Rakon 2010 Shareholders Letter by Rakon Limited

2010 review

quality performance speed and innovation

02 rakon Shareholders letter 2010

About rakon Throughout the world modern communication technologies are influencing how we work and operate. Data is being transferred all over the planet. Rakon products enable this connectivity. From satellite systems in space to the infrastructure we use to connect with others at work and home, from the GPS technology in your phone to the electronic equipment used in space exploration; these examples and more all require Rakon products. Rakon manufactures components that generate an electrical signal at a specific frequency. Frequency can be used in many ways. For example it may be used to keep track of time (like in your wristwatch) or it may provide stable clock signals for timing used in things such as networks, positioning/location devices and GPS smart phones.

speed and innovation

quality performance

From 1967 until 2006 Rakon was a family owned New Zealand company. In 2006 the company publicly listed. Since then Rakon has acquired and set up operations around the globe and now has a combined history in frequency control dating as far back as 1937. Rakon is one of the few true high tech companies in New Zealand. It is a forward thinking world leader in frequency control solutions. Headquartered in New Zealand approximately 1700 staff are spread across five international manufacturing plants.

review

2010

Strengths Strategy and Position Rakon’s strategic direction remains clear; gaining market share through investment in R&D to pioneer new solutions and be the first to meet the next generation of market requirements. Rakon’s strengths lie in its speed to market, innovation, efficient manufacturing and acute understanding of both industry and customer requirements. Rakon anticipates customer needs and develops the next generation solution to meet them. Strong partnerships with top Fortune 500 companies have aided Rakon’s growth and development with some relationships dating back over 30 years. Rakon has grown its global manufacturing and engineering capability and is well on its way to being the global industry leader in frequency control products.

S t r e ng t h s s t r at e g y & p o s i t i o n

C h a i r m a n ’ s r e p o r t

m a n a ging direc t or’ s rep or t

g l o b a l m a n a g e m e n t s n a ps h o t

b o a r d o f d i r e c t o r s

p e r f o r m a n c e a t a g l a n c e

F i n a n c i a l s

M a r k e t o v e r v i e w

P r o d u c t s

T y p i c a l TC x o P r o d u c t i o n p r o c e ss

G l o b a l p r e s e n c e

up d at e o n r a k o n c h e ng d u, c hin a

04 rakon Shareholders letter 2010

Chairman´s report

Dear Shareholders welcome to this the fifth Annual Report of your company Rakon Ltd. Our result for the fiscal year 2010 was far from satisfactory, however the company overcame some very determined worldwide headwinds while enhancing its global business footprint and profitable business streams for the future. Rakon’s EBITDA for the full year was $4.3 million but importantly the second six months was a $7 million improvement on the first six. This highlighted the business growth that began around November 2009 and has continued with increasing strength since then. This growth in business is not a surprise; it is the result of our planning and continued hard work by our global team. While the market is maybe 6 months or so behind our original projections, it has now started and the demand is at, or better than the levels we had planned. The current and projected demand has given us the confidence to publicly state that we are comfortable with analysts projections for FY 2011 EBITDA of between $25 million and $30 million. We will be able to give more detail on this position at our Annual Shareholders Meeting on

September 10th. Our share price has been a real disappointment over the past year. We have no doubt been caught up in the enhanced volatility of the past 2 years. As a firm whose demand was significantly stalled by the Global Financial Crisis, it’s not unrealistic to see that we have to deliver the performance we believe we are capable of to convince the market to see our value. We are determined to do this and confident that we can succeed. We have never doubted our plans or abilities and this year sees those plans back on track. There is much more detail on these plans within the report from your Managing Director. Going Global Rakon is a growing global business, and building a global business is significantly different to exporting. “Going global” is often misunderstood in New Zealand where it has traditionally meant exporting; “making more here than our population can consume and selling the rest overseas”. Often exporting means better quality than is sold at home, hence the phrase “export quality”. But what Rakon does is light years apart. We have built our plan on technology

and skills grown in New Zealand, we have enhanced our power by joining these attributes to similar and complementary skills, technology and market opportunities around the world. Everything is controlled from New Zealand our home base, even though we have no market here. This involves a different mindset and understanding. Team members are continually on aeroplanes, away from home and on the phone or video conference all hours of the day or night. We have factories and people in the UK, France, Germany, India, China, Taiwan, Malaysia, Korea, the USA and of course NZ. Market Leadership To retain the market leaderships we have, we need to always be ahead of technology shifts in our key market places, working with design engineers on products and systems years before the finished products or systems will reach market. We have come a long way so far and still have a long way to go. In fact we don’t see a ceiling; we want to continue to build what will be New Zealand’s most successful global technology company, something we can all take great pride in and profit from. New Zealand needs many more companies like Rakon to build a base balancing our dominant reliance upon the land; agriculture and tourism. The Government clearly understands this and we applaud their investment in Research and Development grants which Rakon is a recipient of. Over the past 12 months we have used grants to develop our crystal technology and to accelerate the development of products for the smart phone and femtocell markets. Worldwide currency markets have

