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Rakon Half Year 09 Results

Auckland, NZ: 14th November, 2008

Rakon Half Year 09 Results

Technology company Rakon Limited (RAK) remains confident despite the global economic environment and a corresponding slowdown in consumer spending.

Rakon Managing Director Brent Robinson said the drop in consumer spending was not unexpected and Rakon's diversification into telecom infrastructure and aerospace sectors would allow the company to remain strong.

"We still see great opportunities for Rakon in the GPS and Mobile Phone space, even with the current economic climate. Also our investments in businesses in the UK, France and India have given us diversification into new infrastructure markets and added new opportunities for us to grow through significantly increasing our market share."

Acquisition of the FCP business in 2007 broadened Rakon's market exposure into infrastructure related business, complementing its largely consumer-focused NZ business. Mr. Robinson said this, along with strategic decisions to move production from France to India and signing a Chinese JV to complement the NZ production facility, provided Rakon with a sound and secure position to build on.

Rakon today posted its half year figures, which sees sales revenue for the first half of its 08/09 financial year at $79.4m with EBITDA $10.4m. This is down 12% and 16% respectively on the same period last year, and is linked to the current global economic situation. An increase in depreciation and financing costs plus a higher effective tax rate (due to French operating losses) mean net profit after tax was $2.0 million for the first half. Operating cash flow rose by $15.2 million to $9.1 million when compared to the first half of last year.

NZ business

Sales volumes increased by 3% from the consumer GPS products focussed NZ business, but revenues were down 10%, due to a slowdown in consumer spending that impacted the growth Rakon had anticipated in the second quarter of this year.

Mr Robinson said Rakon's larger leading customers had shown good growth but this was at the expense of smaller second tier customers who were struggling to compete in the difficult environment.

"Sales prices for our high volume IT products were in line with our projections, down 15% on the same period last year, but percentage margins were consistent with last year, due to good management which saw cost reductions and productivity gains offsetting any sales price reductions.

"Currency movements had little impact on the results as the average US$/NZ$ exchange rate for the first half, inclusive of hedging gains, was essentially the same rate as the first half of the prior year."

Rakon's balance sheet remains strong with net debt of $10 million and a recent significant increase in facilities with the ASB which provide substantial headroom in the form of unused facilities.

Mr Robinson said given the current global climate the company was now moving with caution in commencing construction of its new facility in China and did not expect to start work until the next financial year.

UK revenues up

Rakon UK operations posted an increase in revenue on the back of an increased proportion of sales being for the company's high specification, high value, Pluto TCXO (temperature compensated crystal oscillators).

"We are seeing good growth in a range of applications because of the specifications and price point of the Pluto TCXO," Mr Robinson said. "We are also delivering improved margins, thanks to Improvements in manufacturing cost and a richer product mix."

French restructuring complete and India provides world leading cost base

Rakon's sale of the European trading business in May, and lower OCXO sales from the company's French facility meant the overall European result was slightly down on last year.

"We noted a particularly buoyant period when the infrastructure investment prior to the Beijing Olympics generated exceptionally high demand. Now, sales have dropped back, which has allowed us to complete the transfer of manufacturing capability to our Indian joint venture without any impact on customer deliveries," said Mr Robinson.

Rakon is well placed to grow its market share in the traditional telecommunications market. In addition to the company's profitable UK facility, the formation of a joint venture with Indian based Centum Electronics (February 2008) has provided the company with a world leading cost base that will be supported by French engineering design and technical capability.

"The transfer of the manufacturing capability for volume OCXOs from France is largely complete and the Bangalore facility is operating well. The transition of France to a business focused on research and development and very high specification but low volumes manufacturing, is also progressing well and we are confident that the next financial year will deliver a strong turnaround in financial results for the OCXO business," Mr. Robinson said.

Rakon positioned as world leader

Mr. Robinson said Rakon was soundly placed in the personal navigation device market and whilst leading customers' focus on reducing inventories would have a short term impact, he expected the market to rebound with strong growth.

"And, importantly, recognition of Rakon's GPS leadership position has us well placed as the adoption of GPS in mobile phones finally begins to gather momentum," he said. "We have some excellent prospects in this market. The level of engagement with a number of influential customers and potential partners is very strong; our team have been making excellent progress."

"The opportunity for Rakon in this market is significant: whilst mobile handset sales may fall in totality we expect sales of GPS enabled handsets to increase. Handset manufacturers are continuing to look for ways to increase performance which suits Rakon's expertise well."

Mr. Robinson said the company's joint venture arrangements with Timemaker, announced earlier this year, reflected the company's commitment to becoming a global force in supplying to the mobile phone market.

Where next?

Mr. Robinson said he was excited at the potential for growth in new emerging technologies, such as femtocells, which offered great opportunities for Rakon.

"Rakon's combination of product performance and cost gives us a real competitive edge in these markets. We regard some independent projections as somewhat optimistic as regards timing of demand; nevertheless these are markets that we continue to invest in with confidence."

He said the current uncertainty and volatility in customer orders and forecast, and the short lead times Rakon operates in, made it difficult to forecast a result for the second half of FY 2009. However, Mr. Robinson expected the second half result to be in line with, or slightly below that achieved in the first half of this year.


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