Baylin Technologies Inc

TSX:BYL

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Baylin Technologies Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 9, 2023.

I will now turn the call over to Kelly Myles, Director of Marketing and Investor Relations of Baylin Technologies. Please go ahead.

[Kelly Myles, executive]

Thank you. Good morning, and welcome, everyone. Thank you for joining us this morning for the third quarter 2023 Earnings Conference Call for Baylin Technologies. On the call with us today from Baylin, are Leighton Carroll, Chief Executive Officer; and Dan Nohdomi, Chief Financial Officer. We will 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 2023 and could include the use of non-IFRS measures. These statements are subject 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 of the use of non-IFRS measures and refer you to the risks and assumptions outlined in our public disclosures, in particular, the sections entitled forward-looking statements and risk factors in our annual information form for the year ended December 31, 2022, and our other filings, which are available on SEDAR.

Our Q3 2023 results were released after market close 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 Leighton.

[Leighton Carroll, executive]

Thank you, Kelly. Before I begin, I want to highlight the rights offering that was included in our press release yesterday. As part of management's continuing efforts to recapitalize and improve the balance sheet and materially reduce our North American debt, the company intends to proceed with the Rights Offering under which shareholders will receive the rights to acquire common shares of the company.

The number of common shares available for subscription and the subscription price payable on the exercise of the rights, as well as the timing of the Rights Offering in other terms will be determined and announced at a time of -- at the time of commencement of the Rights Offering, which is expected in the very near future.

We are grateful for the continued support of our investor and our principal shareholder, Mr. Royer, and after exploring raising capital in various forms, we concluded that the Rights Offering would be the fairest to all shareholders. We are also pleased to report that Mr. Royer, some of our Board members and myself personally will be participating in the Rights Offering.

Now to the third quarter, look, we're obviously disappointed with the results. They're not what we had envisioned. And it's interesting because that was despite having a number of wins and having a lot of momentum not just in terms of product development, but in terms of traction with customers.

It's been a really interesting economic cycle, and it's almost punctuated by each of the verticals our business operates in. Our pipeline is huge, which is interesting. It's -- literally, we're still sitting on a ton of backlog. Our pipeline is actually larger than it's been since I joined the company and yet we're having to weather a storm with what we're seeing kind of broadly.

And this is not unique to any one of our 4 verticals, but several customers have had pushouts and that factor has affected -- clearly have affected 3 of the 4 businesses. So with that, we obviously had challenges that we talked about in the second quarter. We saw them again in the third quarter. And while we were quite mad to mitigate them, unfortunately, we had a negative adjusted EBITDA, second quarter interrupting the company's run of 7 prior quarters.

The Mobile and Network business, it's an interesting story because, guess what, not a big surprise, our primary customers business is at a much lower volume. We have been working like mad within that business to do really 3 things, right? So that primary customer has said that in 2024, they are expecting their business, their Mobile business to start to revamp. Okay. So if we know this is the low time, we need to set ourselves up for where the puck is going. The nice part is we have won a number of new product opportunities with that primary customer for that Mobile business that will start showing up at the end of Q1 '24, which is a good thing, which means that the business is buoyant.

We've been working like mad to get this business to where it should be and feel confident that we've made some significant strides there. Number two, we have been taking cost out of the business, you end up in a tough environment like this, you have to reduce your cost structure, make up decisions and grind, and to be honest, improve your operational efficiencies, and I feel good that we've done a lot of work in that space to mitigate what we've been facing.

And then the final thing is that we've been working very hard on the non-mobile side of the business. In that non-mobile, what we call that network side of the business, it's -- while our primary customer is a part of that, our primary customer will be a minority of that in 2024 because we've won so many additional opportunities which is a good thing. It just for now, and honestly, as we're in the immediate future, we just -- we're not in a place where this capitalizes into work in part because of the build cycles and in part because of pushouts from some customers.

Similarly, our Embedded Antenna line had a slowing quarter and it's the same as pushouts. We had volumes. We had good forecast. That business is nicely profitable, happy with the business, happy with the book of opportunity in front of us. But as we go into the end of this year, what we are seeing is the, what I would say, the consumer-facing products or consumer-led products where the end market is the consumer market. Those have certainly softened, whereas we're seeing growth now in public safety and automotive. So it's a bit of a mix.

And as a result, it was a bit lower than where we would like it for this quarter, although, again, nicely profitable. Wireless infrastructure, the business line saw lower sales and revenue velocity despite a number of really, to be honest, cool winds that I think we had for this business. Again, we've had pushouts. Clearly, looking at a list of projects that -- and we don't report them or press them until we get it over the finish line. But where we know that we've won, our customers have specced us in an additional marquee products in a nice book of business, but because of what's happening in the wireless ecosystem, a lot of those projects have been pushed to early 2024.

