REL: 1421 HRS Rakon Limited
ADDRESS: RAK: RAK - Annual Meeting Address from the Managing Director
The past year has largely been a successful one for Rakon. We have continued
the transformation of our business, which began several years ago, taking it
from a NZ operation to a global company enabling us to truly compete with the
best and biggest in the world. We have rebounded well from the global
financial crisis and have managed to expand our business significantly in key
That is not to say we are not facing challenges. The global economy has not
yet stabilised and this is causing volatility in many of our markets. The
strong New Zealand dollar is also obviously a concern for us and puts
additional pressure on our earnings.
These factors in the short term create challenges for us requiring prudent
and careful management of our investments and expenditure.
Despite these challenges we have continued to achieve all of the goals we set
earlier in the year and are very confident about our position and where we
In the past we saw Rakon described as a "GPS technology" company; however,
this is no longer accurate and today we are much more diverse.
Our business can largely be summarised into four main market segments.
Smart Wireless Devices, which are consumer devices such as smart phones and
tablet PCs and currently account for about 14% of revenue.
Telecom, which accounts for around 38% of revenue and includes all the
equipment required to make our global telecommunications networks run. From
cellular base stations, to microwave and fibre optic links right through to
more traditional copper wired networks.
High reliability, which largely includes applications for Space, Defence and
Aviation Industries where quality and performance are absolutely critical.
Currently this is 14% of revenue and growing with our recent acquisition.
Last but not least is Positioning, which is our more traditional GPS market
and includes the in car navigation systems, sport and recreation equipment as
well as precision GPS for mining, surveying and agriculture. It remains an
important part of our business, accounting for around 25% of revenue,
although nowhere near as central to our business as it once was.
Having this breadth of the markets and products and capitalising on our
reputation as the leader in technology allows us to pursue our objective to
grow into one of the largest and most profitable frequency control product
companies in the world.
The Telecom sector is a significant part of the global Frequency Control
business. We have seen very strong growth in the telecom sector over the last
year. This growth is being driven on two fronts; firstly from an increase in
market and secondly from overall growth in network infrastructure.
The increase in demand for infrastructure is a result of a massive increase
in the need for telecom networks to cope with more data traffic. On one hand
we have the increased use of smart phones, which consume data over mobile
networks and on the other hand there is a general increase in data usage over
the internet as more and more people shop online and download music and
videos. Overall Cisco expects mobile data traffic alone to increase more than
ten times over the next few years.
To support this increase new hardware needs to be deployed. We have heard a
lot about "ultra-fast broadband" here in New Zealand but this is the tip of
the iceberg. In addition to fibre-optic deployments we are also seeing
upgrades to existing copper networks, the expansion of 3G mobile services and
the deployment of new 4G mobile networks.
All of this is happening now and all of this relies on accurate frequency
control devices in order to operate.
Since 2005 we have been executing a strategy to become a leading supplier to
this market. It started with the acquisition of CMAC in 2006 followed by the
JV in India and more recently the expansion and adaption of our UK and NZ
facilities. Throughout this time we have continued to innovate with industry
leading products developed by our teams across the world.
In a relatively short period of time we have been able to go from a niche
player in this sector to one of the leaders. We are now a recognised and
preferred supplier to all the major equipment vendors around the globe and
with the expansion of our product range we expect our position to only
Sales into this sector provide a good counter balance to our consumer markets
and have enabled us to weather the worst of the storm caused by the global
financial crisis. Results from our UK and Indian businesses in particular
Sales of our OCXO products have been particularly strong as we continue to
see the benefits of our move into India. In the current YTD volumes
manufactured are more than double what was achieved in the same period last
year. This is largely due to increased demand for wireless network capacity,
not only 3G but also the emerging 4G or LTE networks.
Growth in sales of our ultra-stable TCXOs incorporating our proprietary Pluto
IC has been a real cornerstone of our business over the last few years.
This continues to be the product of choice for telecommunication applications
including the massive rollout of fibre that has been occurring globally and
the emerging small cell market.
Our focus on new product development for the Telecom market has been
significant. In addition to continuing to develop higher specification,
smaller size and lower costs OCXOs and TCXOs we have made a number of
significant breakthroughs with new products.
In 2010 we launched the world's smallest integrated OCXO, the Mercury. This
is in hot demand as infrastructure providers look for ways to reduce size,
power consumption and cost.
We have also developed a range of VCXO & XO products for which volume has
begun to ramp up in our Auckland facility. This was previously a gap in our
product offering and by adding it into our portfolio we can expand the
revenue we earn from our existing customers and attract new customers.
