Welcome everyone to Rakon's FY23 results and business update presentation. If you wish to ask a question during the presentation, please type your question into the question and answer box on your screen. I would now like to hand the presentation over to your speakers today, Sinan Altug, CEO, and Anand Rambhai, CFO.
Hi, everyone. Thank you for joining us today. Anand and I will take you through a detailed review of our fiscal year 2023 results, including financial highlights, sector by sector performance and progress against our strategic objectives. We'll talk about dividends. We will conclude with a look ahead at FY 2024. FY 2023 has indeed been a remarkable year for Rakon. Our core business has experienced its best year ever, thanks to our robust strategies and diligent execution. Our core revenue growth stands at an impressive 16%, excluding all one-off revenues, demonstrating our ability to navigate challenging market conditions, but also showcasing our increasing market share and robust business performance. Consistent with our commitment to driving shareholder value, the board has declared, for the first time, a fully imputed dividend of NZD 0.015 per share.
This represents a significant milestone in our journey, reflecting our improved operational risk profile and our confidence in Rakon's strategic direction and long-term growth potential. Our ability to maintain consistent margins, where most competitors observed margin erosion, is a reflection of our strong competitive stance in operational efficiency. We have successfully achieved all FY 23 milestones outlined in our three-year growth plan. This is a testament to our commitment to strategic and sustainable long-term growth. We will continue to execute our strategy in the coming years, targeting further expansion and improved business performance. An exciting milestone this year has been the completion of our manufacturing facility in India, which will be inaugurated in June. This facility will not only act as Rakon's global manufacturing hub, but will also enhance our production capacity, capabilities, and operating cost structure.
Finally, we were also able to pay down NZD 10.7 million of debt in FY23. Let's briefly go through the financials. Our FY23 financial results demonstrate the positive outcomes of the strategic investments we have made to grow our core businesses and how these offset the impacts of the one-off chip shortage revenues. Our revenue was NZD 108.3 million, marking a 5% increase. This growth has been largely driven by our core business' strong performance, highlighting the robustness of structural growth drivers within and our leadership position in our core markets. The underlying EBITDA of NZD 42.2 million reflects our highest higher investments in growth, but also the impact of inflation on our operating expenses, which we perceive to have peaked and now abating.
Despite external pressures and industry-wide challenges, we continue to invest into our future and remain focused on delivering superior shareholder returns. We are proud to deliver what we have promised in FY 23. We are also proud to deliver revenue growth 5th year in a row and a 36% compound annual growth rate on our core business EBITDA, as evidenced on the chart on the bottom right. Then we'll provide further details on our financials later in the presentation. Now let's delve into FY 23 operating performance by market segment. A crucial point I want to attract your attention to is the impressive growth rates we have achieved in each of our core market segments. With telecommunications up by 17%, space and defense up by 18%, and positioning up by 21%.
Starting with the telecommunications market, we've experienced strong and consistent growth, largely fueled by the proliferation of 5G deployments and the continued upgrade of 4G networks. In FY 2023, our revenue in this segment has risen by a robust 17%, reflecting our strategic positioning in this critical market. Our telecommunications revenues are now exceeding NZD 100 million for the first time in our history. Our gross margin has remained relatively stable at 43%. As we look at FY 2024 in the short term, tier one customers are reducing inventories after having built up safety stocks over the past two years to mitigate supply chain risks. However, our position in telecom continues to be robust. We are confident that this will continue to unlock lucrative business opportunities over the next five years, including the recently launched India 5G rollout.
The telecommunications market growth projections remain very strong. For instance, the 5G subscriptions are expected to hit 5 billion by 2028. That is a 5x increase in five years. We are continuing to make investments now to position us to capture the substantial growth for the good part of this decade. Moving on, let's explore our activities in space and defense markets. Our performance in this market is characterized by robust revenue growth and high stable margins, a testament to our ability to thrive in this most demanding market. In FY23, we observed an 18% revenue increase, propelled primarily by the rising demand for high reliability space applications. Additionally, our gross margin rose to NZD 19.7 million, which represents 68% of the revenue.
