U.S. Markets closed

Edited Transcript of RAK.NZ earnings conference call or presentation 18-Nov-19 10:00pm GMT

Half Year 2020 Rakon Ltd Earnings Call

Mt. Wellington, Auckland Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Rakon Ltd earnings conference call or presentation Monday, November 18, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anand Rambhai

Rakon Limited - CFO

* Brent John Robinson

Rakon Limited - CEO, MD, CTO & Executive Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen. Thank you for standing by, and welcome to the Rakon's Half Year 2020 Results and Business Update Presentation. (Operator Instructions).

Please note that this conference is being recorded today, Tuesday, the 19th of November 2019. I would now like to hand the conference over to the speakers today: Mr. Brent Robinson, CEO and Managing Director; and Mr. Anand Rambhai, Chief Financial Officer. Thank you, gentleman. Please go ahead.

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [2]

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for joining the call this morning. To start with, I'll hand the opening over to Anand, who'll run through the financials for the first half.

--------------------------------------------------------------------------------

Anand Rambhai, Rakon Limited - CFO [3]

--------------------------------------------------------------------------------

Yes, good morning, everyone. Welcome to our presentation. If we move through Slide #3. I'll take you through the financials. So generally, all comparative numbers we talk about will be against the same period last year as the period ended September 30, 2019.

So firstly, as a snapshot, revenue for the -- this current period, September '19, was up NZD 3.6 million, profit was down NZD 0.7 million, and EBITDA was up NZD 1 million compared to the same period last year.

And then on same slide, I'll find the movements. So revenue firstly, for the period, was up 7% to NZD 57 million. This increase is explained with reference to our key market segments.

So in Telecommunications, which makes up now 57% of revenue, is showing good growth with higher volumes through our (inaudible) growth from New Zealand with higher demand and the launch of new products. Rakon is supplying into both the 5G antennas and into the core networks.

Secondly, Global Positioning makes up 17% of our revenue, was down NZD 1.7 million for the 6 months. This is predominantly from a particular high-volume, low-margin business with pricing pressure has made -- business was no longer economic.

And third market segment being Space and Defense. This makes up 22% of our revenue, and it's down NZD 1.1 million overall. Within this category, Space is higher with the increased deliveries of Low Earth Orbit business, offset by the lower Defence business from delays and long lead time products out of France.

Profit is NZD 0.7 million lower and EBITDA is NZD 1 million higher. So underlying EBITDA includes positive impact of NZD 1.5 million from the adoption of the new leases accounting standard. Excluding this, underlying EBITDA is down NZD 0.5 million, lower than the same period last year and in line with the profit movement.

So the overall profit movement is explained on the next slide, if we move to Slide number 4. So this slide provides an explanation of the net profit result. I'll talk through the graph on the right, which explains the movement from the NZD 2 million net profit reported for half year '19 to the $1.3 million reported for half year '20.

So firstly, gross margin was NZD 1.7 million higher than last year, predominantly from the flow-through of overall higher revenues. Gross margin percentage was similar to last year at 46%.

The next bar shows the impact of Rakon no longer booking share of Thinxtra losses from 5th June, 2018. In the prior year, 2 months' worth of those losses were included, hence a positive year-on-year movement.

Next bar shows the impact of higher costs coming through to integrate Rakon India into the wider group. These costs include the building up of a team in India to support the manufacturing operation, including management, whilst continuing to pay the previous joint venture partner the support services fee. This fee was around NZD 1 million in New Zealand per annum and has ceased from this month.

The next bar shows higher R&D and other costs. These are from higher headcount and a greater proportion of time spent on R&D activities as well as higher costs relating to the construction of prototypes of new products.

FX gains were also lower this period compared to last year. This is mainly from higher borrowings in foreign currency. So with the weaker New Zealand dollar at the end of the period, this causes an overall revaluation gain compared to the prior year. But with higher borrowing in foreign currency, just made that gain a lot less than it was the year before.

Next bar is interest, which is up. And it's based on the higher average borrowing during the period.

Okay. Moving to Slide #5. So I'll now cover off some key metrics. And I'll touch on those not a lot as that have been covered already.

