the end of the period

Balance Sheet

As at As at As at 30 September 2011 30 September 2010 31 March 2011 ($000s) ($000s) ($000s)

Current assets




Non-current assets




Total assets




Current liabilities




Non-current liabilities




Total liabilities




Net assets






197,806 199,619

Minority interest Total equity








Rakon FY2012 Interim Shareholders Letter  

Letter to shareholders covering the first half of the 2012 financial year (1 April 2011 - 30 September 2011).

Rakon FY2012 Interim Shareholders Letter  

Letter to shareholders covering the first half of the 2012 financial year (1 April 2011 - 30 September 2011).