Rakon Limited (RAK) Earnings Call Transcript

[Audio Gap] Rakon's FY '25 Results and Business Update. [Operator Instructions] I must advise that this presentation is being recorded today, Wednesday, the 28th of May 2025. I would now like to hand over to Rakon's Investor Relations Manager, Nick Laurent. Thank you, and please go ahead.

Kia ora koutou and good morning, and welcome to Rakon's full year 2025 financial results and business update. Joining us today are Rakon Chief Executive, Sinan Altug; and Chief Financial Officer, Mark Dunwoodie. In a moment, I will hand over to Sinan and Mark to present the update. But first, a short reminder that during this presentation, we will make forward-looking statements about Rakon Limited and the environment in which the company operates. Because these statements are forward-looking, Rakon Limited's actual results could differ materially. I encourage you to read the disclaimer on the important notice slide of the presentation for more detail. And lastly, we ask that anyone recording today's webcast does so for note taking purposes only and not for publication or broadcast of the webcast content. I will now hand over to Rakon Chief Executive, Sinan Altug.

Good morning, and thank you for joining us. For anyone new to Rakon, we are a global leader in frequency control and timing technology, the heartbeat inside the world's most demanding systems. Our technology synchronizes 5G mobile networks, stabilizes timing on satellite constellations, underpins precision GNSS and is now designed into next-generation AI data center hardware. Today, I will first headline our FY '25 performance, then walk through key strategic milestones, market-by-market results and the FY '26 outlook. Mark will unpack the detailed financials. We'll close with Q&A. Let's begin. At the half year, we updated you that the FY '25 was already one of the most challenging years in Rakon's history with especially tough conditions in our core telecommunications and positioning markets. We responded with a disciplined focus on reducing our cost base while relentlessly executing our strategic growth plan, positioning the business for a return to growth as markets recover. Thanks to these efforts, we preserved our earnings in line with our guidance, delivering an underlying EBITDA of USD 9.5 million -- I'm sorry, NZD 9.5 million, right around the midpoint. Key to this achievement in a low revenue year was a significant reduction in our cost base. Operating expenses, excluding significant one-off items, were down approximately 10% year-on-year in addition to an $8.5 million reduction in inventory. Our aerospace and defense core market once again delivered record revenue with double-digit year-on-year growth, continuing a positive trend for the last 3 years. We also saw a strong pickup in telecommunications order volumes in the second half of the year, validating the positive market signals we noted at the half year. In fact, 2/3 of the telco revenue was booked and delivered in the second half of the year, reflecting stabilizing market conditions and selective global 5G investments, particularly in North America. Across all core markets, 60% of FY '25 group revenue was delivered in the second half, accompanied by a $16.8 million improvement in underlying EBITDA compared to the first half. This second half surge has given Rakon a significant lift entering FY '26. Next, let's take a closer look at our results at a glance. Looking at our full year performance, there was a sharp contrast between the 2 halves of the year. FY '25 revenue was $104 million, down 19% year-on-year, but momentum flipped in the second half and revenue jumped 49% versus the first half as orders rebounded. Underlying EBITDA was plus $9.5 million, right around the midpoint of our guidance range after the second half turnaround I mentioned, and we posted a net loss after tax of $5.8 million, which includes a $3.6 million one-off restructuring and transaction costs. We drew an additional $5.8 million on debt facilities to keep investing in new aerospace and AI R&D and manufacturing capacity. Operating expenses, excluding significant one-off items, were down 10% year-on-year and inventory was reduced 15% year-on-year, releasing an additional $8.5 million in cash. Mark will talk about our financials in more detail. Now let's review how we executed our strategy and delivered on key growth initiatives in FY '25, which was the final year of our 3-year plan. As we conclude our 3-year growth plan spanning FY '23 to FY '25, I'm pleased to say that not only have we consistently delivered the targeted milestones for each year, but we are also seeing the desired growth outcomes from these initiatives. FY '25 was no exception. We made great strides in pushing into new subsegments and focusing our growth and revenue diversification on the