caused us considerable heartburn over the past year. We operate in 6 major currencies: the NZD, USD, Pound Sterling, Euro, Japanese Yen and Chinese Yuan. All have their impact on our Profit and Loss accounts and Balance Sheet. There continues to be volatility in all these currencies and we keep a constant and vigilant eye on them and their likely movements. However, we have taken advantage of what we believe are some recent positive positions in some of the cross rates and in particular the NZ$/ US$, to lock in acceptable rates for the remainder of our financial year. With all the demand for data growth projects being built around the world, our future looks good and we will work hard to build on these activities and the relationships we have built over the last 5 years or more. Last year was one we don’t want to repeat financially but the learnings and confidence shown to us by the investment community and our shareholders in taking up our $65 million capital raising will remain with us for a long time. Thank you for that. To the team at Rakon thanks again for all your hard work during times that have been anything but easy. Your resilience and persistence has ensured the firm’s platform is solid to reach our long term goals. To our shareholders thank you for your support. I look forward to providing you with a progress update at the ASM and having the chance to talk one on one about our fine company.

Bryan Mogridge Chairman

. . . what Rakon does is light years apart. We have built our plan on technology and skills grown in New Zealand, we have enhanced our power by joining these attributes to similar and complementary skills, technology and market opportunities around the world.

06 rakon Shareholders letter 2010

managing director´s report

As we expected the second half of the 2010 financial year saw a strong improvement in results as demand grew across our entire business. There is no avoiding the fact we were hit hard by global economic factors over the past eighteen months; however, Rakon has not only survived these difficult times but we have significantly progressed our strategies despite the challenges we faced. During this financial year we have been able to strengthen and expand our product portfolio into new areas, improved our relationships with key strategic customers and have seen several long anticipated production programmes begin to deliver tangible results. All of this has been underpinned by an ongoing investment of time, effort and money in R&D and people; as well as investment in our manufacturing facilities in New Zealand, Europe, India and China. Smart Phone Demand We have begun to see that GPS is now becoming a standard feature in higher end cellular phones (smart phones). What is also positive is that in the overall cellular phone market more and more people are choosing smart phones over lower cost phones with fewer features. These two factors combine to mean there is a growing demand for GPS in cellular phones and the high performance TCXOs which are required to ensure the system works. Rakon has been working with large tier-one smart phone companies for some years to incorporate our technology. This has not been an easy task, hurdles such as meeting low price points, supplying very high manufacturing volumes and the fact Rakon is not an existing ‘approved’ supplier to many of these companies, have had to be overcome. In March of this year we saw two major tier-one smart phone manufacturers begin to use significant volumes of Rakon products. This is in addition to the existing, albeit smaller

volume, smart phone business Rakon has been supplying for the last few years. We expect our volumes into this market will be significant in the 2011 financial year. Mobile Data Crunch The proliferation of smart phones and their increasing use to download or upload pictures, music and other content has put mobile phone networks under increasing pressure. Existing networks can only process so much data and those limits are near to being reached. With massive increases in data consumption predicted many believe we are going to see a ‘data crunch’ where networks will no longer be able to cope. This concern has driven investment into the sector with many communications networks expanding their existing infrastructure, or pushing forward with new technologies which will enable more data to be moved at lower costs. Rakon’s products live at the heart of these networks, providing a timing reference that is used to help move data at higher speeds, over longer distances and with fewer errors. Over recent times we have secured preferred supplier status with many of the world’s leading infrastructure providers. This is a significant achievement as it often gives us first opportunity on new business as it develops. Annually these infrastructure providers spend in excess of US$500 million on frequency control products. Through these relationships we have been able to secure design wins in much of the new 4th Generation network equipment (LTE and WiMax) which is being trialled now. We have also been able to displace competitors and increase our market share in more traditional areas, such as 3G base stations and fibre optic equipment. All of this combined has seen our sales into the telecommunications network sector grow significantly in 2010. We expect that growth will continue and remain highly