And then finally, Satcom. Satcom's an interesting industry. The commercial side, we're certainly seeing pressure from some of the new entrants, but our bread and butter, which has been focused on high-power applications, military applications, space applications, broadcast applications. Our book of business is robust, and the funnel is extremely large. We would like to, if anything, improve and raise the level of production that we have in our facility outside of Montreal.

But with that said, we're pleased with the business. It's been resilient, and we feel good about what we're doing, particularly with the new product stack.

With that, our backlog is sitting at $32.4 million at September 30, 2023, compared to $38 million at the end of last year and $37.4 million at the end of this quarter last year. The backlog is pretty durable. But if you look at it, the biggest delta in our backlog, it's at Mobile and Network business. And that's -- again, it's a fast turnover purchase order business. And obviously, the -- our principal customer has had a challenging year. So the number of POs we have in that business are currently down even though we feel good about where we're going next year.

We're continuing to work the quality of our backlog and meaning the -- what we're actually building in the gross profit and the revenue we can derive from it. And I would suggest that -- particularly I'd even just call it the Infrastructure line and to an extent, the Satcom line. You can look at those 2 business lines, and it is a market material in the gross margin profile, which has helped us weather some of the lower margin -- excuse me, lower revenue that we're seeing today. I'm happy with the work. I like our road map, but we've got some more work to do.

Finally, the number of bids that we have coming up and hopefully get across the finish line here in the next couple of quarters is pretty exciting for the business. In recent developments, I do want to call out a couple of things that I think are pretty cool. We've talked about our multibeams before, but I think the neat thing is we really have gotten a lot of traction, and a lot of visibility and a lot of visibility for the Galtronics brand that we own with that multibeam antenna. It is opening doors for us and certainly has opened a number of doors with Europe, and we are continuing to have conversations with new customers in Europe who we've never had relationships with, which is pretty cool.

The Artemis Lunar Space Mission. This is kind of a core success coming out of our Advantech Group outside of Montreal. That Artemis Lunar Space mission is NASA's space mission coming up when the lunar modules are way out away from the earth and on their way to the moon, the communication from the earth to those modules is powered by us. As a geek at heart, to me that's cool technology. And that's an example of something that really we are differentiated and the right guys to do.

In addition to that, our team in Kirkland also launched Ka-band's SSPA, which -- to be honest, filled the hole in our product portfolio and is also based on our new Genesis line, excuse me, and the point of that is Genesis is not only great technology and great technology matters from an end-user feature functionality perspective, but guess what, it's cheaper to produce, which means over time, we will improve our efficiencies and grow our book of business. So we feel pretty good about where we're going despite how challenging this quarter was. It's an unique economic environment with interest rates. It is what it is. We're going to fight through this and keep building on the successes we've had.

With that, Dan, our CFO, will now comment on third quarter results.

[Dan Nohdomi, executive]

Thanks, Leighton, and thanks, everyone, for dialing in this morning. Before I provide a summary of Q3, I wanted to provide an update on our credit facilities. Firstly, we're pleased to report that the -- that our GTD facility -- pardon me, GTD subsidiary has fully repaid its loan with HSBC Vietnam, and they did at maturity in August of 23.

The background, the loan originated in October 2020 and was established for $3.2 million. Proceeds of which were used to partially fund the GTD factory, which unfortunately never went into production, but we are pleased to close that chapter.

Additionally, in September of '23, we agreed with our lenders, RBC and HSBC Bank of Canada to amend our credit facilities. And that extended the maturity importantly, of our Term Loan to December 31 of this year and then the maturity date of the Revolving Facility to the end of Q1 of next year. We're obviously very grateful and appreciative of the continued support of both RBC and HSBC Canada.

I'll now comment on our third quarter results. Revenue was $23.5 million in Q3 of this year, which was a decrease of $6.5 million or 21.5% compared to Q3 of '22. Decrease primarily due to volume reductions in the Mobile & Network, Embedded and Wireless Infrastructure business lines that Leighton alluded to earlier, partially offset by stronger sales in the Satcom business line.

Margins were better in Q3 of this year, at 31.2% compared to 26.4% in Q3 of '22. And that's interesting because it's despite the lower sales, lower volume. And from a gross profit perspective, gross profit was $7.3 million, which was a hair lower than Q3 of last year. The improved gross margin resulted from a balanced product mix due to sales from newly launched products that Leighton talked about earlier as well across a number of our business units, changes in pricing strategy and a continued focus on data, and making decisions with fulsome information and also focusing on contribution margin at the business line level.