We have also focussed over the last 3 years on capitalising on our GPS market
leadership by building a strong share in the smart wireless device sector.
This is a high volume, competitive market. These smart devices require
higher performance than other consumer products and this enables us to
leverage our technology expertise. It is also a market that has strong growth
and provides us with significant opportunities.
These days most of us are aware of how popular iPhones, iPads, Android and
other smart wireless devices are. The smart phone sector is expected to grow
from the 288 million units produced last calendar year to over 1 billion
units by 2015. Currently Rakon supplies around 15% of this market, although
we are seeing this steadily grow.
We have faced strong competition from incumbent suppliers to the handset
market but have been able to gradually develop a strong position. Late last
year we established ourselves as a supplier to two of the largest smart phone
manufacturers in the world.
Since then we have further increased our penetration with those customers and
recently made good inroads with two other smart phone manufacturers.
Our strategy of expanding into China will give us a world leading cost base
which will ensure we can profitably compete in this market. In the mean time
we need to continue to develop the market and our Auckland facility is
working hard to keep up with that demand while we do everything we can to
manage our costs until we complete this transitioning phase.
Space and Defence is a very important market for Rakon. Last year we acquired
a French based competitor who specialises in this sector. That acquisition
doubled Rakon's presence globally in this market and made Rakon the largest
manufacturer based outside of the USA, which is a great advantage when so
much of the growth in this area is coming from Europe and the BRIC countries.
In the most recent year this market grew to 14% of Rakon's global revenues.
It is a market that we consider we can grow gradually to be a larger share of
Rakon's revenue base.
This market is dealing with extremely high performance products and requires
the highest levels of quality. The market is characterised by very long
design cycles but also very long product lifecycles. As a consequence it is
difficult for new entrants to win business meaning competition is much more
limited than in other markets. As such, margins tend to be significantly
higher to justify the investment in product development and manufacture.
Most of Rakon's product for this market is manufactured in France. Our
French business has recently moved into profit and we are confident we can
continue to improve and grow this over the coming years.
The market growth we have enjoyed has been underpinned by expansion in most
of our facilities.
On the back of very strong demand in the Telecom market last year we doubled
the manufacturing capacity for OCXOs in India and expanded into a second
facility. In the current year we have almost completed a further doubling of
this capacity and construction of a large state of the art cleanroom. The
establishment of this cleanroom is an important step forward as it enables us
to manufacture high spec crystals in India to further reduce manufacturing
costs and hence expand the markets we can profitably address.
Our growth in the Telecom market has also driven us to adapt our high volume
GPS TCXO technology to enable testing and programming of ultra stable TCXOs.
Demand for ultra stable TCXOs has grown substantially over recent years as
they are used in fibre-optic networks and in the developing femto or small
cell market. We expect this growth to accelerate with the rollout of 4G
networks as these will incorporate significant volumes of small cells in
order to meet the massive bandwidth requirements driven by the huge increase
in data. We have trebled capacity in NZ and the UK over the past 12 months
to meet this demand, but importantly we are able to implement much larger
increases in capacity very quickly with limited retooling of our GPS TCXO
As I have already noted the smart wireless device sector is also growing and
projected to continue with very strong growth for several years. Very
recently we completed construction of our Chengdu facility which will play a
significant role in addressing this market going forward. This is a
significant investment for Rakon and a large step forward for us as a
company. Our Chengdu facility provides scale at a very competitive cost and
is situated amongst our largest customers. Our success in the market means
we expect to load this facility quickly.
The completion of our Chengdu facility means that the NZ business can
continue its transition to manufacture a broader range of products. This
includes VCXOs, XOs and ultra-stable TCXOs for the Telecom market and high
value GPS applications. In addition the NZ business continues to have a key
role in spearheading the development of new products for consumer GPS
applications. Recently we have been working very closely with the world's
leading smartphone chipset producer to develop a new product for this market.
This product demands a very high performance crystal and our expertise has
enabled Rakon to establish a lead position for what we expect will be a very
large market. This highlights a trait that has been key to our success over
many years, that is, having leading technology that solves difficult problems
for our customers and partners.
As a shareholder, our performance is not currently rewarded with substantial
bottom line profits and share price growth. As a leader of Rakon I am very
pleased with the strategic position we have continued to build and diversify.
We have an excellent platform and are focussed on continuing to grow revenue
and earnings for all shareholders.
End CA:00213570 For:RAK Type:ADDRESS Time:2011-09-09 14:21:54