This very healthy and stable margin level reflects the high-performance requirements of this unique market and the value attributed to them. Furthermore, we made solid strides in our new space program, particularly in building R&D capabilities, expanding our product portfolio, and nurturing strategic relationships. Looking ahead into FY 2024 and beyond, we have a strong order book in both space and defense, providing us with confidence for FY 2024. In the space market, Rakon is involved in an increasing number of low Earth orbit, LEO constellations, particularly for telecommunications, remote sensing, and edge computing applications. In the defense market, we are experiencing strong demand in mostly private communication and life-saving applications.
As the emerging LEO satellites are projected to more than double the space market size and drive a threefold increase in the number of active satellites by 2030, we believe we are ideally positioned to ride on this growth. Let's turn our attention to our positioning market segment. Our positioning market segment has enjoyed steady growth, bolstered by a solid growth in the industrial and automotive segments, as well as a remarkable resurgence in the locator beacon market, resulting in a revenue increase of 21% year-over-year. Our gross margin has increased by 10% to NZD 18 million, which represents 53% of the revenue. Looking ahead to FY 2024 and beyond, similar to telecom, we are seeing a temporary industry-wide slowdown in positioning as some customers readjust their inventory levels. Beyond these inventory corrections, our customers are forecasting strong long-term market growth.
Leveraging our exceptional product performance and customer service, we are well positioned to capture this future growth. Now let's discuss our other markets. Although this is not in our core, it's worth spending a moment as this is where we saw most of the one-off benefits in FY 2022 and FY 2023. All of these one-off contracts are now completed in full, and importantly, the growth of our core business offsets this impact. I'll now hand it over to Anand for a detailed FY 2023 financial review.
Thanks, Sinan. We'll just move to slide number 10, I think it is. This slide shows the five-year view for key financial metrics, with the FY 2022 and 2023 bars showing the core business in dark blue, chip shortage business in light blue, and the share of our associates, Timemaker, earnings in orange. Some of the key things to note are as follows. Starting on the top left, total revenue has been on an upward trajectory for the last five years. For FY 2023, revenue is 5% higher overall and 16% higher in core business, offsetting the lower chip shortage business. On the bottom left, gross margin is NZD 1 million lower than prior year and at a healthy level from a five-year perspective. Core margin is up NZD 8 million from revenue growth. Margin percentage is lower due to product mix.
For example, there was increased revenue out of our lower margin India telecom business and decreased revenue from the higher margin chip shortage business, which was completed in FY23. On the right-hand side, the five-year trend for underlying EBITDA and net profit after tax is shown. Overall earnings is lower in FY23 due to the completion of the chip shortage business and the negative contribution from our associate, Timemaker, partially offset by the growth in our core business. I'll now move to the next slide. Firstly, focusing on the green bars, this slide explains the movements from FY22's NZD 33 million net profit on the left to FY23's NZD 23 million net profit in the middle. How that results in the NZD 42 million EBITDA achieved.
Moving from left to right, the key things that impacted net profit were, firstly, there was a year-on-year foreign exchange gain, mainly from the revaluation of US dollar debtors and cash balances. Timemaker profits were down NZD 3.8 million. Rakon is a 37% shareholder in Timemaker, which is the world's largest crystal blank manufacturer. Timemaker supplies raw materials to Rakon, its main volumes is into the consumer electronics market. Timemaker has been impacted by lower demand for consumer electronics post-COVID supply chains reducing their inventories also. R&D investment has increased year-on-year, driven by a combination of inflation, planned investments and growth initiatives such as the U.K. semiconductor chip design team and continued new product development. The next three bars represent other significant cost movements, similar to other businesses, all cost lines have been impacted by inflation.
Staff-related costs were higher as we navigated labor shortages and dealt with wage inflation. Other costs like rent and electricity, software licensing and compliance costs were all up, and increased engagement with customers pushed up travel. These impacts were anticipated in our guidance. Going forward, we'll be focusing on streamlining operating costs and accelerating the transfer of some products to be made in India. These movements result in a profit of NZD 23.2 million for this year. The section on the right of the graph shows the adjustments made to net profit to get to underlying EBITDA of NZD 42 million, the major items being depreciation and tax. I'll now move to the next slide. Net cash at the end of FY 23 was NZD 16.5 million, which was NZD 6.8 million lower than FY 22.