profitable over the next few years and this market could continue to account for up to half our profit despite predicted increases in demand in the cellular phone area. In addition to these network deployments we have seen the beginning of commercial femtocell deployments. Femtocells are tiny cellular base stations that can be installed in consumer homes. The advantage of these devices was initially that they were a low cost way of providing cellular coverage to problem areas. However they are increasingly being seen as a way to help take pressure off the main cellular network and deal with the impending “data crunch”. Some network providers in Japan have begun to give these femtocells away for free and market analysts expect there to be significant growth in the market over the next couple of years. Rakon has been heavily involved in this market since its inception. We are an active member of the industry association and currently supply an estimated 90% of the femtocells being manufactured today. As the market grows we expect to see increased competition, however to date no one else has been able to meet Rakon’s combination of specification and cost that femtocells require. We remain conservative in our estimates of how quickly this market will grow, but there is significant potential there for us which we are continuing to work hard to capitalise on. R&D Investment Our ongoing investment in innovation is critical to our success. At any one time we will have a variety of research or development projects underway. Over the past year we have undertaken three significant projects that are worth mentioning specifically. Firstly, we have developed and launched a new product line of surface mount VCXOs (Voltage Controlled Crystal

Oscillators). Rakon has previously only serviced the market for these products in a very limited way with legacy product designs. This new range has required significant work over several years and leverages our world leading TCXO expertise as well as effectively utilising existing manufacturing capacity. The world wide VCXO market is estimated to be worth in the region of US$800 million, although we intend to focus mainly on the higher performance end of that market we still see the opportunity as very significant. Many customers in the telecommunications space have been asking for Rakon to develop solutions in this area and for every OCXO we sell several VCXOs are typically also consumed. Secondly, we are nearing completion of our new Mercury product. The Mercury is a leap forward in OCXO technology, utilising a proprietary ASIC (Application Specific Integrated Circuit) which we have developed in our Advanced Technology group. The Mercury will be the world’s smallest high performance OCXO and will enable Rakon to set new price/performance levels. We expect this product to be shipping to customers in sample volumes later this year, with initial production in 2011. Thirdly, we have undertaken a project to look at an entirely new way of manufacturing quartz crystal blanks, using a process called photolithography. The quartz blank is the base component in our crystal units and the traditional method, involving slicing a solid bar of quartz into wafers, is reaching the limits of capability in terms of size and cost reduction. In order to continue to shrink our products to meet customer demand

Over recent times we have secured preferred supplier status with many of the world’s leading infrastructure providers.

08 rakon Shareholders letter 2010

. . . Rakonâ&#x20AC;&#x2122;s projects are targeted at developing improved product performance at competitive cost to maintain our position as the industry leader for frequency

and stay at the forefront of technology we need to develop a new way of doing things. Photolithography essentially uses a process similar to developing a photograph and has been used in ultra-miniature crystal design for some time; however, it is new for Rakon. So far this year we have been able to produce prototype crystals that are half the size of our current production units. There is significant work required to take these prototypes and make them production ready, but we expect to do this over the coming year. As well as these projects we continue to enhance our proprietary product testing capability and have initiated and progressed several projects that are focused on improving product performance in our existing TCXO and OCXO product ranges. The demands for consumer products to deliver improved and consistent performance and for networks to cope with ever increasing data loads firmly align with our strategic product roadmap. Rakonâ&#x20AC;&#x2122;s projects are targeted at developing improved product performance at competitive cost to maintain our position as the industry leader for frequency control products.

control

speed and innovation

quality performance

products.

Manufacturing Developments As many of you will know we are building a significant facility in Chengdu, China. This is a strategic move to ensure Rakon has the production scale and cost base to be able to continue to grow in our high volume consumer markets, such as cellular phone GPS. Progress on the facility has been pleasing with factory designs complete, recruitment of staff underway and construction due to start in July this year. We expect to begin shipping product in mid 2011.

We are also pleased with the contribution from our Indian joint venture operation, Centum Rakon. We began manufacturing OCXO products, which had previously been manufactured in France, there in June 2008. The premise was that India would give us a much lower cost base and would enable us to return the OCXO range to profitability. Transferring operations from France to India was never going to be simple however we are now seeing the benefits of this move. India is now running at a commercial scale and doing so profitably. We are now in the process of expanding their capability and capacity to meet significant demand growth. Outlook The past year has been a challenging one, but it has also been successful in many ways. A large amount of hard work has been done and we are beginning to see the fruits of that effort. Although our results will always be subject to global economic conditions we have had a great deal of success in matters over which we have control: our products, our technology, our process and relationships with our customers. We believe that 2011 will be a very exciting one for Rakon as we continue to capture new business, see existing business expand and deliver some solid results to our shareholders.

