Baylin Technologies Inc
TSX:BYL
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Baylin Technologies Inc
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Good morning, ladies and gentlemen, and welcome to the Baylin Technologies first quarter 2022 financial results conference call. [Operator Instructions]
I'll now turn the call over to Mr. Daniel Kim, Executive Vice President, Corporate Development of Baylin Technologies. Please go ahead.
Hello, and welcome everyone. Thank you for joining us this morning for the first quarter of 2022 earnings conference call for Baylin Technologies. On the call with us today are Leighton Carroll, Chief Executive Officer, Dan Nohdomi, Chief Financial Officer; and Cliff Gary, VP of Finance. We will all be available for questions at the end of the presentation.
Before we begin, let me make it clear that our comments today may include forward-looking statements and information and answers to questions that could imply future expectations about the prospects and financial performance of the business for 2022 and could include the use of non-IFRS measures. These statements are subjects to risks, uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made or information provided today. So you should not place undue reliance on them. We also do not intend to update forward-looking statements or information except as required by law.
I ask that you read our legal disclaimers and explanation for the use of non-IFRS measures 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 annual information form for the year-end of December 31, 2021, and our filings, which are available on SEDAR. Our Q1 2022 results were released after market closed 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 the call over to Leigh.
Thank you, Daniel. The first quarter continued to show signs of improvement in our business despite the obvious challenge with global supply chains and the impacts of COVID, particularly in Asia and obviously in China. We will provide additional detail about each of our businesses lines later in the presentation.
But I'd like to highlight the following, adjusted EBITDA for the quarter was $0.2 million, the second consecutive quarter of positive adjusted EBITDA since the third quarter of 2020. Adjusted EBITDA in the first quarter of 2022 was an increase of $2.5 million compared to the first quarter of 2021. The increase in adjusted EBITDA is primarily due to an overall increase in revenue and gross profit that Dan will discuss further. Operating expenses were higher. In Q1 of 2021, approximately $1.8 million -- actually $1.9 million in government COVID incentives were received. These were recorded as a reduction of the cost of sales and operating expenses in Q1 of '21. And obviously, we received no COVID assistance this year. Taking that into account, and obviously as a result of that, this is a positive swing of $4.3 million in adjusted EBITDA year over year, $2.5 million plus the adjusted $1.8 million, $1.9 million of government assistance.
Our backlog at March 31, 2022, it continues to be at historical highs, $38.2 million. In April 30, it was at $39 million. So we are seeing the same momentum despite the increase in revenue. The backlog Satcom continues to grow while infrastructure saw a substantial backlog growth in Q1 to its highest levels in its history. Satcom, to be sure, is seeing our business capitalize on multiple tailwinds successfully, while the infrastructure side is a testament to the revisions and our go-to-market strategy, coupled with the quality of our engineering and products. Incidentally, the mobile business is at a level consistent with historical performance, while the embedded line continues to have a very strong order book. Overall, this translates into our backlog at March 31, 2022, increasing by $17.7 million or 86.2% year over year. The improvements in our go-to-market strategy, business development and sales activities, coupled by the great work by employees of our business led to this accomplishment.
On March 31 of this year, we announced that our Galtronics USA subsidiary has been fully approved by a Tier 1 North American carrier to sell its [indiscernible] in-building stadium and venue infrastructure products throughout the United States. Galtronics is now fully approved at all 3 of the big 3 U.S. carriers for these types of installations. This allows the Galtronics sales team to sell directly into each of these carriers on a national basis, but it also means that employees of these carriers are able to choose Galtronics for their projects and purchase our products through their internal purchasing systems. It's a nice milestone for the business.
On April 11, we announced that the Galtronics subsidiary received a purchase order of CAD 700,000 from a U.S. carrier for its macro tower antennas, the largest macro tower order that we've had to date. Galtronics macro antennas are comparatively lightweight and can support capacity and throughput requirements for carriers. And the combination of this, the carrier chose 3 models that support low and mid-band requirements for LTE and their eventual rollout of 5G. We were very excited obviously to see this development and it's a testament to the quality of our engineering and product and what our customers think of us.