So first of all, just moving down the right-hand side to depreciation and amortization. This was higher from the factor of adopting the new leases accounting standard. The impact of this causes depreciation and interest to be higher and lease costs to be lower. The overall impact to profit is not significant.

For operating cash flow, this has improved compared to prior year, and NZD 1.5 million of this improvement is from the new leases date as accounting standard where lease payments no longer are included in operating cash. The remainder of the positive movement is mainly because inventory growth was lower in the current -- than the current period in the prior year -- sorry, so inventory growth this period was lower than comparable period.

Okay. From March 2019, inventory has grown up to September. So this has grown due to the following reasons: To support the launch of long lead time, high-value products out of New Zealand; to customer orders that have been delayed, supporting a higher expected second half revenue in our French Space and Defense business. This is similar to prior years with approximately 2/3 of the revenue out of the French Space and Defense business is booked in the second half compared to the first half.

And finally, the impact of the higher Rupee and Euro at period-end also boosts -- translated New Zealand dollar value for inventory.

Okay. Capital expenditure. This was down compared to the same time last year. Last year, we had significant spend in the second half of the year, whereas this year is expected to be more linear. And net debt has also increased, and this is expected with the growth in inventory and higher CapEx in the second half of last year.

I'll now pass back to Brent, and he will take you through the key achievements.

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [4]

--------------------------------------------------------------------------------

Thanks, Anand. Key achievements on Page 7. Telecommunications growth with filling 5G demand starting to generate revenues, especially out of Asia. New products delivered out of New Zealand. These have mainly been into Asia with 5G expanding into Korea and China. Half year on half year volume growth in India. If we look at the volumes for the first half compared to the second half, most of the same period last year, we've seen volume growth.

Rakon India is now fully integrated into the wider group and operating completely independently with its own management structure, which has taken a while to get in place, but we have a very good team operating our company in India.

We have been waiting very hard to develop new technology called Quartz MEMS, so we've completed this development that's using the technology called photolithography, which enables us to make very, very small quartz crystal resonators using similar processes to the semiconductor industry. And these have been developed here in New Zealand.

We've registered the -- a trademark of this called XMEMS. Crystals are typically been associated with the term X. So we've described it as XMEMS. So we are now ready for deployment into some of our high-performance TCXOs and OCXOs. We've completed all our qualifications and test runs, and we're getting extremely good results from these new products, termed XMEMS.

Going through the market update. Page 9. Telecommunications, our main market, 57% of our revenue. From the U.S. dollar point of view, it's up 25% on the same period as last year. We've delivered new products from Rakon New Zealand (inaudible) radio heads, and this has been gathering momentum in Asia, resulting in revenue growth when compared to last year's first half. Revenue from products for network equipment grew 50% compared to the same period last year. So what I mean by that, we mean the network equipment, switches, the routers, backhaul, this type of equipment grew quite a lot on the preparation for 5G rolling out. What we have seen, though, is our 4G and 4.5G mobile base station equipment has slowed, impacting Rakon India when we compare the first half of 2020 versus the second half of '19. I know there is a mistake in the presentation there, it was really compared with the second half of '19.

For the outlook, we're expecting 4G and 4.5G mobile base station demand to be down in the second half but expecting 5G base stations to start deploying in Q4 of 2020 in Europe and the U.S. but most of the deployment we have been experiencing has been in Asia. So Asian markets are still leading the 5G deployment. Other regions are expected to ramp up either in the first half or second half of calendar year.

Rakon has increased market share with all Tier 1 customers, and we're well positioned for the next calendar year. So we've just been through our billing negotiations with our Tier 1 customers in Europe, and we've increased our allocation with the 2 main ones in Europe going into the next calendar year.

Core network infrastructure to support 5G synchronization standards will continue to grow, with the increase in demand for products both India and Rakon New Zealand.

Going on to global positioning on Page 10. Overall, global positioning revenue was down 15% as Anand said. There's been a large customer of less demanding specifications that has resulted in Rakon shedding some of the high-volume GNSS business. As Anand said, there was very little margin in this type of business, and we've been doing it for many years. But it's come to a point where we would rather focus our energies on high-margin business.

