Rakon HY2021 Review including Market Update

Half Year Review (HY2021)
April – September 2020
rakon.com
Enabling the connected future

HY2021 Financial Overview
Rakon has reported an unaudited net profit after tax of
$4.6m*
1
for the six months to 30 September 2020 (HY2021),
compared with $1.3m in the September 2019 half-year
(HY2020). Revenue was $2.6m higher at $59.5m.
Rakon reported Underlying EBITDA
2
of $11.4m – an increase
of $4.5m from the previous corresponding period.
Despite severe initial effects from Covid-19, the company
achieved a strong first half-year result due to prompt
mitigation actions in the first quarter and increased demand
in the second, particularly from the Telecommunications
market segment. Telecommunications revenue was up
$6.2m for the half-year and now comprises 64% of Rakon’s
total revenue. The increase in demand in the second quarter
occurred mainly in the New Zealand business as many Tier
One customers managed their supply chain risks by building
safety stock.
Revenue growth in Telecommunications was offset by
declines in the Global Positioning and Space & Defence
market segments. Global Positioning revenue was down
$3.7m, due predominantly to Rakon’s continuing focus on its
high-end positioning business, with less focus on the higher
volume, lower margin, commoditised Global Navigation
Satellite System (GNSS) business. The Space & Defence
segment was down $0.8m, with lower Space revenue due
to phasing of orders offsetting higher defence revenue out of
Europe.
Inventory levels were higher at 30 September 2020 than
at 31 March 2020 due to increasing customer demand for
longer-lead-time products and the need for the company to
carry safety stock as a mitigation for potential supply chain
interruptions. Net profit after tax benefited from higher
revenue, lower operating costs, Covid-19-related cost savings
and government relief. Net debt reduced from $7.9m to
$2.8m as a result of strong operating cash flows and lower
capital expenditure. Operating cash was $7.9m, driven by the
half-year earnings and historic research and development tax
credits received during the period.
Operational Overview
Rakon’s plants in New Zealand and India were restricted
or shut down from late March through April 2020 due to
the Covid-19 pandemic, while the French operations were
largely unaffected. Strong actions were taken across Rakon’s
global operations in the first quarter to protect the business,
including reductions in staff salaries, directors’ fees, rents,
travel, cuts in discretionary expenditure and recourse to
government relief where eligible. Many measures have also
been taken, and continue to be in place, to keep the team
safe. The New Zealand and India operations recovered well
in the second quarter and (at the time of writing), all plants
continue to operate normally – even in the significantly Covid-
affected regions of France and India.
Rakon expanded its TCXO
3
and OCXO
4
production capacity
in both New Zealand and India during the first half-year in
preparation for expected higher 5G demand. In India, the
company’s capacity for discrete OCXOs increased by 25%,
while New Zealand’s capacity for TCXOs increased by 10%
and OCXO capacity doubled.
Focus on core technology continued – in particular on
XMEMS
®5
, Rakon’s advanced quartz-based resonator
technology which is delivering new levels of resonator and
oscillator performance. The trademark for XMEMS
®
has
been registered in key regions. Rakon also achieved design
wins with strategic customers and their applications for new
products using this proprietary technology.
Market Update
Supply Chain Disruption
At the end of October, there was a fire at one of Asahi Kasei
Microdevices (AKM)’s factories. The Japanese company
is the world’s largest semiconductor manufacturers of
TCXO Integrated Circuits (ICs). Fortunately, no one was
seriously harmed in the fire; however it is creating TCXO chip
shortages globally and these are used in many applications.
AKM supplies chips to Rakon which are mainly used
in the Global Positioning market but also in some
Telecommunications applications.
Within the Global Positioning market and other mid-tier
specifications, Rakon has a good level of inventory and is able
to support its customers. Rakon is also fielding increasing
enquiries for its higher margin, Ultra Stable TCXOs where it
uses its own proprietary chips. The company believes the
overall effect on its business should be positive, mainly in
FY2022, if and to the extent orders materialise and other
supply chain constraints can be overcome.
Telecommunications
As mentioned, revenue was up in this segment despite
the Covid-19 disruptions, particularly in the second quarter
as customers tried to secure safety stock. It appears that
many customers were making sure they had provision going
forward, as the components that Rakon manufactures are
key for their equipment. 5G products delivered out of New
Zealand provided strong revenue growth including very strong
demand from one large customer in Asia.
Key achievements included Rakon winning the major share of
business in the 5G Remote Radio Head segment and a major
Tier One cloud customer being secured.
Outlook
In the second half of the current year, with ongoing economic
uncertainty from geopolitical tensions and Covid-19, 5G
Half Year Review (HY2021)
April–September 2020
2
•
RAKON HALF YEAR REVIEW (HY2021)
APRIL – SEPTEMBER 2020
Brent Robinson
CEO / Managing Director
* Footnotes 1–5 are on page 4 of this document.