Brent Robinson CEO, Managing Director

Global management snapshot

Darren Robinson Sales & Marketing Director

Graham Leaming Chief Operations Officer/ Chief Financial Officer

Sinan Altug Global Business Development & Applications Manager

Michael McIlroy General Manager Engineering NZ

Hugh Tucker General Manager Global Sales

Global Philip Davies Business Unit Manager UK

Pierre Poulain Business Unit Manager France

George Ye General Manager, Rakon Chengdu China

Unnikrishnan P.M. General Manager, Centum Rakon

Ron Chen General Manager, Timemaker China

regional

Andrew McCraith

Business Development and Product Manager

Andrew Miles

Ajaib Hussain

Engineering Manager UK

Business Development Manager

Oleg Sheynin

Engineering Manager Oscillators NZ

Claude Trialoup

Product Manager Military and Aerospace

Phil Brownlie

Engineering Manager Equipment NZ

Dean Ransom

Regional Manager North Americas

Dominique Capouillet

R&D Manager France

Dee Shahidi

Regional Manager Asia

Graham Ockleston

Product Manager New Technologies

Justin Maloney

Marketing Manager

Kevin McAloon

Product Manager Volume Products

Mary Carbin

Business Development Manager

Wolfgang Balzer

Regional Manager Europe/ Product Manager OCXOs

Sales, Marketing, Product Management

Brian Karl

Manager Project Management Office

Malcolm Leuchars

Human Resources Manager

Pam Anderson

Financial Controller

Stephen Lewis

Chief Information Officer

Support

Engineering/Research and Development

David Grant

General Manager Operations NZ

Jean-Michel Jurine

Operations Manager France

Ravi Ramalingam

Manufacturing Manager NZ

Steve Fal

Manufacturing Manager UK

Operations

Germany

India

China

France Taiwan

USA

10 rakon Shareholders letter 2010

Board of directors

BRYAN MOGRIDGE

ONZM

Independent Chairman Bryan Mogridge was appointed Chairman in November 2005. Bryan has been a public company Director since 1984. He is currently Chairman of Enterprise Waitakere, Waitakere City Holdings Limited, BUPA Care NZ Limited, and The Starship Foundation. Additionally, Bryan sits on the Board of Mainfreight Limited and Pyne Gould Corporation Limited. Bryan has also chaired the New Zealand Wine Institute, the New Zealand Food and Beverage Exporters Council and the Tourism Board. Bryan was appointed Vice Chairman of UBS New Zealand Limited in April 2007. Board committee memberships: Audit and Risk Management Committee, Remuneration Committee (Chairman), Nomination Committee (Chairman).

BRUCE IRVINE Independent Non-Executive Director Bruce Irvine was appointed as a Director of Rakon in November 2005. Bruce is currently the Chairman of House of Travel Limited, Christchurch City Holdings Limited, Pyne Gould Corporation Limited and MARAC Limited. He is also a Director of PGG Wrightson Limited, Godfrey Hirst Limited, Perpetual Trust Ltd, Market Gardeners Co-operative Limited, Skope Limited, and Scenic Circle Limited. In

a voluntary capacity, he serves as a trustee of the Christchurch Symphony Trust and the Christchurch Art Gallery Trust. Board committee memberships: Audit and Risk Management Committee (Chairman).

SIR PETER MAIRE

DCNZM

Non-Executive Director Peter Maire was appointed as a Director of Rakon in November 2005. Peter is a co-founder and former President of Navman NZ Limited. He sold his shareholding to Brunswick Corporation in 2004 and resigned from his position as Chairman at the end of 2005. Peter is a past board member of New Zealand Trade and Enterprise and is an Honorary Fellow of the Institution of Professional Engineers New Zealand. Peter has made significant investment into New Zealand Technology companies. He is a Director of Orion Systems Limited and the principal shareholder of Fusion Transactive Limited and Fusion Electronics Limited. Peter was made a Distinguished Companion of the New Zealand Order of Merit (DCNZM) in the 2008 Queenâ&#x20AC;&#x2122;s Birthday Honours. Board committee memberships: Remuneration Committee, Nomination Committee.

quality performance speed and innovation

WARREN ROBINSON Non-Executive Director Warren Robinson founded the Rakon business in the basement of his Howick home in 1967. He successfully grew and operated the business until 1986 when Brent Robinson became the Managing Director. In subsequent years, Warren has continued to maintain an active role within Rakon and was Chairman until November 2005. Warren received a First Class Certificate in Radio Technology and is a member of the Institute of Electrical and Electronics Engineers, a senior member of the New Zealand Electronics Institute and is a member of The Royal Society of New Zealand. Board committee memberships: Audit and Risk Management Committee, Remuneration Committee, Nomination Committee.

of US$100 million. Rakon has a full suite of high performance frequency control products supported by design and engineering facilities in New Zealand, the UK, France India and China. Brent has over 25 years experience in the design and manufacture of crystals and oscillators. He led the team that created the world’s smallest “1 ppm” TCXO in 1990 and the first high volume “0.5 ppm” TCXO in 2003. Both these developments were years ahead of competitive solutions and enabled the GPS industry in particular to achieve significant steps forward in terms of performance and market growth.