This waterfall chart shows how the NZD 23 million profit for the year ends up in the NZD 6.8 million movement in cash. Key impacts to operating cash outside of profit are movements in inventory, payables and receivables. The first gray bar shows the increased year-on-year inventory. For the first half, inventory was built up to mitigate against supply chain risks and support the factory moves in India. Inventory peaked this year and has trended down along with payables to March 2023. More cash was tied up in receivables due to higher sales in the last quarter of FY 2023 and the mix of payment terms of receivables changing. Our focus going forward is improving. Thanks, Anand. Moving on, let's now discuss our strategic direction and our outlook. We have a clear strategy designed to enhance and grow shareholder value, which we have shared with you before.
We believe that the key to accomplishing this is by focusing on our strategic pillars that are central to our ongoing operations and future expansion. To recap the strategy quickly, our core business segments of telecommunications, space and defense and positioning have major structural growth drivers within them and continue to offer substantial growth opportunities. We are committed to further expanding these segments and leveraging the underlying growth drivers, building on our strong global position, long-standing customer relationships, and our ability to deliver innovative, high-performance products. We are also committed to remaining at the forefront of the industry through investment into constant technological advancement and innovation, and maintain and grow our product leadership in the market. We continue to deliver leading-edge solutions that best meet our customers' evolving needs in all of our core markets.
While we continue to strengthen our core markets, we also continue to aim to venture into new adjacent and emerging markets that align with our strategic objectives. This enables us to broaden our growth avenues and develop new revenue streams. To recap, as we have shared with you before, our growth strategy hinges on key strategic pillars with which we align our investments, capital, resources, and focus. Growing our core business is the first pillar. Telecommunications, space and defense position in core markets where we positioned ourselves very favorably continue to offer significant growth opportunities. We aim to expand these by leveraging our underlying growth drivers and strong global position. Going on to our three-year growth roadmap, which we shared with you before, it has these strategic milestones that help us build and expand value for our shareholders.
We are proud to announce that we have achieved all the milestones we set out for FY23. Our teams globally are to be commended for their dedication and successful execution of our strategic plan. Now, some of the key FY23 milestones achieved. Next slide. New manufacturing facility in India is almost complete and is opening in three weeks time in June. Construction fitted out the facility and transferred our existing manufacturing from the old facility
This highly strategic expansion will be something maintain competitiveness in all our core business segments for many years to come, and also solidify our presence in the important Indian market, where significant growth is forecasted in especially space and telecommunications markets, both of which are core to us. We have also increased our investment in R&D for our proprietary semiconductor chips this year. We have relocated our U.K. chip design team to a new facility in Cambridge, strategically placing them in the heart of the semiconductor ecosystem. We released our Niku next generation chip as planned. This new chip enables some unparalleled specifications that have so far been very well received in the market in consideration for next generation requirements. We have also continued to invest in expanding our capacity and capabilities in XMEMS's nanotechnology manufacturing here in New Zealand.
Our first products based on XMEMS's technology were released, already generating revenue and garnering enthusiastic feedback from our customers. In addition, we also continued our R&D and other investments in space, and especially in the emerging new space. We have established many strategic relationships, and I'm pleased to report that one of our first space GNSS receivers is now in orbit in a demo mission integrated into a LEO satellite designed for Earth observation and specifically for remote sensing and edge computing applications. Separately, you may have also seen our media release, we have three products in the European Space Agency's Juice mission launched in April to Jupiter's moons. Our commitment to our long-term strategy remains steadfast. Despite the short-term market conditions and challenges, we will keep aligned with our strategy, and we will continue to execute our FY 2024 milestones in all of our key investment areas.
Next, we will discuss our board's decision to commence dividends. FY 2023 marks another significant milestone in Rakon's strategic journey with the commencement of dividend payments. The board has declared a fully imputed dividend distribution of NZD 0.015 per share. This move underlines Rakon's dedication to providing shareholder value and is a testament to our financial health and strategic progress. Through FY 2023, we have improved our operational risks as we reduce impacts from supply chain disruptions, allowing us to start reducing inventory. We have also almost completed our Indian facility within budget. In addition to managing our cash intensive operational risks, we have managed our cash very carefully all around. The board has reviewed our three-year growth plan and cash flow forecast variables. This rigorous analysis and planning have guided us in determining our dividend distribution.