Bruce Irvine
Chair
roll-out has slowed but recent activity indicates demand improving.
Space & Defence
Combined revenue for Space & Defence was down 7% compared to the first half
of the 2020 year. Space revenue was down due mainly to the phasing of orders and
deliveries. Solid demand continues in the Defence market segment, with revenue up
compared to the prior corresponding period, with good growth in Europe.
Outlook
In line with previous years, planned deliveries are higher in the second half than in the
first. This should result in a similar revenue to the prior year. New business has been
secured within the ‘NewSpace’ segment from a low-earth-orbit satellite network in
Asia and revenue from this business is expected to start flowing in the last quarter of
the current year. Growth is also expected in the domestic Space business in India.
Global Positioning
Global Positioning revenue was down 38% as the high-volume, low-margin GNSS
business continued to decline. Covid-19 caused revenue to be lower from aviation
customers and in the emergency beacon segment as a result of supply chain issues.
Outlook
Recovery is expected in the second half-year as industrial and precision demand
return to normal levels – but some uncertainty still remains. Demand for emergency
beacons and agricultural applications is expected to return and Rakon’s continued
focus is on its high-margin, precise positioning products.
Closing Comments and Outlook
It was pleasing to achieve a good first-half result, which included the initial
negative impacts from Covid-19 as well as subsequent strong demand from the
Telecommunications market. Rakon continues to monitor performance and will
update the market if required. Looking ahead, there are good opportunities for the
company but some uncertainty still exists.
• Despite initial effects of Covid-19 being
severe, a strong result due to prompt
mitigation actions in Q1 and increased
demand in Q2
• Net profit after tax: $4.6m vs. $1.3m
• Underlying EBITDA
2
of $11.4m vs. $6.9m
• Revenue of $59.5m vs. $56.9m

◦ Telecommunications continued to
grow: up $6.2m

◦ Space & Defence was down $0.8m
but expected to recover by year-end
and exceed FY2020 result

◦ Global Positioning was down $3.7m
Half Year 2021
Performance Key Points
Revenue % by Market Segment
2017
2018
2019
2020
H1H2H1H2H1H2H1H2
$46.0m
$48.7m
$3.4m
$48.3m
$3.8m
$52.8m
$8.3m
$53.3m
$60.7m
$ 7.4 m
$56.9m
$62.1m
REVENUE & UNDERLYING EBITDA
$6.9m
$ 7. 9 m
$5.9m
$0.6m
RevenueUnderlying EBITDA
2021
H1
$59. 5 m
$11.4m
RAKON HALF YEAR REVIEW (HY2021)
•
3

APRIL – SEPTEMBER 2020
64
%
19
%
Telecommunications
Space and Defence
Global Positioning
Emerging and Other
10
%
7
%
57%57%
22%22%
17%17%
4%4%
HY2021
HY2020

Half Year 2021 Financial Summary

Balance Sheets
As at
30 September
2020
$000s
As at
30 September
2019
$000
s
As at
31 March 2020
$000s
Current assets88,98986,48086,007
Non-current assets60,02862,76964,237
Total assets149,017149,249150,244
Current liabilities41,10 846,44745,740
Non-current liabilities8,78211, 0 8 612,6 4 8
Total liabilities49,89057, 5 3 358,388
Net assets/ Total equity9 9,12791,71691,856
4
•
RAKON HALF YEAR REVIEW (HY2021)
APRIL – SEPTEMBER 2020
Summary of Revenue and Profit
Six months
ended
30 September
2020
$000s
Six months
ended
30 September
2019
$000s

Year ended
31 March 2020
$000s
Revenue59,53456,912118 , 9 8 0
Underlying EBITDA
2
11, 36 36,93514,787
Depreciation and amortisation(4,344)(4,326)(8,823)
Finance costs – net(407)(525)(1,055 )
Adjustment for associates and joint venture
share of interest, tax and depreciation
(875)(649)(1,4 47)
Other non-cash items(127)(8)(178 )
Income tax (expense)/ credit(969)(85)696
Net profit after tax for the period4,6411,3423,980
Summary Statement of Cash Flows
Six months
ended
30 September
2020
$000s
Six months
ended
30 September
2019
$000s
Year ended
31 March 2020
$000s
Net cash flow
Operating activities7, 9 2 63,4299,401
Investing activities(1,860)(3,040)(6,631)
Financing activities5,373(1,531)(3,078)
Net increase/ (decrease) in cash and cash
equivalents
11, 4 39(1,142)(308)
Foreign currency translation adjustment487570(672)
Cash and cash equivalents at the beginning
of the period
( 7,76 2 )( 6,782)( 6,782)
Cash and cash equivalents at the end of
the period
4,16 4( 7, 3 5 4 )(7,762)
Borrowings(6,997)(280)(145)
Net debt (excluding lease liabilities)(2,833)(7,634)( 7, 9 07 )
1. All amounts in this document are in NZ $ unless otherwise specified.
2. Disclosure of Non-GA AP Financial Information. Rakon has used ‘Underlying EBITDA’ as a measure of non-GA AP financial
information in this 2021 Half Year Review document. Underlying EBITDA is defined as: ‘Earnings before interest, tax, depreciation,
amortisation, impairment, employee share schemes, non-controlling interests, adjustments for associates’ and joint ventures’ share of
interest, tax & depreciation, loss on disposal of assets and other cash and non-cash items.’ Underlying EBITDA is a non-GA AP measure
that has not been presented in accordance with GA AP. The Directors present it as a useful non-GA AP measure for investors, enabling
them to understand the underlying operating performance of the Group and each operating segment, before the adjustment of specific
cash and non-cash items and before cash impacts relating to the capital structure and tax position. Underlying EBITDA is considered by
the Directors to be the closest measure of how each operating segment within the Group is performing. Management uses Underlying
EBITDA to assess the underlying operating performance of the Group and each operating segment. This document should be read in
conjunction with the Rakon Limited Interim Report September 2020. A detailed reconciliation of Underlying EBITDA to net profit after tax
is contained at Note 4 (Segment information) of the financial statements.
3. Temperature Compensated Crystal Oscillator. A crystal oscillator with additional circuitry to remove frequency variations due to
temperature change.
4. Oven Controlled Crystal Oscillator. A crystal oscillator that uses a miniaturised oven to keep its internal temperature constant.
5. Crystal Micro-Electro-Mechanical System. Rakon’s advanced quartz-based resonator technology. It is made with Rakon’s
NanoQuartz™ microfabrication process, delivering new levels of resonator and oscillator performance.