For results and business update. If you would like to ask a question during the presentation, please submit your questions in the Q&A box on your screen at any time. I must advise that this presentation is being recorded today, Wednesday, the 29th of May, 2024. I would now like to hand over to Rakon Investor Relations Manager, Nick Laurent. Thank you, and please go ahead.
Good morning, and welcome to Rakon's FY 2024 financial results and business update. Joining me on the call today are Sinan Altug, our CEO, and Drew Davies, our CFO. 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 slide in our presentation for more detail. That slide also contains a note regarding the non-binding indicative proposal. On 18 December, Rakon announced it was undertaking a process to consider an unsolicited, non-binding indicative proposal. Rakon refers shareholders to its market announcements on this matter, with the latest announcement being on 13 May 2024. Rakon has no further updates in respect of the proposal at this time.
Shareholders are reminded that there is no certainty that any transaction will eventuate from the proposal or as to the pricing or timing of any transaction. Please note that during the Q&A portion of this presentation, we will not be commenting further in respect of the proposal and Rakon's engagement with the bidder, in accordance with the confidentiality restrictions Rakon is subject to. With that, I will now hand over to our CEO, Sinan Altug.
Good morning, and welcome to everyone joining us for the webcast. I'm Sinan Altug, the Chief Executive, and with me today is our CFO, Drew Davies. Today, we will provide an update on our performance for the fiscal year 2024, which ended at the end of March. This past year has been one of the most challenging in Rakon's history from a demand standpoint. Despite the difficulties, I am proud to say that our team has demonstrated remarkable adaptability and agility. We have successfully achieved several key milestones in our growth plan and stayed focused on executing our strategy. Drew will present the financials, and we will continue with an update on our progress towards our growth strategy and the outlook. Following our discussion, we will open the floor to your questions. Let's begin.
There is no doubt that fiscal year 2024 has been tough and challenging from a demand standpoint in some of our core markets, and in addition to navigating the business challenges, we have also dedicated significant time and energy to evaluating the takeover proposal received last December. Overall, I believe we have done quite well. A major highlight was the growth of our Space and Defense segment revenue, mainly on the tails of our space business. It grew 27% year-on-year to reach its highest ever revenue level, and for the first time, contributed more margin dollars than our telecom segment in FY 2024. In other core markets, similar to our peers, we have faced a cyclical slowdown as mobile network operators deferred planned capital expenditures.
This has led to lower orders and longer inventory cycles in our telecommunications market segment, and in addition, the positioning market has also not yet recovered fully. We have continued to gain market share and have maintained a high design, design win rate across all markets we participate, which is a clear precursor that we are poised to capture a larger market share as conditions improve. Cutting costs and driving efficiencies remains a major focus to navigate the current cycle and optimize our business for future success. We have made notable progress in several important areas, including year-on-year inventory levels, and we are already seeing these initiatives' positive impacts on our operating expenses.
Another highlight is the fact that we have captured the sensitive balance of cost reduction and efficiency initiatives while still maintaining a clear focus on our strategy, which means we continued the execution of the critical initiatives in our three-year growth plan. These investments continue to position us well for market recovery and enhance our resilience through future cycles. We have hit many of the milestones we shared with you previously.
As such, just weeks ago, we announced a $17 million NewSpace contract win with a very well-respected space market leader, establishing Rakon as a top global supplier of space subsystems. This is an extremely important milestone, which I will talk about later. And the launch of our Mercury X chip, following the earlier launch of Niku, is a great example of our successful strategy execution as well. Both of these products are pivotal to our success in AI hardware, which we anticipate becoming a core market for Rakon imminently, and more on this later as well. With that, I will pass it over to Drew.
Thank you, Sinan. Starting with page number 4, which provides a summary of our financial performance in the fiscal year 2024 results. In the top left, we reported NZD 128 million in total revenue. That's down 29% from the same period last year, or when you exclude the NZD 16 million of one-off TCXO revenues, which are included in the prior year, 2023 results, total core revenue is down NZD 36 million or 22% annually. While we continue to maintain our market share of sales to our customers, the key drivers in the reduction of total revenues has been the decline in orders received in the telecom and positioning segments as a result of stockpiled inventory by our key customers.