Also on the segment, industrial high-precision GNSS, this is the part of GNSS that we're most interested. But unfortunately, this has also been down with the demand from heavy equipment industry in decline in the U.S. We're expecting this to turn around. But with this global uncertainty, there has been a slowdown in this segment.

Emergency beacon market revenue was up 40%, and this was due to new frequencies being rolled out and deployed for emergency location beacons.

Looking at the outlook. Competitive pressure from low-cost GNSS modules in Asia will increase price pressure. And this high-volume market is not really a focus of Rakon. And Rakon will focus on preserving margin and top line. And this lower margin stuff may decline further. There's not a lot of margin left in it.

The emerging autonomous car market is bringing in new applications and opportunity to Rakon's technologies and products. So we've always thought that this autonomous car market will need very good positioning, but also a very good time synchronization, and we're seeing this confirmed by various new applications emerging with new customers asking for very tight tolerance OCXOs and TCXOs for automotive applications.

Space and Defense. Combined revenue for Space and Defense was similar to the first half last year. Space revenue was up with a significant delivery into China for the first phase of products for Low Earth Orbit, LEO satellites, indicating the potential for this 'New Space' market. Space revenue in U.S. dollars grew 19% for products out of Rakon France, whereas Defense revenue out of Europe was down 10% for products out of France and Rakon New Zealand, mainly due for -- to less demand in the U.S. for the New Zealand products.

The outlook. Demand for traditional geostationary satellites is expected to weaken as the market segment transitions towards LEO satellites, these Low Earth Orbit satellites. 2020 Q4 deliveries from Rakon France are expected to be high, in line with the yearly trends and are needed to meet the full year result.

Defense spending in the U.S. is predicted to be stronger in the second half of this financial year. Rakon India is positioned well to continue the growth with localized supply into Space and Defense market in India. This will take some time to materialize though.

So I'd like to hand it over for questions. So back to Eddie for moderating the questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question is from the line of Mike Daniel.

--------------------------------------------------------------------------------

Unidentified Analyst, [2]

--------------------------------------------------------------------------------

You guys have put some numbers on the value of the 5G market to Rakon over, say, a 5-year period. Have you given it a bit of a tester to see what you think the value will be over that sort of 5-year period of implementation?

--------------------------------------------------------------------------------

Anand Rambhai, Rakon Limited - CFO [3]

--------------------------------------------------------------------------------

Yes, when we put together our long-range plans, we do start with the market and then flow that down to what impact that has on Rakon. I couldn't tell you off the top of my head, what those numbers were for each year, but that is the process we tend to go through. So little bit difficult because it's -- there is views on how big that market is and when the applications will actually come to fruition. And therefore, when the demand is going to flow through, for CapEx, back down to Rakon because that's where we really pick up the demand. It's a CapEx that the network builders have.

--------------------------------------------------------------------------------

Unidentified Analyst, [4]

--------------------------------------------------------------------------------

You must have a rough idea?

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [5]

--------------------------------------------------------------------------------

Over the period, it'd be several hundred million dollars worth of business in frequency control for 5G. But what our proportion or what our allocation of that business will be, will be dependent on what competition comes into play. At the moment, we've got a very strong position. And we can't say we're going to get all the full several hundred million dollars because we know that competition will come in. The whole world's 5G is not going to rely on Rakon. But at the moment, we have a very strong position.

--------------------------------------------------------------------------------

Unidentified Analyst, [6]

--------------------------------------------------------------------------------

So there's no sign of (inaudible) tend to commoditization, which the Chairman was a bit worried about at the AGM.

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [7]

--------------------------------------------------------------------------------

No, I don't think this market will commoditize per se, but there will be competitors that you could count on your hand, that will come in and get allocation. It's the way that these equipment operators -- equipment operator manufacturers worth their supply chain is to make sure they have at least 2 suppliers for each component in their equipment.

--------------------------------------------------------------------------------

Unidentified Analyst, [8]

--------------------------------------------------------------------------------

So right now, who are the competitors for Rakon in that space?

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [9]

--------------------------------------------------------------------------------

Well, now the traditional suppliers that we have is NDK, Vectron, and a new entrant SiTime, who is trying to get some business there as well.