DARREN ROBINSON Executive Director

BRENT ROBINSON Executive Director Brent Robinson was first appointed Managing Director and Chief Executive Officer (CEO) at Rakon in 1986 and continues in that role at Rakon today. Brent also leads the technical engineering team acting as Chief Technology Officer (CTO), remaining involved in leading the design of new products and processes. Under Brent’s leadership Rakon has grown from a New Zealand company with revenue of US$1 million to a global company with revenue

Darren Robinson was appointed Marketing Director at Rakon in 1990. Darren has over 25 years sales and marketing experience at Rakon and has driven sales for Rakon through exploring new markets, applications and establishing arrangements with many top Fortune 500 companies. Rakon is now a preferred supplier to many of the world’s leading consumer and infrastructure technology companies with annual sales revenue of US$100 million.

12 rakon Shareholders letter 2010

performance At a glance

Revenue

EBITDA

2H-10

1H-10

2H-09

1H-09

2H-08

1H-08

2H-07

1H-07

1H-07 0

100

-4

-2

NZ$ million

Research & Development Spend FY-10 FY-09 FY-08 FY-07 0

NZ$ million

Building a global leader Since 2006 Rakon has been developing from a small niche supplier to a global leader in frequency control and is well positioned to expand in the US$3b frequency control market.

2006

2007

2008

2010

Initial Public Offering (IPO).

European acquisition.

Indian & Chinese JV.

Chengdu factory build begins.

GPS TCXOs and crystals.

Added very high performance TCXOs, OCXOs and crystals.

Added consumer grade OCXOs and quartz blanks.

Added VCXO/XO range and provision for low cost crystals.

2012 Expansion of TCXO line for very high volume consumer applications.

Approx staff

450

TCXO-

OCXO+

TCXO+

TCXO

XTAL+

850

1500

1700

China

Blank

XTAL India

XTAL-

France

China

Blank

India

XTAL

XTAL France

China

India

XTAL

France

XTAL+

Great Britain

TCXO

NEW ZEALAND

TCXO

OCXO

Great Britain

TCXO+

NEW ZEALAND

TCXO+

OCXO+

Great Britain

VCXO

NEW ZEALAND

XTAL

OCXO

TCXO France

TCXO

Great Britain

NEW ZEALAND

OCXO+ OCXO+

XTALBlank

1900

Responsiveness

In 2009 further research went into improving the thermal sensitivity of Rakonâ&#x20AC;&#x2122;s space quartz crystal Ultra Stable Oscillator (USO). Its frequency sensitivity has a strong influence on final performance of the DORIS system (Doppler Orbitography and Radio-positioning Integrated by Satellite, CNES system) which uses Rakonâ&#x20AC;&#x2122;s OCXO. The new performance achieved (5.10-14/0C) is the best performance achieved by any space USO globally.

quality performance speed and innovation

14 rakon Shareholders letter 2010

Financials

Income Statement

2010

2009

For the year ended 31 March 2010

($000s)

Revenue

144,513

139,472

EBITDA Depreciation, amortisation and share based payments

4,269

18,529

(8,653)

(8,566)

EBIT

(4,384)

9,963

Interest

(298)

(2,140)

(4,682)

7,823

Income tax expense

(679)

(3,354)

(5,361)

4,469

Net (loss)/profit before tax

Net (loss)/profit after tax

Statement of Cash Flow

2010

2009

For the year ended 31 March 2010

($000s)

Net cash flow: - Operating activities - Investing activities - Financing activities

1,010 (8,948) 54,078

16,631 (20,177) (898)

Net increase/(decrease) in cash and cash equivalents Foreign currency translation adjustment Cash and cash equivalents at the beginning of the period

46,140 (2,253) 1,994

(4,444) (57) 6,495

Cash and cash equivalents at the end of the period

45,881

1,994

Balance Sheet

2010

2009

As at 31 March 2010

($000s)

Assets Current assets Cash and cash equivalents 46,559 Trade and other receivables 34,064 Derivatives - held for trading 102 Derivatives - cash flow hedges 242 Inventories 40,732 Current income tax asset 1,886