Total gross margin was NZD 57.9 million in the current year, down 35% from the prior year, or when you exclude the margin generated from one-off TCXO revenues of NZD 9 million, which is included in the prior year results, total core gross margin is down NZD 22 million or 28% annually. Primarily as a result of the lower telecommunications and positioning sales, as well as restructuring and redundancy costs and manufacturing inefficiencies that occur with lower volume of production. Total operating expenses are NZD 59.5 million, which is comprised of research and development expenses, sales and marketing costs, and general and administrative expenses, and does include the costs accrued to date for the work on the proposal.
In total, operating costs are relatively flat on an annual basis, even with a 4.2% increase in our R&D costs as we continue to invest in activities to drive our future strategic growth initiatives. While also total G&A expenses are down 1.8% annually, even with the NZD 2.2 million of costs incurred associated with the proposal. As we have stated in the past, we are in the process of optimizing our global operating cost structure to determine the appropriate expenses necessary to support our future strategic growth initiatives. Underlying EBITDA was NZD 13.5 million, down 68% annually, primarily driven by the lower total core revenues in telecom and positioning markets, as well as an EBITDA non-cash loss incurred from our minority investment in Timemaker.
Capital expenditures were NZD 17 million, which is down 9% annually, primarily as a result of lower capital costs incurred this year associated with the completion of the construction of our new Indian manufacturing and R&D facility, which opened and has been operating since mid-2023. Operating cash flow was a positive NZD 17 million this year, up 60% over last year's performance, primarily driven by our focus on working capital management, including a $7.7 million reduction in total inventory balances. Now, turning to page five. This page provides a summary of the Space and Defense segment performance, with the total revenues of NZD 36.8 million, up 27% annually, generating NZD 24 million of gross margin at 65%, with our French high resiliency and New Zealand business units driving this annual growth.
As we recently announced, with the NZD 17 million satellite subsystem contract win over the next three years, we continue to see strong customer pipeline into 2025 and continuing in the next few years. Turning to page 6, titled Telecommunications Segment. Revenues were NZD 66.9 million, with NZD 22.6 million of gross margin at a gross margin rate of 34%, which has declined from NZD 101 million of sales in the prior year, with NZD 43 million of gross margin and a gross margin rate of 43%. As we have discussed on prior calls, our share of contract wins with customers remains consistently high. However, sales in the current year are down due to stockpiled inventory with our largest customers, as the rate of 5G mobile network upgrades globally has fallen versus prior periods.
Our decline in the gross margin rate reflects several factors, including restructuring and redundancy charges incurred during the year, the production ramp-up costs at our new India facility during 2023, as well as the lower overall production volumes globally, leading to inefficiencies and cost allocation from our manufacturing operations. Included in this segment are revenues from sales to artificial intelligence computer manufacturers, and while small, relatively today, we believe they will grow significantly, which Sinan will go into further detail in this presentation. Turning to page 7. This summarizes our positioning segment with revenues of NZD 13.9 million, down NZD 20 million or 59% from the prior year. But when you exclude the TCXO shortage revenues in fiscal year 2023, then our positioning segment revenues are down NZD 10 million or 41%, again, primarily due to lower customers drawing down stockpiled inventories, and our market share remains steady.
Gross margin of NZD 6.2 million is down by NZD 12 million annually, but when we exclude the margins associated with the sales with the TCXO shortage in the prior year, our margins are down NZD 7 million. The gross margin percentage of 44% is down annually, primarily due to lower order volumes and inefficiencies in cost allocation from manufacturing operations. Turning to page 8, which is a fiscal year 2024 key financial results. I've already spoken to revenue and gross margin results in the prior slides. For operating expenses, when you exclude the costs accrued to date for the work on the proposal, our operating expenses in total of NZD 57.3 million have declined by 3% annually, which is primarily a reduction in our general and administrative costs.