We start to balance the distribution of pro-profits to shareholders and investment. The board believes that this level of dividend payment is sustainable in conjunction with our investments and the execution of our growth plan, which is focused on delivering shareholder value over time and generating additional cash flow. Finally, I'm pleased to announce the introduction of a dividend reinvestment plan. This plan will provide an option for our shareholders to reinvest their dividends in additional shares and effectively grow their shareholding without brokerage fees. Now let's move on to discuss our guidance for FY 2024. As we move into FY 2024, we acknowledge we are immune to industry-wide global headwinds, but we remain confident in our long-term strategy and the strength of our core markets past short-term volatilities.
As we now look at FY 2024, we are currently navigating an industry-wide normalization of customer inventory levels, which are expected to impact our FY 2024 revenue by NZD 10 - 5 million, principally in the first half, and specifically in the telecom and positions. There remains some level of uncertainty for the second half. Taking these transient challenges and uncertainty consideration, we project an underlying EBITDA in the for FY 2024. This inventory normalization is not specific to Rakon's customers. It is a transient that the industry at large is navigating. Similar to us, our customers are reducing their inventories that they have accumulated to de-risk supply chain disruptions in the past years. However, it's important to emphasize that the longer-term outlook of our core markets and the underlying growth drivers remain strong.
It's also crucial to note that we have not lost any business to competitors, nor have we experienced any loss in design wins. To the contrary, the opportunities we currently are winning for the next generation designs will allow us to continue to grow over the next five years. These factors are allowing us to look past the current market volatility. I also wanted to add importantly that our space and defense business continues to be strong with a robust order book already in place for FY 2024. As a part of our growth strategy, as we indicated before, we continue assessing acquisition opportunities that will enhance our competitive advantage and facilitate further value creation. We are engaging with targets that align with our business model and long-term strategy.
We continue to adhere to a very strict set of acquisition criteria, which means we are not rushing into it. These companies that we are considering would provide market access, complement our existing products, bring innovative technologies, and contribute meaningfully to our overall growth strategy. In response to short-term challenges, we are aiming to streamline our operating expenses and overheads, driving efficiency while also reducing time to value creation and the cash conversion cycle as Anand touched on . We are accelerating manufacturing transfers to better align our production capabilities with the market demand, thereby improving our cost base. Most importantly, we are ensuring that none of these measures will impede our long-term strategic goals. In conclusion, our vision remains clear, our strategy is sound, and our commitment to shareholders is unwavering despite any near-term challenges.
We are excited about the future and remain focused on delivering long-term value to our shareholders. Thank you for your time. We value your continued support. We are now ready to take your questions.
Right. We have some questions from Tony Morgan. Just a moment. Tony's asking, should we expect a considerable revenue growth from, in FY 2024 into FY 2025 as new products and demand increases? Interested in your thoughts on this.
Is that specific to XMEMS or all of our new technologies?
It's not specific to XMEMS.
Mm-hmm.
He goes on to ask another question about XMEMS and how we understand the volumes of XMEMS will relate and the revenue from XMEMS will relate to our total revenue and also in the new space.
Mm-hmm.
sector as well.
I can say that like we did at our annual shareholder meeting last year, we are intending to quantify those aspects and the return on investment for our investment areas at our annual shareholder meeting this year. Several of those technologies, for instance, our investment into semiconductor chips, is already paying off handsomely at this point. 45% of our revenue actually is coming from products that are based on our own semiconductor chips. For XMEMS, our investments are on track to become cash positive by the end of FY 2025. We have already five products now generating revenue at strong margins. For new space, new space investments are also on track to become cash positive by the end of FY 2025, but we will quantify this further at our annual shareholder meeting.
Tony, flow on question probably relates to cash flows and free cash flow into FY 2024.
Yeah. we've got our guidance out there for FY 2024, and that's based on our base case forecasts. What we can say, we're not gonna put out a operating cash flow number, but what we are doing very carefully is monitoring how the year goes. We will carefully manage our cash as we go along and adjusting particularly our CapEx profile and CapEx spend to ensure that our cash position remains robust at the end of the year.
Perhaps, moving on to another shareholder's question, Eden Bradfield, where do you see gross margin moving in the next year or two? Also, do you see any tailwinds from onshoring, and how might they play out for the company?