On April 20, we announced that the same Galtronics USA subsidiary receives its first in a series of expected orders from a smart city solution provider who has partnered with a Tier 1 carrier to deploy small cell antennas on streetlights. So if you think about streetlights and small cells, most times in major cities, small cells are a big round thing sitting on a pole or they're on the side of the building and in certain jurisdictions, that's not permitted. Well, they have street lights on poles. Those are fine. This effectively allows the carrier to replace streetlights with a streetlight with a small cell embedded with a radio unit. And the cool part about it is we expect decent velocity on this in certain jurisdictions and all of the antennas that go into those are made by Galtronics.
Finally, our Satcom business has also had some very nice wins. Satcom was awarded a multiyear contract for SSPAs, which are solid state power amplifiers, to a U.S.-based sports video broadcasting company, which is going to be upgrading their fleet of hundreds of mobile satellite communications trucks, I'll let you ponder what the name is; awarded a multi-year contract from a major Latin American customer for SSPA for a military radar system; and received a substantial order from a major telco, over 100 SSPAs and over 100 frequency converters for a network that provides communication links between schools, post offices and other U.S. state government facilities, many of which are in the rural parts of the Lower 48.
These placements with key customers are testament to the work by our engineering and production teams and the quality of our products that are tested to ensure they meet our customers' very high expectations. And look, it's ultimately the culmination of the work done by our teams in Ottawa, Montreal and Tempe and across the United States. Innovative products are clearly in need and Galtronics is well positioned. With that, Dan -- well, actually Galtronics and Advantech, excuse me.
Dan, with that, I'm going to turn it over to you. Dan, our CFO.
Thank you, Leighton. I'll begin with a summary of our first quarter results. Revenue was $31 million in the first quarter of 2022, an increase of $7.5 million or 32% compared to the first quarter of 2021. This increase was mainly due to stronger sales across all of the business lines despite shortages and supply chain issues, which continue to affect the company today. Revenue in the first quarter of 2021 was negatively impacted by the pandemic supply chain disruptions and chipset shortages.
Gross profit was $8.1 million in the quarter, which was an increase of $4.5 million or 124% compared to the same quarter last year. Gross margin was 26% in the quarter compared to 15.3% in the first quarter of 2021. The increase in gross margin was attributable to improved product mix as a result of changes in pricing strategies as well as a data-driven focus on contribution margin at the business line level. The increase in gross margin in the first quarter of 2022 included improved gross margins generated by the Asia Pacific business line and positive gross margin earned on a consumer product for a major customer, for which it had earned a negative margin in the prior year period. The increase was also due to strong revenue in the Satcom business line and growth in the embedded antenna business line.
Adjusted EBITDA for the first quarter of 2022, as Leighton mentioned, was positive $0.2 million, the second quarter -- second sequential quarter positive adjusted EBITDA, and as Leighton mentioned, previously, a $2.5 million dollar increase compared to the same quarter in the prior year. The increase was primarily due to the overall increase in revenue and gross profit mentioned earlier, partially offset by higher operating expenses as government incentives received in a prior year period were accounted for as a reduction of cost of sales and operating expenses.
Net loss for the quarter was $3.1 million compared to a net loss of $8.5 million in the same quarter of last year. Net loss in the first quarter of 2022 was primarily due to an operating loss, partially offset by the income tax recovery. On a per share basis, the first quarter of 2022 produced a net loss of $0.04 per share compared to a net loss of $0.17 per share in the same quarter of 2021. Net cash as at March 31, 2022 was $2.3 million, a decrease of $6.6 million at the beginning of the quarter, primarily due to investment in working capital, principle and interest payments and CapEx.
As for our credit facilities that we have with RBC and HSBC Bank Canada, as disclosed previously, the credit facilities were extended from March 29 to September 30, 2022. We are very grateful for our lenders continued support of our business, and the extension will provide us with additional time either to renew the existing credit facilities when they mature or define alternative credit facilities. We are currently in discussions with several prospective lenders and advisers for that purpose, and we're also very thankful for the good help that our advisers are providing and good counsel.
Finally, I'd like to update you on the situation with our consumer product program in the Asia Pacific. As mentioned during our last quarters conference call, we substantially improved the economics of the product in mid-August of last year at which time we seek to lose money on the product. We're pleased to report that we earned a positive gross profit on this product for the first quarter of 2022, the second quarter -- second consecutive quarter positive gross profit for this product that we expect to substantiate wrap up in Q2 of 2022.