8,907 30,603 959 41,221 1,727

Total current assets

83,417

123,585

2010

2009

As at 31 March 2010

($000s)

2,941 743 41,712 33,766 17,762 4,142 931

3,306 743 44,535 37,831 19,996 4,854 -

Non-current assets Trade and other receivables Investment in shares Property, plant and equipment Intangible assets Investment in associates Interest in joint venture Deferred tax asset Total non-current assets

101,997

111,265

Total assets

225,582

194,682

Liabilities Current liabilities Bank overdraft Borrowings Trade and other payables Derivatives - held for trading Derivatives - cash flow hedges Provisions Current income tax liabilities Other liabilities

678 522 24,200 12 138 75 1,102 4,193

6,913 2,171 19,437 1,831 174 -

Total current liabilities

30,920

30,526

Non-current liabilities Bank borrowings Other liabilities Provisions Deferred tax liabilities

- - 1,718 -

7,864 15,351 2,256 399

Total non-current liabilities

1,718

25,870

Total liabilities

32,638

56,396

Net assets

192,944

138,286

Equity Share capital Reserves Retained earnings Minority interest

173,846 (14,058) 31,520 1,636

103,301 (1,748) 36,732 1

Total equity

192,944

138,286

16 rakon Shareholders letter 2010

Market Overview

positioning Rakon has been the number one frequency control solutions provider for positioning systems since entering the market back in 1991. Global Navigation Satellite Systems (GNSS) are increasingly becoming part of our modern day infrastructure and services. Positioning capability is constantly being designed into an extending range of mass marketed consumer applications.

Innovation and precise understanding Main Applications: Personal Navigation Devices (PND), emergency beacons, recreational GPS, surveying/mining/ agricultural GPS. Main Product Families: GPS TCXOs, GPS crystals, GPS module

telecommunications Rakon has had success in gaining market share through superior product performance and close customer relationships. Expanding deployments of 3G wireless networks as well as plans for 4th generation technologies (WiMAX, LTE) provide significant opportunity for Rakon. Underground fibre optic cables are also being installed to transfer more and more data. Rakonâ&#x20AC;&#x2122;s technology helps networks move more data through new and existing methods by improving network synchronisation. The emerging femtocell market is also gaining momentum. This small cellular base station is designed for use in the home or business. Femtocells allow service providers to extend their service which otherwise would be limited or unavailable. Femtocells offload the amount of data traffic through a network helping to alleviate data congestion. Rakon currently supplies an estimated 90% of the femtocells in production.

Constantly achieving new levels of performance Main Applications: Wireless/cellular communications infrastructure (such as GSM, CDMA, WCDMA, LTE and microwave), fibre optic connection equipment, femotcells and network timing equipment. Main Product Families: XOs, VCXOs, TCXOs, OCXOs

high reliability

Mission critical precision performance and reliability

All of Rakon’s products play an important role in the performance and reliability of the applications they are used in. However in some industries reliability and high precision performance are critical. Rakon’s ‘high reliability’ customers contribute to world development in the areas of space, defense, power, medical and scientific research. A recognised technology leader in this market, Rakon has world leading quality assurance practices. The company has a long history and reputation of working in partnerships with these organizations to develop new technologies to meet increasingly exacting requirements.

Main Applications: Space, aviation, defense, public safety. Main Product Families: crystals, XOs, TCXOs, VCXOs, OCXOs, and space qualified crystals and oscillators

mobile

Creating breakthroughs ahead of their time Main Applications: GPS enabled smart phones & PDAs. Main Product Families: TCXOs

Demand for Location Based Services (LBS) is driving the requirement for GPS capability in the phone. Rakon is a global leader in creating high volume, low cost, high performance solutions that enable GPS to work within the challenging operating environment of the mobile phone. GPS is becoming a standard feature in smart phones and the smart phone market is growing disproportionally to the rest of the mobile phone market. The environments that handset GPS must operate in are extremely challenging. Rakon has been developing new designs in high stability TCXO technology, to continue to develop cost reducing solutions with unmatched performance. Rakon’s technology leadership in GPS applications has been recognised by smart phone manufacturers and Rakon are gaining market share with the leading players in this market.