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

Yes. Okay. You don't give a forecast for what you think the EBITDA might be for the end of the year. Do you have any idea?

--------------------------------------------------------------------------------

Anand Rambhai, Rakon Limited - CFO [11]

--------------------------------------------------------------------------------

We don't -- again, we're not putting out a formal recommendation or guidance. And the main reason is a lot of our -- full year revenue was earned in the second half or even in the last quarter of the year. So it's a little bit difficult for us to predict exactly how that's going to go. There's a bit of variability around. So we prefer not to nail down a range at the moment. I mean, it's been like that for a few years. It's just the way that our -- particularly, our French business seems to deliver its results.

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [12]

--------------------------------------------------------------------------------

But as we said in the AGM, we're expecting the EBITDA to be flat on last year if not slightly down.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question is from the line of David [Oxley]

--------------------------------------------------------------------------------

Unidentified Analyst, [14]

--------------------------------------------------------------------------------

I had one quick question if I may. When you talk about the low-spec, high-volume revenue within GNS -- GNNS (sic) [GNSS] being a bit weak. Do you -- have you given any clues to what percentage of the total revenue within that division is made up by the low-spec stuff that is under pressure?

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [15]

--------------------------------------------------------------------------------

Revenue-wise, it's probably about 10% or 15%. But gross margin-wise, it's a lot less than that, maybe 20%. The gross margin-wise, it's pretty close to only a few percent.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question is from the line of [Jeffrey Merchant]

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

I guess, line on, how many of your products used locally here in New Zealand?

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [18]

--------------------------------------------------------------------------------

Only a couple of percent of our revenue is generated from New Zealand.

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

Would you repeat that?

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [20]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

You got no idea.

--------------------------------------------------------------------------------

Anand Rambhai, Rakon Limited - CFO [22]

--------------------------------------------------------------------------------

Sorry, the way that it tends to work is we supply to network builders. So the Nokias or the Samsungs, the (inaudible) or companies like that. So we're building networks all around the world. We supply them as customers and to -- as component customers. We don't know exactly, necessarily, where those products -- where they're building exactly those networks at any point in time. So what -- with the rollout in the South Island or other places in New Zealand, our equipment may well be within those networks, but we don't have that end application or end visibility as such in terms of where it's deployed.

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

That's right. So you don't know really what comes back?

--------------------------------------------------------------------------------

Anand Rambhai, Rakon Limited - CFO [24]

--------------------------------------------------------------------------------

Yes, that's right. We're supplying kind of the builders and we don't know where they're building exactly or when they're buildings exactly.

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [25]

--------------------------------------------------------------------------------

Sorry, I misinterpreted your question. I thought you were talking about what -- how much we're actually selling into the New Zealand market, not ends up back here. But I'd say New Zealand is quite a small market when we look at the global total spend, it's in the noise, really.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

There are no further questions at this point. I would like to hand the call back to Mr. Brent Robinson for any closing remarks. Please go ahead, sir.

--------------------------------------------------------------------------------

Brent John Robinson, Rakon Limited - CEO, MD, CTO & Executive Director [27]

--------------------------------------------------------------------------------

Okay. Thank you. So my closing comments are overall for the first half, we've seen revenue and margin growth. This has been underpinned by strong volumes in telecommunications. Rakon India is now completely independent from our JV partner. So that's a major achievement for us and no longer costing us quite a high management fee. There's been a number of one-off costs in the first 6 months.

Closing comments. We've done our final payment to our JV partner for our Indian operations. So that's also been consumed in the first half. Delays in 5G rollout is disappointing for us. We expect the ramp-up from our European customers to be higher. But on the other side, with one of dominant share with our Tier I customers rolling into next calendar year. The key focus going forward will be on production efficiencies, expanding capacity for the new 5G products. So I believe we're at the beginning of a long-term growth wave for 5G, and Rakon is very well positioned to benefit from this growth in telecommunications. Thank you very much. Good morning.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Ladies and gentlemen, that does conclude our teleconference for today. Thank you for participating. You may all disconnect. Thank you.