With that'll I'll now turn it back over to you Leighton.
Thank you, Dan. As I alluded to in our opening remarks, we have a lot of things that are working well for the business. Obviously, revenue being this far ahead of where the company was last year, gross profit being $4.5 million or 124% better are all very important. A lot of this, though, is about where we're going and what customers think of us, particularly given the challenging period that we had been through.
In my mind, nothing speaks more to what customers think than where they place their money and when they use their wallet. In that regard, seeing our backlog at the end of Q1 at $38.3 million, a $17.7 million increase over the prior year, led by our Satcom and infrastructure lines, with strong performances from our embedded and continued consistency in performance from our mobile line, I'm very proud of the work the team has done.
I did want to thank the employees of Baylin for the hard work. I continue to be grateful for the level of commitment and engagement of all of our people across the world. As I mentioned on many occasions, part of our turnaround strategy has been to implement a data-driven transparent culture to drive accountabilities internally while having a strong customer commercial focus. Obviously, the concept is it allows us to identify and resolve the issues more quickly, work collectively to solve problems, et cetera. The fun part about it for me is when we implement better reporting, better operational visibility and empower people across the business to own their own decisions and to have the data help them identify problems, look at our efficiencies and improve on their own. You catch people exhibiting the right behavior. That's the bit to me that demonstrates a change is in the culture and that the business is going in a very positive direction.
Leveraging the quality of people, the strength of our engineering and our manufacturing, and through developing our innovative products, we are seeing the fruits of our labor, not just in revenue, but in our order book as well. What's interesting about the positive performance is that this has been despite some obvious challenges. I think everyone in the world has heard about chipset shortages, supply chain disruption and has seen video of the COVID lockdowns in China. Across all of our businesses, we have seen these things and these exact items that I just walked through absolutely have impacted our business. And yet, despite this, we are continuing to drive good performance in the business and seeing our future look strong. As I tell people in the business, you can't say the dog ate your homework, you can't say it was raining or it snowed outside, we have to get our job done.
And so yes, there are challenges with supply chain. Yes, there is a COVID lockdown. Yes, there are component shortages, but we have to keep moving forward and get this business to where it ultimately can be. We continue to monitor the war in Ukraine into the potential effects on our business. And although our direct exposure to customers in Russia and the Ukraine are minimal, there may be direct impacts in our business, particularly in terms of supply chain and commodity prices. Thus far, impacts have been negligible in our view. I would also like to say our hearts go out to the population of Ukraine, and in particular, the refugees who have fled the conflict.
Now I'd like to speak about our businesses and the work that is going on with each. In our embedded antenna line, it continues to demonstrate strength and will likely do so into the third quarter -- minimally the third quarter of this year with continued year-over-year growth, due in part to demand from new customers from home networking products. This continues to increase in revenue and volume from the second half of 2021 and the first half of 2022, despite global chipset shortages that are impacting our in customer's ability to build and have an appropriate schedule and forecast. The embedded antenna business continues to demonstrate a strong order book. And I would actually like to pause and thank the team, both the North American leadership for manufacturing as well as our teams in China, who are -- is where our factory is for the embedded line. They have done a remarkable job managing the supply chain issues, in managing the challenges with the lockdown and still continuing to see production velocity.
The wireless infrastructure business has achieved -- to be honest something I'm very proud of is the achievement in backlog says about where we're going. The business had been historically kind of at a low level of a consistent level of backlog and had really good products. Well, we are now seeing significant order activity in part, because we are penetrating new customers and in part, because we are continuing to innovate with our products. Further, we expect that deployments will strengthen over time, particularly as people return to the office and there have been many upgrades, particularly in terms of newer technology like 5G that had been delayed due to the pandemic. We are also launching several new antennas over the course of Q2 and Q3. And one antenna I would like to speak to is we have a multi-beam macro based station antenna that we feel is an area of competitive advantage. Similarly, our innovative small cells from Galtronics will see further development this year, opening new opportunities to drive sales to carriers.