high-growth areas of aerospace and defense and AI and cloud computing infrastructure. In aerospace, we continue to build on Rakon's supplier status for our timing and subsystem products. We released next-generation versions of our subsystems. These are products critical to communication, synchronization and navigation of satellites and space vehicles, and they deliver the highest performance with unparalleled reliability. Alongside our ultra-stable oscillator components, these new subsystems were key drivers of the record FY '25 revenue and strong forward orders in our Aerospace and Defense segment. In addition to several large contract wins last year, we had also talked about the satellite subsystem contract, the details of which were confidential before. I can now reveal that this contract is also with MDA Space to add next-generation satellites to the existing Globalstar Low Earth Orbit constellation. Globalstar provides the backbone for Apple's satellite service, and Apple has invested over USD 1.5 billion and has taken an equity stake in Globalstar. Such wins position us strongly for similar large-scale LEO opportunities. And you have heard us say that AI and cloud will become a core market for Rakon. We expect FY '26 will mark the start of significant revenue. We are well immersed into some leading next-generation AI data center architecture, and we are already expanding production capacity. Our timing and synchronization solutions position us for strong sustained growth as AI hardware infrastructure market scales. FY '25 was also a year of operational milestones. We have accelerated the transfer of select product lines to our India manufacturing center of excellence, unlocking cost and scale advantages. And in parallel, we reorganized the business units and realigned our leadership team to sharpen execution and customer focus. And to reinforce our technology leadership, we have released multiple next-generation semiconductor chips, including Vulcan, which we will start sampling to AI and telco customers in the first quarter. These innovations ensure we stay ahead of performance demands, whether in AI data centers, 5G networks or the new space economy. Together, these milestones give us operating leverage and innovation pipeline to fuel sustainable growth and long-term value. I'll share more about how these feed into our next 3-year strategy at the Annual Shareholders' Meeting in August. Let's now quickly review how each of our core markets performed in FY '25. We'll start with Aerospace and Defense. We continue to see record revenue and double-digit year-on-year growth in this segment for the third year in a row with total FY '25 revenue of $42 million, up 15% from the same period last year and generating $27 million of gross margin at a rate of 66%, which is our highest percentage margin of any segment by far. High demand for space subsystem products is a key growth driver alongside our ultra-stable oscillators and next-generation Mercury-R chip-based radiation hardened products. Now Telco. Telco faced headwinds but showed significant improvement later in the year. The FY '25 revenue was down to $45 million. That is down 33% year-on-year and at a gross margin rate of 26%. The key drivers behind these numbers were the continued demand weakness in the telecom market as well as the inventory overhang at our customers and the inefficiencies in our manufacturing cost allocation from the lower order volumes also impacted our margin. Another factor was our phased exit from a major Chinese telco customer, incidentally the largest in the world to mitigate geopolitical risks. However, there was a notable turning point in the second half with 2/3 of the total telco revenue delivered in the second half of the year. These orders were driven by stabilizing conditions, as I mentioned, and selective global 5G investment as subscriptions and data usage grows. Rakon held its market share at all Tier 1 customers and maintained a high design win rate as before. So we are once again well positioned as the market continues to stabilize and return to growth. Next, a brief look at our Positioning segment. Positioning revenue was $11 million, down 21% from the prior year at a gross margin percentage of 46%. Like in telco, continued market weakness was responsible for lower order volumes. We continue to be a strong player in the precise positioning part of this market, including emergency vehicles, survey equipment, unmanned aerial vehicles, critical timing, autonomous industrial equipment. But overall, this segment remains flat, given the offsetting factors of increased competition driving down price. There still remains longer-term upside as some new applications scale. That concludes the core market performance review. I will now hand over to Mark to talk about our financial results in more detail.

