Baylin Technologies Inc
TSX:BYL
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Baylin Technologies Inc
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Good day, and thank you for standing by, and welcome to the Baylin Technologies Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions] I will now turn the call over to Mr. Daniel Kim, Executive Vice President, Corporate Development of Baylin Technologies.
Good morning, and welcome, everyone. Thank you for joining us this morning for the first quarter 2021 earnings conference call for Baylin Technologies. Joining me is our President and CEO, Randy Dewey; and our VP of Finance, Cliff Gary. We will all be available for questions at the end of the presentation. Before we begin our report, let me make it clear that our comments today will include statements and answers to questions that could imply future events, such as our 2021 prospects and financial performance and could include the use of non-GAAP measures. Though it is obvious, these statements are subject to risks, uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made today so do not place undue reliance upon them. We also disclaim any obligation to update forward-looking statements except as required by law. I ask that you read our disclaimers and refer you to the risks and assumptions outlined in our public disclosures, in particular, the section entitled forward-looking statements and risk factors in our AIF for the year ended December 31, 2020, and our other filings, which are available on SEDAR. Q1 2021 results were released after market yesterday, the press release, financial statements as well as the MD&A are available on SEDAR and on our website at baylintech.com. I would now like to turn over the call to Randy.
Thank you, Daniel. Last quarter, we suggested to you that despite the ongoing challenges presented by the pandemic, we were continuing to see promising signs of recovery. As we entered the quarter, our optimism was fueled by our improving backlog and positive momentum on previously delayed projects. We also highlighted a number of macro factors that were playing in our favor such as the reopening of cellular stores in North America and Europe, picking up on cruise ship activity, stadium cellular upgrade programs had recommenced. Finally, with the completion of the much delayed C-band auction, there was expectation of a pickup in capital spending with U.S. wireless carriers. While we still stand by these positive developments, the road to improve financial results is rebounding more slowly than we had hoped for. Unfortunately, this translated into lower-than-expected first quarter financial results. All areas of our business have been negatively impacted by the pandemic and new initiatives such as our massive MIMO factory in Vietnam continued to be impacted by travel restrictions. This pandemic had a continued significant impact on revenue, sales mix and margins in the first quarter of 2021, particularly for the infrastructure and SATCOM business lines. The infrastructure business line saw a slower-than-anticipated recovery of its products, but nevertheless, received approval from a Tier 1 carrier to manufacture 2 types of base station antennas, which will benefit the business line in future periods. SATCOM business line saw the carryover effects of COVID-19 from the fourth quarter of 2020 on their revenue but experienced stronger order intake in the first quarter of 2021, finishing the quarter with a robust order backlog. In the fourth quarter of 2020, the Asia Pacific business line was awarded a contract to produce a consumer product with an RF component. This award represented an opportunity to diversify its business into a new product category, although the product satisfied the customer's technical RF specs, the final product was not found to be acceptable as a retail product, resulting in significant customer returns. We, therefore, made the difficult decision to exit this business, incurring a loss of $2 million in the first quarter of 2021 on this product category, but a smaller number of components remain to be shipped in the next few months. I'd like to turn the call back over to Daniel to provide more commentary and details on our financial results. Daniel?