The Satcom business line, the commercial side continues to show strength and is in a very different place than it was say a year ago. We expect military and other government related users, which represent the bulk of the Satcom business, to continue and potentially increase in late '22 to '23. As we all know, many Western countries have increased defense spending. Moreover, I'm very excited to see the launch of multiple high -- excuse me, multiple innovative upgrades in our Satcom product portfolio we have scheduled for this year. The engineering teams in Advantech and the production teams in Advantech have been doing a terrific job moving the ball forward, and I'm looking forward to see their continued evolution.
Overall, we expect the Satcom business line to be much stronger this year, as the investments in technology upgrades, and in many cases, the -- we're investing capital into Montreal to improve our throughput and improve our efficiencies and capabilities. This gets me excited because where we are is not where we're going to be. And the next part is then demonstrating higher year-over-year revenue while continuing to grow their order book.
The mobile business line Q1 saw continued improvement. Not only is our backlog remain consistent, but we added additional operational financial reporting capabilities that is allowing the team to better pinpoint and address issues while improving the overall cost control within the business. We have also won several key, major high-end phones antennas, which will go into phones for our customer in Asia. We are continuing to review our product portfolio with a view to right sizing the product mix. And this of course will be ongoing. The product rationalization is intended to improve the bottom line, even if it is the expense of overall top line. At the end of the day, if the total on the bottom is improving, that's good for our business and that's the focus.
The MMU facility, in March of 2022, we announced as a result of the long-term options available for Vietnam, we determined to liquidate the assets. Actually, we may have mentioned that prior to March of '22 now that I'm thinking about it. We are continuing to work on selling the legacy equipment and are in active discussions with potential tenants and partners to take the facility or leverage the facility for our benefit. We expect to bring this situation towards resolution by Q3 of this year.
I would like to take the time, once again, to thank the people of our company and our businesses. As I've said in the past, I believe we make great products that our customers need. We are investing and we are innovating. I want to -- I would like to thank our investors and our Board for standing behind us and allowing us the opportunity to fix the business. The proof of all of this effort and the results of the efforts of our people is seeing the company backlog grow to the highest levels in the history of the business while simultaneously the revenue is growing within the business. That's pretty cool. There remains a lot to be accomplished, but I am proud of our people and the substantial progress that continue to make months-over-month, quarter-over-quarter.
That concludes our formal remarks. Operator, we are pleased to take questions.
[Operator Instructions] Your first question comes from Andy Nguyen with Raymond James.
This is Andy on for Steven Li. Could you give us some more color on the progress you made on the refinancing? Have you received any term sheet? And how many lenders are you talking to?
Yes, thanks, Andy. Great question. So I think there are 2 halves of the coin to be discussed. So first of all, as Dan mentioned, we are very thankful to RBC and HSBC who are the banks that we work with for their work through us through a very challenging period. At the end of the day, we are continuing to talk to them and the door is not closed for further extension of the North American credit facility. So I'd like to just make sure that we put that on the table that this is not an exercise just to move away, but it's an exercise to do the best thing on behalf of the company and we will assess that as we go down this process.
Now obviously given the challenges in the business and that we're not at an adjusted EBITDA level that I am satisfied with, or that will be appropriate for Charter Bank at least at this point, I'm fully confident we will be, we need to look at other alternatives. And to that end we have chatted with, oh geez -- I think overall it's a bit of a dating process when you do this. We've talked to a few dozen Canadian institutions and have had continued conversations with them. And by the way, one of the biggest things to manage to having confirmed interests in the term sheets, just as you were asking, is they need a track record and coming out of the first half of 2021, the business didn't have that.
We are starting to develop that. We are starting to see multiple quarters of adjusted EBITDA positivity, and certainly the backlog speaks for itself. So with that in mind, we are still talking with multiple parties in Canada. In addition to that, the company hired an investment bank in the United States and thus far we have - make sure I'm getting the number right. We have 26 discussions underway with another 18 pending. So we are about to enter a very active period where we are looking at the best financing options for the business, whether that's extending the RBC, HSBC facilities in North America or whether that is looking at a third party or even other alternatives. This has been an active discussion internally and is a major focus for review, as you can imagine.
Got you. And I have another question on the lockdown in China. Could you give us some more color on how much impact is it on your productions? And can you move the production if the current lockdown continue to persist?