18 rakon Shareholders letter 2010

products

Rakon is a world leader in developing and making frequency control components, which have quartz crystal technology inside. The frequency control component is at the heart of almost all electronic circuits and provides precise timing which is in a variety of applications. Our products are continuously evolving. At Rakon we work in partnership with our customers from initial concept through to the final product – offering customised solutions and an acute technical understanding every step of the way. The precision of the timing component can directly affect performance of the electronic device. The timing accuracy generated by Rakon’s products is measured in parts per million (ppm) or parts per billion (ppb). Our customers have differing requirements for things such as accuracy level and output characteristics, cost, manufacturing flexibility and size requirements. Rakon has 6 main product families. At the heart of all these families are Rakon’s crystals which are also sold separately. Quartz Crystals (x) At the heart of the XO, VCXO, TCXO and OCXO product is quartz crystal (X). By passing an electric current through the quartz, the oscillator circuit can generate the underlying timing signal it uses. Rakon uses the majority of its crystals for its own oscillator manufacturing. crystal oscillators (XOs) and voltage controlled crystal oscillators (VCxos) Rakon is currently developing a new XO and VCXO product range. Generally XOs are lower in cost as they are quartz crystals combined with simple electronic circuitry. VCXOs are electronic oscillators designed to have their oscillation frequency changed by a voltage. Customers using high performing OCXOs for basestations and telecom infrastructure, also use many XOs and VCXOs as part of their timing network requirements.

High Stability TCXOs (Temperature Compensated Crystal Oscillators) High stability TCXOs are focused on the high volume, high performance markets, such as mobile phones and PNDs where small oscillator size is important. Performance ranges are from 0.5 ppm over a wide temperature range, with physical sizes as small as 2.0 x 1.6 mm. Ultra Stable TCXOs Many applications demand an even higher level of performance than our high stability TCXOs. Using Rakon’s unique, patented compensation technology, our ultra stable TCXOs can achieve stabilities better than 100 ppb over temperature. This worldbeating performance has led to Rakon becoming the supplier of choice in the majority of emergency beacon, timing/ synchronisation and femtocell reference designs and has helped us replace the competition’s more expensive products in many telecommunications infrastructure systems.

OCXOs (Oven Controlled Crystal Oscillators) OCXOs are used in applications like wireless communications (base stations), network synchronisation and satellite communication, where precise reference clocks are needed to secure high volume data traffic. Stabilities can be as tight as sub-1 ppb (one part per billion, which is equivalent to about three seconds out of a century). OCXOs are generally more expensive as their physical dimensions are a lot larger and they consume a lot more power than a TCXO. Temperature Compensated OCXOs Rakon has identified a gap in the standard frequency control product offering where the tight stabilities of OCXOs are required but size, price and power consumption pressures mean a different approach is needed. With this in mind, Rakon has designed a new class of unique, patented oscillators, the TC-OCXO. Using the same Pluto technology as our ultra stable oscillators but with additional temperature control, we can now offer superb, sub-50 ppb performance at a fraction of the price and power consumption of a standard OCXO. This product has a tighter frequency stability specification than any TCXO but is cheaper than the lowest cost OCXOs available. Modules In 2006 Rakon developed the worldâ&#x20AC;&#x2122;s smallest GPS RF front end module. This is a complete GPS radio which a GPS designer can integrate into their system without having to worry about the difficult RF design work. Since then Rakon has expanded its product range and offers more cost effective GPS modules for positioning and timing applications.

quality performance speed and innovation

20 rakon Shareholders letter 2010

typical tcxo Production Process

p s n

k i

h J g

TCXO Manufacturing and Assembly Crystal Test

4 3 f 2

Clean Room 1 b

Pre-Clean Room A

The oscillator manufacturing process is highly complex. There are over a thousand steps that the crystal typically goes through taking up to eight weeks from the initial quartz bar to becoming a complete oscillator product. Extensive testing is conducted throughout the entire process from beginning to end. At Rakon, specialised equipment developed in-house provides unique advanced TCXO testing and compensation technology. The example shown is of a typical TCXO production process.

1. PRE Clean Room Cutting A Quartz bars are mounted onto plates. The angle of cut affects the frequency versus temperature performance. X-ray equipment is used. Slurry saws slice the bars into thin wafers. Any natural impurities are removed and they may be further cut into smaller wafers before further processing. B

Lapping, Dimensioning and Bevelling C The wafers are mounted into machines which grind the wafer surfaces down using fine abrasives. The thickness of the wafer determines the frequency. The blanks go through a process to set their exact dimensions (length and width). D The quartz wafers or blanks are tested and sorted into groups using frequency sorters. They are X-rayed to measure their final dimensions and angle with respect to the reference quartz lattice plane. E Lower frequency wafers need to be slightly curved around the edges. The wafers are bevelled by placing them into high speed rotating chambers with a abrasive powder which removes the sharp corners. F

2. Clean Room Etching

The quartz blanks are then etched chemically, to improve the surface finish and then sorted into frequency groups. G All processes from etching through to sealing are performed in a class 1000 clean room to ensure no contamination is on the quartz surface which may cause performance or quality issues later on. Laser particle counters monitor the environment and critical processes and pieces of equipment.