Thank you, Randy. Revenue was $23.5 million in the first quarter of 2021, a decrease of $3.4 million or 12.9% compared to the first quarter of 2020. SATCOM had the largest percentage of revenue decline by -- followed by infrastructure and then Embedded. APAC revenue enjoyed positive double-digit year-over-year growth. It was the only business unit to enjoy positive growth in the quarter. Lower than budgeted revenue combined with the less favorable revenue mix in the first quarter compared to the prior year resulted in lower gross margin of 15.3% compared to 31.9%. Also contributing to the lower gross margin in the first quarter was the aforementioned manufacturing issue with one of APAC's platforms, which began in Q4 and will terminate in the second quarter. Excluding the loss generated by this one APAC platform, the company's gross margin in the first quarter would have been $5.6 million. Due to a continued focus on cost reductions, operating expenses in the fourth quarter decreased by $2.6 million or 22% compared to the first quarter of 2020. A portion of the decrease was due to government stimulus received in Q1 through various programs. The Canadian federal government extended the wage subsidy program in September 2021, and we expect to continue to receive those subsidies in Q3, albeit at reduced amounts. The financial impact of COVID in 2020 on the Advantech and Alga businesses added to the already prolonged integration path, which is nearing the end of that effort, but has impacted the recent financial performance. We expect to see improved results and performance as we believe these 2 business units are capable of. Net cash as of March 31, 2021, increased by $1.4 million from December 31, 2020, mainly due to the proceeds from the exercise of common share purchase warrants issued in December 2020, and the drawdown of the Vietnam loan offset by principal and interest payments, cash taxes and loss incurred on a customer product and the APAC business line. Our lenders have agreed to an amendment to our credit agreement, which includes removing the senior debt-to-EBITDA ratio for the remaining quarters of 2021 and adding trailing 12-month EBITDA thresholds for September 30, 2021 and December 31, 2021. The availability under the revolving credit facility was reduced from $13 million to $10 million and the minimum liquidity requirements was also reduced by $3 million. The amendment includes a waiver of compliance with the senior debt-to-EBITDA ratio and fixed charge coverage ratio for the quarter ending March 31, 2021. As a result of the non compliance, the $14.1 million long-term portion of the term loan was classified under current liabilities. Capital expenditures were kept to a minimum in the first quarter of 2021 with spending of only $190,000 in an effort to conserve cash. I'll now turn the call back to Randy.
We have not lost any customers or orders, but the softer period has affected the business on a short-term basis. Our focus continues to be on securing new orders and longer-term contracts while continuing to implement the cost-saving initiatives that commenced in the fourth quarter of 2020. As COVID-19 slowly loses its grip on our end markets, we expect we will see sequential growth and improved financials quarter-over-quarter for the remainder of 2021. The outlook for the wireless infrastructure business line for 2021 has improved for several reasons. First, completion of the 5G spectrum auction in December 2020, which will spur new investments across our carrier partners. Second is several projects delayed in 2020 are now scheduled for 2021. Third is new carrier supplier status wins for small cell for which revenue commenced in the first quarter of 2021 and last, base station antennas with a Tier 1 North American carrier. The outlook for the Asia Pacific business line for 2021 has also improved due to the pent-up demand across numerous customer segments, resulting from the COVID-19 lockdowns in North America and Europe in 2020. And furthermore, Asia Pacific has secured additional key model wins with its key customers and likewise has aggressively pushed into other product segments, such as tablets and laptops. The Embedded Antenna business is expected to continue to perform well in 2021 with gross margins expected to improve through the balance of 2021 due to a capital investment, which will automate a portion of the manufacturing process at one of its highest volume products. The increase in consumer demand for Wi-Fi 6 products, coupled with recent platform wins in this market, has this business line expect to grow in 2021. The SATCOM business line has been directly affected by the severe downturn in the airline and cruise ship industries. Although there are signs that recovery may occur in the second half of 2021 by contrast, we have seen a significant increase in military proposals and contract wins to new and existing customers for large opportunities that are expected to commence shipments in the first half of 2021. The launch of our new Summit Series II solid-state power amplifier has achieved early success with a key customer win. This platform has -- it was an enormous undertaking for our team, and we now expect to deliver our first system in the second quarter of 2021, with other awards expected to be delivered soon afterwards. We believe that there is no other platform in the market that can perform and deliver the type of capabilities our Summit Series II can, and it will open up multimillion-dollar opportunities in both GEOs domain and the rapidly emerging LEO constellations. Completion of our new Massive MIMO facility in Vietnam still remains a challenge. We continue to experience delays in final commissioning and approval of the facility, principally due to the effect of COVID-19 related travel restrictions that, together with softer demand in the MMU sector means the timing for volume production of the facility remains uncertain. That concludes my formal remarks. Operator, if we could open up the line for questions.
[Operator Instructions] Your first question comes from the line of Bill Zhang with Raymond James.
I wanted to start off with -- in discussion here. The 2 base station antennas from the Tier 1, do you guys have a timeline for that? Any additional information, that will be great.
We've just been approved by the Tier 1 carrier. We will commence, obviously, the efforts in the second half of the year, we expect to be in that business. It's too early to give you any guidance on that point. But obviously, we don't typically give guidance, but this is a significant step forward. We've been classified and in building DAS. We've been classified -- sorry, approved supplier for those categories, we've never reached the status of base station antenna. So this is a new sort of territory for us, which is great opportunity, and we are expecting to, to provide more details on that in the future quarters in the reports, but it is early days, but it's a significant milestone for us to have achieved.