Thank you, Sinan. Good morning, everyone. As Sinan said, the FY '25 year was one of the most challenging Rakon has seen and it delivered a year of 2 very different halves. Our interim results presented in November week were weak, and this was followed by a turnaround in the second half. The turnaround was due to our focus on revenue generation, cost management and operational efficiencies. We also benefited, as Sinan has said, from some market improvement in the telecommunication market. Second half revenue surged by 49% versus the first half, signaling demand recovery and a strong launch pad for FY '26. Underlying EBITDA recovered from a negative $7.3 million to reach positive earnings of $9.5 million by year-end, in line with our guidance midpoint. Including one-off restructuring and transaction-related costs of $3.6 million, the company reported a net loss after tax of $5.8 million compared to an FY '24 profit of $4.5 million. Rakon retains a strong balance sheet with net assets of $155 million. Debt facilities include significant capacity for investment in capital initiatives and growth opportunities, including expansion of production to meet current and future AI and cloud computing infrastructure and aerospace orders. Inventory was reduced by a further $8.5 million to $46.4 million as we continue to carefully manage working capital while maintaining the capacity to meet anticipated demand as our core markets recover. Now talking about revenue. The strong second half performance provided more than 60% of this year's revenue, helping to turn around that very weak first half result. As you can see on the chart, our second half revenue recovered strongly to be only about 9% below last year's result. Core markets of telco and positioning were the most affected in terms of lower orders and revenue, leading to a lower operating leverage overall. One thing to note is the early revenue from AI and cloud computing is currently included in the teleco -- telecommunications sector reporting that we're showing in our slides. As it becomes more material, we'll start to split that out and show it as a stand-alone core market. A large proportion of -- sorry, moving to gross margin. A large proportion of Rakon's costs are fixed with lower orders. We lose our economies of scale. This was reflected in this year's lower gross profit of $45 million and margin percentage of 43.1%, which is mainly due to the loss of efficiencies from low production levels. We are focused on making our business more efficient, which will support an improvement in our operating leverage and gross margin when volumes return. In particular, the transfer of the selected product lines to our India manufacturing facility while generating short-term transition costs will deliver increased efficiencies from FY '26 onwards. On the operating expenses, the concerted focus on cost and efficiency is now delivering sustainable savings with expenses, excluding significant one-off items, down almost 10% year-on-year. Over the long term, efficiency gains will further expand our operating leverage as volumes grow. This result reflects the positive outcomes of cost management and efficiency initiatives, offset by the overlap of expenses during the manufacturing transition. We have balanced cost reductions carefully with continuing to protect our growth pathway. This includes R&D investment to extend our technology leadership, retaining the capability and resources to deliver on growing demand. We also have an accelerated schedule for selected product transfers to India, and we're ramping up production capacity to meet existing and future demand in aerospace, AI and cloud computing products. Expenses, excluding significant one-off items, do not include the $3.6 million in restructuring and transaction costs as shown here. We switch to R&D. Our investment in R&D remained steady year-on-year at $22 million as we ensured we retain necessary resources and capabilities to protect our growth pathway and extend our technology leadership. Financial statements show R&D OpEx in our P&L of $11.7 million. This doesn't include the $9.8 million of products that were capitalized during the year as they met the NZ IAS 38 criteria. Thank you for listening to that. Back to you, Sinan.

Thank you, Mark. Now turning to our outlook across our core markets. Starting with aerospace and defense. In aerospace and defense, we have a strong order book that already stretches beyond FY '26. Customer demand for our subsystems and ultra-stable oscillators in space remain exceptionally high. Our growth is limited by our own speed of capacity expansion, which we have invested heavily into in FY '25. Execution will be a key driver for our growth. Telco hit the bottom of the cycle midyear. We believe orders stabilized in the second half of FY '25, and there is now an upward trend. Drivers are the growing 5G subscriptions, network densification and the fixed wireless access. We held share through the dip. And as carriers resume CapEx, we are ready to capture the rebound. AI and cloud computing infrastructure, this is the new frontier. We have already invested in R&D, invested in capacity and are securing design wins. We expect FY '26 marking the start of a significant revenue trajectory, making AI a core segment for Rakon in the coming years. Our new chips, including our Vulcan OCXO, give us a strong technical edge in this. And positioning revenue is expected to be flat near term. Price pressure offsets the volumes and the growth in some areas. We are defending our high-precision subsegment where margins and customer stickiness remain attractive. Overall, each of our segments has its own dynamics. Space and AI are high-growth drivers. Telco is stabilizing and set to recover and Positioning, we are sustaining with an eye on future optics. Now to wrap up our outlook, let's discuss how these pieces contribute to Rakon's trajectory in FY '26. Let me close by pulling in the key strengths together as to why FY '26 is expected to be a year with tailwinds for Rakon. The significant revenue surge in the second half of FY '25 created real momentum. We enter FY '26 with a growth trajectory already in motion, underpinned by positive sector trends across space, AI and telco. We have a strong order book and targeting year-on-year growth in aerospace and defense, the start of substantial revenue from AI and cloud and stabilizing and now improving telco orders. Our focus on sustainable cost reduction continues. And we are still investing heavily in R&D to extend our technology lead that balance safeguards our growth trajectory. Our organizational transformation means better execution for the company. And as volumes pick up, our operating leverage improves and added capacity drops faster to the bottom line. We have a realigned experienced global leadership team and a refreshed Board with deep international and tech expertise ready to execute. And we are watching tariffs and macro conditions closely, but we do not see a material FY '26 impact. Our diversified global manufacturing footprint actually gives some level of protection. In short, we are well positioned for growth with strong fundamentals, proven demand, cost discipline, innovation investment and the leadership team built to deliver. FY '26 is our springboard year, and we are ready to turn momentum into sustained long-term value for shareholders. I want to thank the entire Rakon team for their hard work and adaptability. This has been the driving force behind our ability to navigate adversity this past year and still advance our strategy substantially. Thanks to them, Rakon is ready to capitalize on the clear growth opportunities in front of us. We will continue with our focused investments in innovation and the ongoing operational transform -- and transformation to unlock Rakon's full potential in the coming years. Thank you all for your attention and support. That concludes the formal part of our presentation. I'll now hand back to Nick to begin the Q&A.