Plating H A machine evaporates gold onto the surface of each blank to form an electrode pattern and enable an electrical connection.

Mounting I The blanks are then mounted and glued into bases using robots.

Final Frequency Adjustment The frequency of each crystal is then measured while excess gold is removed from the surface of the blank by firing high speed ion particles at the surface. J

Sealing The packages are sealed using robotic equipment operating in a high pressure nitrogen environment to ensure no moisture or other contaminants enter the crystal cavity at the final stages. K

3. Crystal Testing After the cleanroom the crystals go through electrical testing (such as ageing and parameter testing). M The crystals are fine and gross leak tested. L The crystals must pass a fully automated 100% electrical and visual inspection. T They are then laser marked, loaded into reels and either shipped to the customer or sent to TCXO manufacturing. N

4. TCXO Manufacturing Surface Mount Technology (SMT) Assembly The crystals are mounted onto ceramic oscillator substrates using high speed pick and place machines. O P

Temperature Testing

The oscillators are then 100% tested in Q R proprietary temperature chambers which measure the oscillatorâ&#x20AC;&#x2122;s frequency stability characteristics over a wide temperature range. In high volume TCXOs a small amount of memory inside the oscillator is loaded with individually calculated information which enables the oscillator to remove most of the crystals natural frequency variation. Rakonâ&#x20AC;&#x2122;s proprietary process enables high volume GPS TCXOs to achieve an accuracy of better than 0.1 ppm at a very low cost. Other techniques for compensating the oscillator can be used to achieve either higher precision or lower costs depending on customer and product requirements.

Final Test and Packing S The oscillators must pass a fully automated 100% electrical and visual inspection before being loaded into reels and shipped to the customer. T

22 rakon Shareholders letter 2010

Global presence

EUROPE

ASIA/PACIFIC Tokyo, Japan

Lincoln/Harlow, UK

Taipei, Taiwan

Design and manufacturing of TCXOs and advanced technology products and European Market and Customer Support

Penang, Malaysia Seoul, Korea Shenzhen, China Beijing, China

Argenteuil, France

Shanghai, China

Design and manufacturing of crystals and OCXOs, Market and Customer Support

Bangalore, India Joint Venture with Centum Electronics

Mannheim, Germany

NORTH AMERICA Chicago, IL, USA Los Angeles, California, USA HEADQUARTERS Auckland, New Zealand Design and manufacturing of crystals and TCXOs and Market and Customer Support

KEY 2 0 1 0

Market and Customer Support

170 0

005

013

Manufacturing

Staff (including Joint Ventures)

Manufacturing plants

Market and Customer Support Offices

Centum Rakon (India) 215 Timemaker (China) 880

Update on Rakon Chengdu, China

Rakon is working hard to establish a significant manufacturing base in Chengdu, China. Chengdu is approximately a two and a half hour flight north-west of Hong Kong. This project incorporates 3 main sub-projects:

1. Build a Factory: Key Building Facts: Land size:

135 m x 128 m (4.3 acres) Approximately 17,000 m2

Building size:

100 m x 90 m (9,000 m2)

Floor Areas: Office Area:

Factory 9,000 m2 2,500 m2

Total Floor Area: 11,500 m2 The building design will be completed in June. Construction will commence in July 2010.

2. Establish Production Capability: Key production capability facts: Initial production capacity of 5,000,000 crystals per month, with space to expand this up to 30,000,000 per month as demand dictates. Oscillator production capacity of 5,000,000 to 15,000,000 per month is planned, although production will not be available until phase two of the project in 2012. This will complement our New Zealand production capability. Equipment will be installed and commissioned during February and March 2011. Qualification of the equipment and production processes should see product rolling out from our Chengdu production lines by June 2011. 3. Build an Organisation:

Chengdu, China Joint Venture with Timemaker Crystal Technology

Approximately 400 employees will be employed in the Chengdu factory when it is fully operational. To build an organisation, we need to recruit and train these staff, while at the same time we need to develop the business processes required to run the operation. Currently Rakon has 10 employees in Chengdu. It is anticipated that the building will be completed in December 2010. Some staff employed in the Chengdu factory will be trained in New Zealand. In addition to the Rakon Chengdu factory, Rakon is working with Joint Venture company Timemaker building on a 16,000 m2 site adjacent to the Rakon Chengdu factory. Plans are underway for the construction of buildings for Timemaker covering a footprint of 8,000 mÂ˛ with a total floor area size of 16,000 mÂ˛ (over multiple levels).