Bill, I would add here as well in terms of commentary. Because we were very strong in small cell, we did extremely well with that arena and had a terrific market share. Now that we have a base station antenna that will help feed on itself because projects that we may have not been able -- had an opportunity to bid on because we did not have a base station solution. We will now be invited to the table. So it does have a bit of a synergistic benefit between our 2 platforms.
Okay. Yes. No, that's fair. And then given the pandemic, obviously, the timing around the MIMO project, I think that's uncertain. I know previously, you mentioned a start in Q2 and production in the second half. Is it safe for us to assume that kind of line has been deferred at this point?
So it's been -- we know after the last 4 quarters, we've been feeling as though we were close to getting the travel restriction issue resolved, and we've come up against difficulties for the last 12 months running here. So we have optimism that we'll get the final pieces of the factory certified and completed in the next quarter here. But I'm hesitant to commit to it because of just the uncertainties around the restrictions. We've had visas approved and flights booked. And then last minute changes in the position of certain governments, allowing certain other countries in and out of Vietnam. So it's been very difficult to have absolute certainty on the timing there. So we are hesitant. We haven't lost a customer. We still have a great relationship there. The volumes in the end markets are softer for them, obviously, but they're expecting that to start a robust return starting in 2022. So the need for the factory and the need for the types of products that we are expecting for make in that factory remains there. The relative recovery in that side has been longer than expected based on the the severity of the pandemic. And though we see the proverbial corner coming here. I'm just hesitant to make any commitments on that front because of so many delays that we've experienced in the last 12 months.
Bill, I would add one other point in terms of the macro environment. Because of the pandemic, industry volumes have dropped dramatically. As a result, there really wasn't much lost opportunity for us, which is a good news. The latest forecast that we've seen from industry research suggest that the market is going to rebound quite robustly in 2021, and that's when we hope we can take advantage of that.
Yes. Certainly, a lot of the moving pieces. I understand you. And then just the last one for me. It's around your -- being impacted this quarter. So I understand this is a special case, the $2 million of loss. Just wondering what the chances are? Or what is the usual ability for products that you work on? I assume it's fairly high in most cases?
Sorry, the line was a bit difficult to hear you. Bill, I know you're asking about the APAC business, but I didn't quite catch the nature of your question.
Right. So what is the usual sort of assessability rate for these products you work on. Because I know for this case, it wasn't sort of accepted for retail?
Yes. So this was an opportunity that we thought was for us to make 2 things. One, a diversification move as well as into a new product category that we were expecting it to be quite successful. And unfortunately, the opposite happened, and the -- we don't typically deal with consumer level specifications such as cosmetic issues and other sort of retail issues. We've always been a hardware company that's on the inside of devices. So this was the first area on the outside of the device. So unfortunately, for us, it was a very bad situation. And we've had since exited, and we are in the throws of the final pieces of that. But yes, it was a very hard and difficult experience for us in many regards. We thought it was going to be a great opportunity, and it turned out to be the opposite.
Your next question comes from the line of Daniel Rosenberg with Paradigm.
I was curious about the robust order backlog that you mentioned in SATCOM. How is that going to impact the gross margin profile as you did to sequential improvement for the balance of the year? Do you expect to get back to the 20% to 30% level that you've seen last year and above 30% in years prior?
Yes, we do for 2 reasons, Daniel. When we were in the fourth quarter, the order backlog and because of C-band and a number of other things, cruise ships and airlines, SATCOM experienced a very soft order booking period. Which translates, of course, in the following quarter to a softer revenue performance. And the SATCOM is, I would say, it's cost or it's fixed costs, aren't as elastic as some of our other divisions. So when volumes are down, margins drop as well. And we had a higher sort of configuration of passive components in our typical mix at SATCOM, so that sort of exacerbated the margin issue in SATCOM for the first quarter. So the first quarter, as I mentioned, the improved backlog is back to the core business, it's the amplifiers, it's the higher-margin product line. It's that, that we saw significant backlog improvement, which translates into revenue starting in the second quarter here. So and of course, with volumes up and with a better mix, we expect to see a margin improvement in SATCOM in Q2 and beyond.