We have increased research and development to NZD 17.7 million in the current year, up 4.2% and now 31% of total operating expenses, excluding proposal costs. We continue to invest in research to develop our future products in artificial intelligence, traditional space, space subsystems, xMEMS, to name a few. Our net profit after tax was NZD 4.5 million. It's down 81% as a result of the top line revenues order declines and resulting gross margin impacts, as well as the NZD 2.2 million in proposal costs incurred to date, as well as the higher loss annually of NZD 2.3 million from our Timemaker crystal manufacturing affiliate. With our focus on working capital management and monetizing inventories, we increased our operating cash flow by NZD 6.7 million to NZD 17.8 million.
To maintain cash levels at NZD 17.8 million, we have invested in capital expenditures for future revenues, as well as incurred necessary costs to respond to the proposal work requirements. Turning to page nine. This is a bridge starting on the left-hand side of the chart with last year's net profit after tax of NZD 23.2 million, to the current year net profit after tax of NZD 4.5 million, with the key factor being the drop in gross profit due to lower volumes, as discussed previously. Then on the right side, we provide the key items to bridge to our underlying EBITDA of NZD 13.5 million. Turning to page ten, which is our focus on asset optimization. We continue to execute key targeted areas to position Rakon for the long term.
The first line is titled India Product Transfers, which is where we are currently transferring existing manufacturing production lines for both our telecommunications and space market segments from New Zealand and France accordingly, which will result in improved gross margins in the future. The second section is titled Inventory Management, whereby we work across our business segments to optimize our inventory usage and purchasing to continue to improve our operating cash flows. The third section is titled HSBC Facility, whereby we have entered into a new global banking agreement with HSBC for all of our business units to use one platform for efficiency at cost-effective rates, which provides Rakon optionality to execute our capital deployment plans or other strategic investments.
The fourth section is titled Driving Efficiency Across Global Operations, where we are proactively implementing plans to streamline our operations globally, especially in our general and administrative, and sales and marketing cost structures, to better align to top-line growth performance. Lastly, let me speak to dividends. Rakon continues to manage the balance sheet to support the company's long-term sustainability. Given the fiscal year 2024 financial performance and the unanticipated cost of the acquisition proposal, the board has not declared a dividend in relation to fiscal year 2024.
While the board continues to have confidence in the company's future, as outlined in its dividend policy, it must take into account the company's operational cash requirements, debt levels, interest rates, and market conditions. This decision was not taken lightly by the board, and a return to dividends will be considered at the next annual results meeting. With that, I turn back to Sinan for the three-year growth roadmap discussion.
Thanks, Drew. Let me now dive into our strategy and outlook. Most of you are familiar with our three-year growth plan. Our strategy is focused and resilient, designed to build long-term value in high-growth markets. We aim to grow market share, improve margins, and diversify our revenue base to reduce reliance on the highly cyclical telecom sector. Despite market volatility, our teams have tirelessly delivered on our growth plan. We have met most of our strategic targets for FY 2024, and some initiatives have been strategically shifted to FY 2025. The four area- investment areas on this slide will continue to be staples of our strategy, driving growth and innovation for Rakon. We have also added AI hardware as a major investment area. At our annual meeting, we will refresh this three-year plan, provide detailed analytics, and offer forward-looking statements to outline our path ahead.
I also want to spend some time on two important core markets that we touched on. The first one is AI. We are making significant strides in the emerging core markets of AI hardware. As we mentioned before, our technology and products are uniquely positioned to tackle the timing and synchronization challenges that data centers face with AI workloads. We continue to actively work with leading innovators in the AI hardware ecosystem to enable the next generation platforms, including the AI factory data centers. These collaborations are critical as they ensure our solutions are integrated into cutting-edge AI infrastructure. Our innovations not only enhance performance, but also improve power efficiency, addressing a major concern for data centers. Our new semiconductor chips, MercuryX and Niku, lay the foundation for our new AI computing hardware products.
