Rakon sticks with strategy despite 12% revenue drop

Diversification will shelter Kiwi company from declining consumer spending, company says

Rakon has seen its revenue drop by 12% year on year, and its earnings before interest, tax and depreciation (EBITDA) fall by 16%, in its latest half year financial report.

In an interim report for the period ended September 2008, released to the New Zealand Stock Exchange (NZX) today, the GPS crystal manufacturer reassured investors, saying its diversification and low manufacturing cost base would see it through an increasingly harsh economic environment for companies supplying consumer technology markets.

Revenue fell from $89.9 million in the six months ended September 2007 to $79.3 million in the same period of 2008. Gross profit fell from $34.1 million to $29.8 million while net profit after tax fell from $5.7 million to just under $2 million. The interim accounts are yet to be audited.

"The Directors of Rakon remain confident that the company’s business plans are robust and will deliver excellent results for shareholders despite the recent slow-down in consumer spending," the report says.

"Rakon’s diversification into telecom infrastructure and aerospace markets through our European operations gives us a solid base of customers in a variety of market sectors.

We have significant potential to increase our global market share and deliver growth in a difficult market. We plan to do this by capitalising on our excellent European technology base and leveraging our increasingly competitive cost base in Asia.

"GPS will continue to offer growth opportunities for Rakon and remains the core of our business. Whilst consumer markets are expected to be weaker there is an increasing number of GPS enabled products available on the market. We see great potential in emerging applications beyond the existing PND [personal navigation device] space to applications such as GPS enabled mobile phones and cameras. We remain committed to supporting these emerging consumer markets as the volume and profit potential is significant."

The report says Rakon has maintained market share during difficult times and has also managed its cost base to ensure percentage margins remain the same despite an expected reduction in sales prices.

"Our joint venture in China is operating profitably and well. We also plan to establish a base there for manufacturing our products for very high volume markets. We will time the building of our factory there to coincide with the expected upturn in demand. In the mean time we have a highly scalable and automated manufacturing model in New Zealand. This allows us to continue to grow substantially and meet projected increases in demand until the extra scale sought from a China based plant is required."

Rakon notes its UK operations had a "very positive result" for the half year.

"Revenue was up on last year on the back of an increased proportion of sales being for the high value Pluto TCXO product destined for the telecom infrastructure markets. Investments in our Lincoln manufacturing plant have begun to yield solid returns. This has been coupled with reduced materials costs achieved through utilisation of Rakon’s global supply base. As a result the UK has delivered good increases in bottom line returns."

Rakon's French operation is now geared towards supplying low volume, very high value products, as well as supporting its Indian operations with with product and process design, the company says.

"India offers a much lower cost base for the OCXO products. This will enable Rakon to profitably target higher volume applications in the telecom infrastructure market that have previously been closed to us."

Meanwhile 4th generation wireless networks have tight requirements for their frequency control products and this suits Rakon’s TCXO and OCXO products manufactured in Europe and India, Rakon says.

"We are working closely with a number of tier one and tier two equipment vendors on frequency control solutions for these next generation networks. We expect to be able to capture an increased market share as they are rolled out in the future."

Rakon's shares are trading near a 52-week low at $1.27. The 52-week high was $3.82.

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