Rakon turns to first-half loss as telco sector stays sluggish

Rakon, whose shareholders pushed sales director Darren Robinson from the board this year, posted a first-half loss, blaming a sluggish telecommunications network industry for lacklustre sales.

The Auckland-based company posted a net loss of $5.7 million, or 2.9c per share, in the six months ended September 30, from a profit of $1.1 million, or 0.6c, a year earlier, it said in a statement. Revenue slumped 21% to $46 million, and underlying earnings before interest, tax, depreciation and amortisation plunged 90% to $647,000.

The shares fell 10% to 18c, matching a record low touched in 2013 and making them the biggest decliner in early trading on the S&P NZX All Capital Index.

"Network operators had continued during the first half to defer investment in infrastructure, affecting Rakon's sales to equipment manufacturers," managing director Brent Robinson said. "Initiatives to reduce Rakon's annual operating expenses by 20%, announced to shareholders ahead of the company's last annual shareholders' meeting, were almost completed."

Rakon tilted its focus to the telecommunications sector after rivals in the smart wireless market caught up, turning what was once a niche product into a commoditised one. That shift helped Rakon return to profitability in the March 2015 year but a slump in spending by network operators weighed on the Kiwi firm in 2016 and pushed it back into the red.

Sales from the telecommunications division shrank 26% to $21.3 million, while global position revenue fell 27% to $12 million. Space and defence was the only segment to improve, with sales up 2.7% to $11.6 million.

The company's margins were squeezed in the latest period, with gross margins shrinking to 36.3% from 41.5% a year earlier, through its restructuring efforts saw operating expenses fall 11% to $20.6 million.

Mr Robinson said the full benefit of those changes won't come through until the 2018 financial year due to one-off costs. In the latest period that included $737,000 from a partial restructure at its New Zealand business, with a further $213,000 provided for and expected to be incurred in the second half of the year. After the September 30 balance date, Rakon told its French staff about a planned re-organisation which it expects will cost 1.4 million euros.

The company affirmed annual guidance for underlying earnings of between $3-5 million, with Mr Robinson saying second-half orders project revenue to be 12-15% higher than the first half, implying sales of $51.5 million to $52.9 million.

Rakon has tested investors' patience with the founding Robinson family's influence becoming a bone of contention at this year's annual meeting. The Shareholders' Association won enough support to oust Darren Robinson from the board, and while chairman Bryan Mogridge retained his seat he indicated he would serve one more term and that founder Warren Robinson was prepared to step down before the next AGM.

The company sold itself as a high-growth prospect when it listed in 2006 but made an ill-fated venture in China around the time of the global financial crisis, taking on too much debt at a time when it lost its advantage in manufacturing GPS components.

Rakon's debt rose to $22.8 million, of which $22.7 million is due to ASB Bank in the coming 12 months. The lender renewed its banking facilities in March of this year, amended some of the terms in September, and "the directors anticipate renewing the cash advance facilities at reduced levels" before it expires in 2017.

The company reported an operating cash outflow of $612,000 in the half, compared to an inflow of $5.3 million a year earlier, and $6.3 million of investment activities, including its investment in internet-of-things company Thinxtra, were offset by a $6.9 million drawdown on its banking facilities. As at September 30, it was in a negative cash position of $688,000.

Mr Robinson said Thinxtra is on track to provide network coverage to 85% of Australians and New Zealanders by the end of June next year. Rakon invested a further A$4.6 million into Thinxtra during the period, taking its stake to 46%, though that would reduce to 36% if the IoT firm's founding shareholders exercise all of their outstanding options.

(BusinessDesk)