Great question. So I'll give you a couple of concrete answers. So the lockdowns, which persist, in terms of their impact on the industrial side of China and obviously continuing to have the manufacturing throughput is critical to the Chinese. They value that greatly. What we've seen is certain cities in certain areas would be shut down and it would almost [ roll ]. And there's a huge testing regime in China.
So here's a very concrete example. We had multiple suppliers in a city, not Wuxi where our factory is, in a city called Kunshan. And those factories for those suppliers were shut down as part of the Chinese lockdown for a period of time. In this case, we didn't need their factories operational. We needed them to be able to provide us inventory they had in their factories. And so literally there were periods where we would talk through, hey, if we don't get these materials in, how many products would be impacted and when would that happen and can we use pivot what we have within our facility, which is still operational and produce other products that are in our pipeline for customers that we have high confidence that will turn or there is a hard customer order for it.
The good news is, and this is where I complimented the team in China, they have been creative, I won't give you the play by play, but thus, far they have managed through it. Of course, we do have issues with employees, depending on where they live, being in a lockdown area and unable to get to work. But overall, the team has done a tremendous job, and we have been able to continue to throughput. I would tell you, as an example, April was probably the month where we saw the most tightening in terms of production velocity, but the demand is there. And customers -- again, the dog doesn't eat your homework, get it done. And our teams are going and going hard and continuing to produce at significant volumes, particularly as we get into May.
Your next question comes from Daniel Rosenberg with Paradigm Capital.
Leighton and Dan, congrats on the improvement that we saw this quarter. My first question was around profitability. So you were able to stay positive here. I was just wondering, is this kind of a new level for you or around this mark? Obviously, there's some moving parts to the business, but how should we think about your ability to improve profitability or maintain it as you work through these macro challenges as well as just the general business volatility?
Yes, no great question. So it's interesting, when we put together our plan for the year, we actually assumed that Q1, based on typical seasonality, what we're seeing and what we know from customer demands, we actually assumed it would be a lighter quarter, and that actually proved not to be the case. Of course, every quarter, every month has its own unique challenges. From our perspective, as we continue to grow revenue and that's a bit of the trick there. If you are growing your revenue and we are able to maintain cost deficiencies and manage through the supply chain side of it, meaning the cost of supply chain in many cases, then as revenue grows, profitability will obviously improve because you're out running your fixed cost structure. It is entirely true that we have seen component prices, raw material prices increase.
In fact they have been in an elevated level really throughout much of 2021, and that continues. We do not always have the ability to pass that through to customers. At the end of the day, there are no excuses. We don't allow excuses within the business, we have to perform, which means, okay, how do we make it more efficient? Can we redesign the process? Can we improve our yield rates on what we're manufacturing? This is a great example of a lot of the things our team in Asia is doing right now to help us achieve the bottom line results. And then it becomes a question of looking at the efficiencies overall.
By the way, Daniel, I'm going to apologize. I realize I didn't answer one key facet of Andy's question that I think may be interesting. One of the things we have been doing within our business given geopolitical risk is looking at manufacturing diversification. As a result of that, I don't foresee us ever leaving China. The manufacturing capabilities and the ecosystem are obviously world class, but one of the things we are doing, and this kind of comes back to a supply chain and constraint discussion in some respects and the cost we deal with on that side, we are looking at placing some products out of our embedded line, things that we think are low risk, the kind of proverbial dip our toe in the pool, into countries like Malaysia and Vietnam, where we have confidence either in the suppliers or we can build it within our own facility in Vietnam.
Similarly, we are looking at infrastructure products and having the opportunity to move it into adjacent countries to better diversify the manufacturing base, both to mitigate risk, but also selectively to manage the cost.
Okay. I appreciate that. And then in terms of the macro front, it sounds like there's a lot of tailwinds or just improvements as we kind of come out of COVID across all divisions. So I was wondering in terms of -- you spoke a lot about innovation and continued evolving of the product. Are you able to -- does this require incremental investment? Or are these kind of bolt-on-type things that you're able to add onto the current product suite as it exists today?