The launch of these products has been met with high demand, and we are seeing substantially high conversion rates on the samples provided to some of the world's leading AI infrastructure companies. These products are already generating revenue, and we expect this to increase significantly over the next five years. We'll provide more details at our annual meeting, as I said, but we are projecting substantial growth. Given its current trajectory, we anticipate the AI market for Rakon could potentially rival our current telecom market segment revenues in the coming five years. The other, core market that I want to touch on is NewSpace. Our investments in space and the rapidly growing NewSpace ecosystem are yielding impressive results. In addition to enjoying the highest ever space revenue, as I mentioned, we secured a NZD 17 million satellite subsystem contract with potential extension beyond three years.
This contract is going to start contributing revenue in FY 25. This one positions us as a top global supplier of space subsystem products, which we are very proud of, and we have a strong order book for FY 25 and beyond in space. Our diversified product portfolio has tripled our addressable market for space to an estimated $250 million. We are also on track to double our share of the serviceable addressable market in the next 5 years. Still, a lot of growth potential in front of us. In FY 24, we launched several new products, including GNSS receivers, master reference oscillators, and ultra-stable oscillators suitable for space. We are also about to introduce a new semiconductor chip for space oscillators, with a second one already in development.
This is really exciting, as these chips are the first of their kind in the NewSpace market. We will provide more information about them soon. Our strategic focus on NewSpace continues to deliver strong results, enhancing our market position and driving future growth. Drew has already gone through our core markets, but I will spend a moment looking at the outlook for each. We see significant opportunities and strategic growth across all of our core segments, including telecommunications, Space and Defense, and positioning. Starting with space, we have a strong order book for FY 25 and beyond, reflecting a robust demand. Our diversified product portfolio has significantly increased the addressable market, as I mentioned. We are on track to double our share of the serviceable addressable market within the next five years, and that is largely driven by demand for our subsystem products.
For telecom, following the outlook of our large tier one infrastructure customers, we expect the telecommunications market to remain somewhat muted, at least in the first half of FY 25. However, we anticipate potential stabilization on a year-on-year basis during the second half of the fiscal year. And as Drew mentioned, we do expect our gross margin levels to return back to their normal levels as we regain operating leverage with increase in demand, as we start volume production in India, and as additional efficiency initiatives kick in. In positioning, we are facing increased competition and price erosion, but volumes remain steady. Also, the inventory correction cycle has not yet completed. We do maintain a strong position in the high-end precise positioning segment, which will continue to be a key market for Rakon, with several new applications enabled by increasingly precise positioning.
Now, wrapping up, the short-term outlook in telecom and positioning market segments remain suppressed due to the economic downturn, but we expect stabilization in the second half of the fiscal year. Our Space and Defense market segment is exhibiting robust growth, thanks especially to our space business. We have a solid order book for FY 25, and we expect immediate benefits from a multi-year space contract that I mentioned. Furthermore, we are well positioned to secure additional large NewSpace contracts within this fiscal year. Our high design win rate boosts confidence in continued market share growth, and we are focusing on efficiency initiatives to drive cost savings and improve resilience and competitiveness across the company and across our product lines. Continuing the execution of our three-year growth plan will improve revenue and margins while diversifying our revenue streams, providing protection through economic cycles.
We have positioned ourselves to benefit substantially as telecom and positioning markets recover, and reach even higher inertia, with space and AI becoming additional key growth drivers for Rakon. In closing, we continue to relentlessly execute our strategy while improving efficiency, and we remain excited about the future. Thank you. Now, I'll hand it back over to Nick to begin the Q&A. Nick?
Thanks, Sinan. We'll now start the Q&A portion of the presentation. A reminder that if you would like to ask a question, please submit your question in the Q&A box on your screen. As mentioned at the beginning of the presentation, we will not be commenting further in respect of the proposal and Rakon's engagement with the bidder in accordance with the confidentiality restrictions Rakon is subject to. One moment as I'll now read out the first question. Our first question is from Eden Bradfield of Blackbull Markets. Eden asks: Can management please speak to new AI chips, i.e. Niku and MercuryX? Has Rakon already started supplying data centers and key AI players?