Thank you, Sinan. We will now start the Q&A portion of the presentation. [Operator Instructions] So we have some questions that have come through from Will Twiss of Forsyth Barr. The first question relates to working capital. He asks, can you talk to the level of working capital and if this new level is sustainable?

Thank you, Will. Yes, we believe it is. Obviously, as the business grows, we will see receivables increase, payables come up as we take orders in. But our key focus at the moment is on inventory and controlling that. So we actually have initiatives this year to review our inventory policies and our inventory at our various sites. That will be our main target in maintaining this level of working capital.

Thank you, Mark. Another question here from Will. It's regarding net cash at this time. With net cash at the end of the year around $3 million, where would you expect this to be over FY '26?

Thank you, Nick. We're working very hard to return to operating -- positive operating cash flow. So we're hoping -- we're not hoping but we're forecasting and driving towards an improved cash position at the end of '26.

Thank you. One moment while we pull up the next question. We do have some further questions from Will, and I'm not seeing any others at this point. So I will continue on with Will's next question, this time looking at R&D. He asks, on R&D, a large proportion of second half spend was capitalized. Can you explain more on this? And what will happen to this mix in FY '26?

So our technology teams are constantly working on the next chip or the next motherboard. We will see similar capitalization progress as we reach the IAS 38 criteria during '26 as well. '25 was high, but we've been forecasting out and with our approach and with our road map, we would expect similar levels going forward over the next couple of years.

And maybe I can add, Will, so this is based on our strategy of ensuring that we tie our technology and R&D spend to the return on investment. If you look back at our last 5 years, you will see a consistent increase in the capitalization of R&D, which effectively means that we are turning our spend in R&D into assets for the company. So we do have a number of new projects in different areas, be it semiconductors, like Mark said, in space subsystems and in some other areas that will add to this moving forward as well. So while the trend will be up and down perhaps, it is a deliberate -- it's an outcome of a deliberate strategy that we have had over the course of the last years.

Thank you, both. We now have a question from RNZ, Jeffrey Haley at RNZ. He's just asked for the profit and loss guidance for FY '26.

Yes, we will provide that at our Annual Shareholder Meeting in August, like that has been traditionally when we provide our guidance.

Great. Thank you. Now we have a question from Kevin Arscott. Kevin, if I can just interpret your question, you've asked about the current capacity of India and the path to get capacity to 100%. So perhaps we can look at what is the path to the transferred products and the capacity to get those up to 100% and also generally what the capacity is at our India facility.

Yes. Kevin, there is still substantial capacity in India actually. You will remember, as we invested into that factory, we had some level of scrutiny as to why we were going big. Now I think that, that's going to pay off from this year onwards because we will be able to -- let me put it this way, in our transfer plans for at least the coming 3 years, the Indian capacity is not going to be a bottleneck. And the path to get the capacity to 100%, that's the second part of your question. That is going to be spread across these coming 3 years.