Yeah. I can say that in terms of the gross margin overall, we have spent quite a bit of time and energy to maintain to our margins this past year. The way that we see it working, the space and defense margins should stay quite strong. I can put that out first. I think we will have margin pressures on the positioning markets, although we are addressing the precise positioning end of it. There will still form margin pressures, they already are. For telecom, we would not oversee anything that is out of the ordinary. We always have margin pressures. The way that we address these is always getting ahead of our competition by technology, getting the next best product, next new technology, and participate in our customers' next generation designs. The second part of the question, Maureen, sorry.
sorry, I just need to go back to... it's just the tailwind from onshoring.
That, for us, remain a bit unclear if it's the global environment and even developments that are happening as we speak right now. However, we do believe that, when you look at Rakon, we actually have localized operations in Europe. We, on our path, as we expressed before, a strategic US acquisition that could give us a footprint in U.S., will undoubtedly have a positive impact for our future path.
Just to add to the margin question, the other ways that we mitigate against declining margin is, for us, it's the product development and R&D. Is the release of new products quicker. Predominantly, though, if those are ASIC-based products, we can also command a premium in margin. Hence the strategy to invest in our ASIC team in the U.K., with the result being new chips being spun quicker over time. Then the second part is, with our strategic development in India with our new factory, that gives us the ability to access a lower cost labor segment, and allows us to prolong margins for our existing products as well.
There is a follow-on question perhaps, and maybe you can confirm whether you've addressed that from Kevin Ascott, who's querying that he thought India was to improve us, our output. I'm wondering what the gross margin effect of opening India would be.
It's a twofold. India will house our existing business, which is quite substantial. There's a factory move from one premises to another going on as we speak. That's one. You know, there's no real impact on margin there, percentage-wise. What that does is give us extra capacity, so the ability to ramp up those existing products. Secondly, probably more importantly, India gives us the ability to move product from New Zealand and from France over the medium, short and medium term. That, moving the product, obviously, logically gives us that margin uplift. We're at the start of the process of moving those products. There's a program of work in place to accelerate that this year going forward.
Perhaps we can make a comment from Mike Daniel, who's saying congratulations on great result. Going on then to ask, what is the significance of the huge growth in data center developments?
The data center, market sub-segment, I say, for us is one of the areas where they are going through a substantial inventory correction. In the short term, it will be down. In long term, the underlying growth drivers and why data centers is a target market for us still remains. Data centers are converging into the telecommunications infrastructure overall. That creates an opportunity for us because the timing requirements for data centers actually mimic the telecom infrastructure requirements more and more, just right in the middle of our sweet spot.
There's also a question from, now from Tony regarding dividends, and also a query from another shareholder regarding whether the dividend complies with our dividend policy, I think relating back to a previous iteration of the dividend policy, actually.
Mm-hmm. I would. Okay. I think I would invite that shareholder to probably refer to our dividends policy that is on our website. Actually, clarify our dividends policy that we introduced last year, with the exception of one sentence, is in its entirety the same. I believe he may be referring to a prior dividend policy that we had. The other question on dividends?
How should we expect dividends to track through the in the future, relative to NPAT, et cetera?
As I mentioned, I think this came after a rigorous analysis of our long-term strategy, which is entirely hinging upon growth and the investment requirements associated with it, to ensure that we are able to balance short-term return to our shareholders with our long-term growth path. We, the board, sees that this level of dividend is sustainable throughout our growth journey.
Further questions from Tony, who's interested in position focus.
Right. That focus is still continuing, as I said. The funding, I can see that he has a question related to the funding. We will look at all internal and external options available to us. Cash, our cash flow, incurring debt, et cetera. We're not at a position to really talk about funding an acquisition. We are, again, as before, we are seriously evaluating options because it fits very well into our strategy and our growth path.
No more new questions, particularly.
Okay.
All of them. Yeah.
Okay. Anything more? No. Okay. I think that sums up the questions. Yeah, FY 2023 was an outstanding year for Rakon. To sum up, we are poised to continue our long-term growth trajectory into the future, and we are confident in our ability to deliver our shareholders substantial growth in the long term. Thanks a lot again for listening.