Rakon's 'internet of things' investment to be earnings positive by 2018

UPDATED: Rakon is also hoping the new low-powered wide area network technology will boost the company's moribund share price.

See also: 'Rakon has a history of reinventing itself,' CEO says

UPDATED: Rakon’s [NZX: RAK] cornerstone investment in an Australian start-up rolling out a new “internet of things” network in Australia and New Zealand in partnership with French company Sigfox is expected to start having a positive impact on the high-tech component manufacturer’s earnings by 2018.

Rakon is also hoping the new low-powered wide area network technology will boost the NZX-listed company’s moribund share price, which jumped three cents to 28c following the announcement of the investment today but is still well down on the $6 per share achieved in its glory days in 2007, a year after its initial public offering.

Rakon believes the biggest opportunity in the venture is manufacturing the sensors that companies worldwide could use to connect their products to others.

It has invested a further $A4.2 million in Australian startup Thinxtra, making a total of $A5.8 million in the past four months and funded from existing debt facilities and cash flow. That’s given it a 63.8%  stake in the network operator, which is likely to dilute to 47. 7% when Thinxtra’s founding shareholders exercise outstanding options.

Rakon chief executive Brent Robinson said it could potentially invest another $A3 million to fund the operation for more than a year but the Auckland company doesn’t need to remain the majority shareholder. “We just wanted to get it rolling,” he said.

Its stake is likely to be diluted to around 35% in a Round B capital raising of around $A15 million scheduled later this year. That will help fund the estimated $A13-15 million cost of the transtasman rollout and operating expenses.

“That Round B capital raising is expected to go smoothly and we would have rolled out to half the population by then and starting to see some uptake of users, so we don’t expect to put any further money in after that,” Mr Robinson said.

The company initially looked at being the New Zealand network operator for Sigfox but decided investing in Thinxtra made more sense. “If we didn’t have the Thinxtra team, we would have had to invent them,” Mr Robinson said.

Thinxtra was set up a year ago, funded by management and a number of industry influencers and customers in Australia and New Zealand.

Trials of the 'internet of things' (IoT) network, which provides an energy-saving alternative to existing cellular networks, are under way in Sydney and Melbourne. Thinxtra hopes to provide coverage to 30% of Australians and New Zealanders by the end of this year, rising to 85% within 18 months.

Mr Robinson said the first purely dedicated network for the internet of things is a game-changer, with a major opportunity for Rakon.

“We can make some building blocks and have some ideas of how to make the sensors at a very competitive cost as we have all the infrastructure and can leverage what we have been developing for the GPS and cellphone industry,” Mr Robinson said. “The market is quite immature and we wanted to get in on the ground floor in the early days. There are huge numbers touted – 50 billion connected devices by 2025 – so we just want to be part of that.”

Sigfox claims its network has the lowest deployment and maintenance costs of any system proposed, allowing lower cost subscription plans.

The Australasian move is part of Sigfox’s plans to expand its network around the world, with rollouts in each country undertaken with a network partner. Set up in 2011, the French company now operates in 14 countries and is backed by investors including telcos and venture capitalists. 

Chief executive and co-founder Ludovic le Moan said the company aims to roll out the global network as fast as possible to convince more companies to develop applications for it because of the breadth of the opportunity. It has set a target of being in 60-plus companies by 2018.

Sigfox’s low-speed networks are typically based on antennae and base station infrastructure that are relatively easy to set up and run independently, and at a tenth of the cost of a traditional cellular network, the company says.

It targets “simple messages” as most IoT-connected devices don’t need to send huge data loads and can function well on ultra-narrow band technology. Because they are only “on” when they are transmitting, power demand is negligible. The biggest uptake of data users so far has been in the areas of security, water and gas metering, and parking.

Mr Le Moan said the network was not competing with existing technologies as the IoT was “something of a revolution.”

“Other networks are trying to cover from low to high and that’s a big mistake. No other business is focused on the low footprint we are doing,” he said. “We are targeting a 60% market share.”

Based on current market forecasts, the parties expect the total number of connections in New Zealand to overtake the total population, currently close to 4.7 million, by 2022.

The companies said Thinxtra will generate revenue from three areas: infrastructure, applications and services. It will sell subscriptions for annual network connections and monthly usage fees, sell and distribute connected hardware, which could include Rakon-made components, and sell services such as advising customers on solutions and implementation.

Rakon has been exiting the smart wireless market, which didn’t deliver big enough margins, focusing instead on global telecommunications infrastructure, the avionics, space and defence industries and specialised global positioning system (GPS) devices.

The company has warned annual earnings will miss forecast, having returned to profitability last year after restructuring to pull manufacturing back to New Zealand and Indian sites only. In January, it forecast underlying earnings before interest, tax, depreciation, and amortisation of between $9 million and $10 million for the year ending March 31, down from a previous forecast of $15.4 million.

Mr Robinson said the year had been tougher than expected due to a decline in telco spend but he said that was now turning around and some significant contracts were due to come through shortly that will improve profitability in the next financial year.


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