And in the context of the customers who are showing demand for these products. Could you provide some color on kind of the evolution of those LEO, GEO satellites that you're seeing on the front line?
Sure. So the market has been changing over the last couple of years for sure and SATCOM, of course, LEO, which I'll mention in a moment. But for us, the move towards a systems approach and providing a a more value-added product in the form of a solution is that the heart of our Summit Series II product line that we've been developing, and we're set to launch our first product to market here this quarter. That for us is a significant opportunity because it shifts us into, as we were talking about larger military proposals, larger contracts, more turnkey solutions to our customers. So it has allowed us to shift into I would say, better programs, larger price tag. Of course, the ASP is not just an amplifier, ASP is now a solution ASP. So it's caused a couple of things. One, for us to get ourselves positioned into larger opportunities. As well as in military contracts are certainly great customers and great long-term relationships, which we've had before, but was more on the component level. Now on the solutions level that helps us shift into that. That said, also the evolution of LEO, it's still in its early stages, as you know, and we all see it in the papers, lots of the satellites are going up to start building out the LEO constellation. But it's really in the early days. The next 10 years is expected to launch an enormous number of satellites, which will build this new constellation, which is only a few thousand miles from earth versus the GEO, which is 22,000 miles from earth. So we are in a point -- where an interesting point in the evolution of SATCOM for the last 30, 40 years, there's been a heavy reliance on the GEO system. That GEO system has been the backbone of satellite communications for decades. This new constellation being so much closer to earth brings an enormous amount of new capabilities, and it's really going to provide 5G in the non fiber areas of the world, that type of performance, which is in some cases, could be interesting and how disruptive it is and as well, the amount of bandwidth and speed and latency that, that new system deals with. So interesting times. It's early days, mind you, early days, but there's Summit Series II in the work that we did was an investment in advance of what is expected to be a very significant satellite than SATCOM sector change.
Okay. And lastly, around the infrastructure line, the product approval by the Tier 1 carrier. As you win contracts around your antenna lines and around 5G build-outs. Could you help just describe the timing, when do we see the revenue? Is it a slow ramp into '22? What does that rollout look like?
Well, it's a combination of things. One, once you get the approval by the carrier, you kind of get yourself a hunting license, so to speak. And your sales team has to work with each of the engineering design centers of the carrier and start working that product into their engineering plans. So getting the approval status, it doesn't turn into revenue the next day. There's a quarter or 2 of work and effort. And then as you get specked into new projects and opportunities, then it turns into real revenue. So we're not giving much guidance on it impacting our results in Q2. But Q3 and Q4, we expect to start seeing revenue commence. And then as we -- as we start, of course, with the engineering plans of the carriers, are now starting to get, I would say, more fulsomely disclosed because of the C-band reallocation is now, I would say, almost fully complete and spectrum is moving from the SATCOM guys to the telecom guys and the telecom carriers are now receiving their spectrum and now starting to be able to deploy some of it. So we're in this -- in the final throws of that over the balance of this quarter. And somewhat a little bit in the next. But then the carrier build out plans are starting to come on the back of that. So lots of plans are underway right now for the usage of that spectrum. And C-band is what is capable inside of these macro antennas that we've been approved for. So as C-band gets deployed, these new C-band macro antennas that we've been awarded. We believe that the 2 fit well together, and we are expecting to be in the revenue in that product category this year, but it's too early today to give any sort of too much numerical guidance here on that.
Your next question comes from the line of Steven Li with Raymond James.
Randy, I missed part of the call, so you might have addressed this already. Do you need your massive MIMO factory online to capture the infrastructure opportunities you've discussed?
No. No, the Massive MIMO factory is specific for that Massive MIMO product. So the products that we've just been talking about are done in our factory in China. It's a separate manufacturing process.
There are no additional questions at this time. I would like to turn it over to Randy Dewey, CEO, Baylin Technologies for closing remarks.
Thank you, operator, and thank you, everybody, for obviously your patience. It's been obviously a very trying time in the last 12 months. The pandemic, of course, is starting to look like it's losing its grip, and we are certainly all very optimistic about that. We continue to drive our costs down and look forward to larger opportunities and as well as some of the positions that we've described earlier. Obviously, it requires some patience on your part. We really do appreciate that very much. And thank you, and we look forward to future reports. Thank you.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.