So good question, and I'm going to bifurcate a little bit. So within our infrastructure division, I would argue our engineering is able to continue within what I would call a steady state view of our R&D. And so we're not pouring tons of money into it, but through the talent and leadership of the engineering group, we have been able to develop several innovations that our customers are really resonating with. And by the way, for me, one of the things that I love to talk about because guess what, it's -- these are patented innovations, which means it gives me a durable area of strength. On the Satcom side, we obviously had, in our past, acquired a couple businesses, good businesses with legacy technology. But now we are upgrading and developing based on where we've been to a whole new suite of products.
And there's 2 kind of important components on this. One is innovation in architecture. And secondly, there's a serious, serious view on manufacturability because if you can have components that are consistent, you can have a better idea of your materials, you have better consistency. The manufacturing processes become more streamlined because even though they're at different power levels, it's a fairly consistent process. There's a lot of work being done in that on the engineering side. But in Satcom, this isn't a, hey, I thought of it on Tuesday, and we're going to produce a product on Thursday. The level of work that the team has put in has taken a substantial amount of time, and it is going - and I'm actually fairly excited about it when we're able to bring this out and open up the proverbial curtains and share some of the things that we've been up to, but this has taken purposeful expense in dollars, but this has been planned for, it's been part of our roadmap and I'm looking forward to see these coming out later this year.
And maybe one for Dan just on the working capital front. So inventories, receivables, there are some moving parts here. But as you look to the coming quarters, could you give us a sense of -- does the working capital position improve, stay at similar levels? How does it unfold?
Great question. Thank you for that. Yes, you're absolutely right. It's -- the way that I think about what we saw in the first quarter was that there was that investment. We anticipate working capital levels to return and to sort of more normalized levels through Q2, Q3. And so the cash use won't be as significant.
Okay. Thanks. And then the last one for me, Leighton, could you just comment on the infrastructure side? I mean it was great to see that spending come back, and you guys seem to be in a position to benefit. Could you just comment on kind of anything regarding the customer dialogue that you're having with 3 carriers? We saw that $700,000 deal signed press release. Just any color to give some context around the opportunity.
Yes. So I would tell you infrastructure is probably the business that was -- aside from the obvious supply chain manufacturing side, would've been the least impacted by COVID from a customer demand perspective historically. And I'm saying this from my prior iterations where I've been in that space, and I've seen the investment cycles of the carriers, as well as the broader ecosystem. Our business launched several products over the course of 2021 that were very solid products and historically had been very, very strong in small cells. The trick was twofold. One, getting the status, and then the proof, if you will, with carriers. Because when I walked in, the status was nascent with one of the carriers and the status was not really fully there with another. And the team has been working at addressing that and did a tremendous job. And then the quality of the engineering, the products start to prove themselves and then it starts to become a little bit of a virtuous cycle.
And that's part of the story, but that's not the only story. Another major portion of the story is the go-to-market strategy, meaning that business, if you think about it, it can't always just be a carrier-focused business because the wireless carriers don't all have great balance sheets and aren't going to fund all the capital for wireless infrastructure that the world eventually needs. A lot of in-building wireless will be third-party owned. A lot of in-building wireless will be tenant owned. How do you tackle those markets? What's your go to market to deal with the guys like the Crown Castles and the American Towers and such?
And there's lots of people in the infrastructure industry. How do you deal with the venue guys and the in-building wireless guys, the Boingos, the [ Mobilities ], the ExteNets of the world? By the way, what is our international sales strategy outside of North America? So there has been a lot of work and will continue to be a lot of work to look at our go to market strategy and most importantly, play to our strengths. We're not going to be everywhere in every use case, in every market that would be foolish. We would spend a lot of money chasing that. But how do you lever what we're great at into the places where customers have needs and maximize that value both for our business and for our customers? And that's really been the approach. And I feel that we're starting to see some of the early fruits of that labor.
Okay, great. Congrats again on the improvement and look forward to seeing more.
There are no further questions at this time. You may proceed.
Okay. Well, first of all, I want to thank the employees of our company for a great quarter. As they know, we don't rest on our laurels. We have a lot more to do. We have a big book of business that we need to fulfill, and we need to keep that book rolling. So good things are happening. I'm very pleased. And obviously, as we've talked about while the business is healing, dealing with the situation with the creditors remains front and center for us, and it's something I look forward to resolve. With that, I thank everyone for joining us and appreciate the time.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.