Yeah, I can answer that. Eden, the answer to that is yes, but, we are unable to provide customer names. But as we mentioned, we are at the start of a path that we expect to be a substantial growth driver for Rakon. We have revenue. These are generating revenue or, for AI, but, it is at the start of that path, so it's quite small.
Thanks, Eden, for your question. The next set of questions comes from James Lindsay of Forsyth Barr. His first question is: Noting your tech-driven strategy to invest for the future, can you give guidance for R&D spend over coming years, and what can and will be capitalized?
Thanks, James. We will continue to maintain R&D OpEx spends in the range that we're at today, with a bias to increase as we see opportunities for return on investment. We don't provide guidance on the capitalization by year at this time.
Great. James's next question is: 5G telco and industrial positioning markets have been much more cyclical than expected. You'd hoped these segments were more protected than consumer markets. Can you talk to any changes in your thoughts on infrastructure, industrial markets versus consumer?
Sure. They still remain more protected than consumer, but there are people and research out there that compares the cycle that telecom infrastructure going through right now, all the way back to the early 2000s. So it is an unusual cycle that we're going through that's once in a 20-year event. The last time was, again, 2001. That caught our customers also unexpected. It's due to superposition of a number of different variables coming together. They are still, and industrial also is protected, but the overall macroeconomic situation and how it extended over and beyond most of the forecasts have also played a part in this. But if you were to compare side by side, yes, these two markets t hey have slower cycle than consumer markets.
Great. James has some additional questions, but I'll just ask a few from some other people first before coming back around to them. So the next questions are from Mike Daniel. Mike Daniel's questions relate to the AI phenomenon. He would like a bit more clarity about what Rakon's potential is to gain from this. So he asks: What is the approximate addressable US dollar market value for Rakon's new AI computing products? Have any of these products been designed in to the likes of some of the named leading players in the market and others mentioned and as in answering leading players question, hopefully? So he really is just asking, what is the approximate addressable US dollar market value for Rakon's new AI computing products, and have any of these been designed in with the leading players?
Yes, so in terms of the numbers with regards to the addressable market, we will provide, as I mentioned, more detail and analytics on this at our annual shareholder meeting. So I'm not going to answer that part of this question right now, but I'm happy to take this also on a separate discussion. But the revenue to date has been generated again, I will leave it at the point where we are indeed working with the world leaders in AI. And I will make that a categorical statement, rather than pointing to any one company at this point.
Great. Thank you, Mike. We have a question from someone identifying as JJ. JJ asks: "What is the likelihood of revenue from Niku meaningfully replacing the rapid decline in telecommunications revenue over the next 12 months?
Yeah, so that, I guess JJ is asking about Niku as well as Mercury-X, because those are the two chips that we have mentioned. Actually, maybe just to touch on this in a few sentences, these are chips that go into our end products, the chips we design ourselves as well. So the end products that Niku and Mercury-X are going into are actually feeding into the next generation platforms in telecom, as well as in other markets. But for telecom, what we are doing with these new chips is to design them to allow us to technologically get ahead of our competition once again. And at the start of that cycle, we, as we have, I think, discussed in the last ASM, we enjoy substantially higher margins with our new, ASIC-based products, our chip-based products.
So, it's hard to make an apple-to-apple comparison, but at the end of the day, I can also say that although we are talking about a decline and a cycle for telecom infrastructure, that does not mean that the existing business has gone away, and a completely new generation of products are going to come. All of it is going to come back, including the existing generations for our customers, as well as new generations, for which we have positioned ourselves excellently for, with our new chips.
Great. Thank you, JJ. Next question is from Jason Hamilton of ACC. Jason asks: "Do you think FY 2025 revenues will be above or below what you have just delivered in FY 2024, and what about EBITDA?
Thanks, Jason. We have not given any formal guidance for fiscal year 25 at this time. Traditionally, we give that at our ASM. I think, as Sinan talked about with positioning and telecom sectors and the uncertainty with the, our customers and stock, stock inventories, we see the first six months this current year is still being challenged, but we do see continued growth and, and expansion in our space, in our space and, and defense segment. So as we get closer to our ASM, we'll give some more color as what we're seeing at that time, around, forward-looking information.
Great. Thank you, Jason. The next question comes from Kevin Arscott. Kevin asks: "You are spending..." Sorry, Kevin, I'm just... Your question just-- here it is. Kevin asks: "You are spending NZD 2.2 million of shareholder money on the proposal. How much will shareholders incur?
I didn't understand how much will the shareholders incur part, but we have had, I think, comments about the cost of the proposal and the money that is being spent. I just want to mention the fact that some of the expenses are not a function of the size of the deal, but rather the complexity of our business and the bidder and what the forward-looking plan is. So, while this does seem high for a company our size, I think some of this is really expected. And the second part of this question, how much will shareholders incur? Kevin, I'll be happy if you reached out to answer, if you can clarify what that means.
Great. Thank you, Kevin. I will now return to the additional questions from James Lindsay of Forsyth Barr. James's third question is: "You have cash on hand, but also have debt. Can you talk to the rationale of your cash debt strategy and how your new HSBC debt facility fits in?
Thanks, James. We took the opportunity to work with a global bank to look at the next 2-3 years as we continue to expand our French and Indian manufacturing and increase the work that we do globally. We wanted to work with the global banks that had the capital facilities, working capital, so we could act quickly in the future when we have the opportunity. So I think what we've done has been proactive in setting up a facility that's very cost effective, positions us with all of our markets on one platform, and then when we make capital allocation decisions, we have both our cash on hand, and if we have to use debt based on the size of the opportunity, we'll do it. So this is a proactive approach to capital management and just having everything taken care of in advance.
James' next question: Are there live opportunities for potential acquisitions with the new HSBC in place?
I wouldn't call it live. I think it depends on the definition of live, but as Drew said, our strategy of organic as well as inorganic growth is what we are continuing to focus on. But of course, we need to take the reality of how our core business is tracking as well. So for us, the priority is to ensure that our core business has stability and growth. So there is, I think when you talk about inorganic growth, the priority of the inorganic growth comes after our core business organic growth at this point. Let me leave it there.
Great, thank you. So we had two questions on inventory, one from James and one from Richard Pickering. I'll ask Richard's question first. Richard asks: Can you provide an indication of the optimal level of inventories Rakon requires going forward, i.e., higher or lower than the current balance of NZD 55 million?
Yeah, thanks, Richard. I look at it as you have to separate our inventories, especially in the space segment, where you will see that go up in the future, just based on the new contracts we're entering into, new pipeline of orders coming in, and because those are long lead times for delivering those sophisticated products, you obviously will see inventories go up in our space segment. For telecom positioning, we will look to optimize that as orders return from customers and use existing inventories. I still see opportunity in terms of bringing down inventory balances in the future, but it'll be a mix between telecom positioning versus increasing in the space segments.
Thank you, Richard. And James Lindsay also has a question on inventory: How far through the inventory reduction program are you?
Well, I think I just answered that in an indirect way, James, so I'll leave it my answer at that one. Thank you.
Sorry. Should have picked up on that. Thank you, James. I'm not seeing any other questions coming through, so I will ask James' final question, which is: Are there other LEO opportunities or space RFPs in progress?
Yes. As I mentioned, we have a few others that we believe we are very well positioned to win within this fiscal year as well.
Great. Thank you, James, for your questions. Bill, I will note that... I will just remind you of the note that we gave at the top of the Q&A in regards to your question. Apart from that, there are no other questions queued, so I believe that concludes our Q&A portion of today's presentation. Thank you, everybody, for the questions you submitted and for joining us today. If you have any additional questions or, or wish to get in contact after this presentation, please email investors@rakon.com. And with that, have a great day. You may now all disconnect.