In Q3 of '23, the improvement mainly generated by stronger revenue recovery in the Satcom business line, again, a favorable product mix and then consistent operational efficiency in the Embedded business line.

Adjusted EBITDA was negative $0.8 million, which was a decrease of $0.9 million compared to the same quarter last year. And then this decrease was primarily due to the decrease in gross profit as a result of the lower revenue base I mentioned earlier which was partially offset by a decrease in operating expenses compared to the prior year period.

Net loss in Q3 was $3.4 million compared to a net loss of $4.9 million of Q3 of last year. The net loss was mainly attributable to an operating loss of $2.8 million. What this translates to on a per share basis is a net loss of $0.04 per share in Q3 of '23 compared to a net loss of $0.06 per share same quarter last year.

Net debt was $26.4 million, which was an increase of $5 million from the end of the year, pardon me, the end of last year, and that was primarily due to an increase in non-cash working capital, investments and inventory and the like, as well as debt service interest payments and then also lease payments.

I'll now turn the call back over to Leighton.

[Leighton Carroll, executive]

All right. Thank you, Dan. Look, I think it's fair to say this is we're existing in a challenging business environment. The high rate environment is interesting because it impacts different sectors of the world, so to speak, in different ways. And some of that does cause issues that daze the company. We certainly saw some in the second quarter, and we're seeing them obviously here in the third quarter with lower revenue, lower gross margin overall, albeit high gross margin percentage on a comparative basis and then look at the end of the day, I'm just not happy with the adjusted EBITDA period.

Look, we expect the remainder of this year is going to be similarly challenging. I'd like to say it isn't, but it is what it is in some of our industry segments. While our overall performance continues to be significantly negatively affected by the results of the Mobile & Network business, we are experiencing softness in other places as I previously described.

Our Satcom business alternatively has been supremely resilient. And to be honest, we're pushing on getting even more performance out of it. Alternatively, the book of business we have is durable and a lot of the stuff that we've been building and new products that we've been releasing, which is importantly because those new products have a different margin structure, were dramatically better margin structure than when I got here.

We're setting ourselves for success in the future. It's just going to be a bumpy ride in the meantime. We continue to prioritize products. We emphasize what we're doing on margins, and we're also focused at this point very clearly on cutting costs, eliminating some positions and really digging on operational efficiencies. It's that you have to do a lot of the obvious things when you're in this type of environment. We are seeing a number of factors that continue and expect that we're just going to have to fight through it over the coming quarter.

As a result of these challenges, and particularly the impact that the M&N business line has had on our business this year, we expect that revenue and adjusted EBITDA for 2023 as a whole will be below the corresponding amounts by 2022. Obviously, with notable improvements in gross margins and operating expenses.

Now I'd like to speak about each business line briefly going forward. The Embedded business line, we talked about the pushouts. The flip side of that is we have a number of things that are starting to go that are -- that I'm actually excited about future. One, we're doing a Wireless enablement of a body armor camera. Why is it interesting? It's for first responders. It's government funding, it's durable. We just started production of that. That will be a nice portion of our revenue going into 2024 and its forecast for obviously, throughout the year.

Number two, we have a project, and we haven't pressed it yet, because we're just getting ready to enter production, where a brand-name manufacturers full-size SUV. Their brand-new flagship model that will be coming up for the 2024 model year. The wireless enablement, the experience inside the vehicle will be us. It's a pretty cool project. We should see some nice revenue next year. Again, it's not in our book right now because it is the timing and the cycle.

On the Wireless Infrastructure Business, we're in -- it's a spectacular environment. I think it doesn't take people very long to just look around particularly in North America and see AT&T, Verizon, T-Mobile, DISH as examples. They've all had layoffs or all announced layoffs over the course of this year. Nokia and Ericsson certainly had, and there are others who are impacted. It's a challenging environment.

The interesting thing is some of our larger competitors have had spectacularly bad results within that Wireless Infrastructure vertical. And while we're not happy with it, we've actually done reasonably well on a relative basis. That doesn't mean we're happy with the results. It doesn't mean we have -- we shouldn't be doing better or I don't want better, maybe that's a way to put it.

And it doesn't mean that we expect more from this business in the future. All those things are true, but it's a very challenging environment we're operating in. So we have to maximize to our strengths, minimize our costs and get set for where the puck is going, so to speak, and that's a huge focus for that business.

The Satcom business line, it's been very solid. We're still dealing with a lot of the legacy products that are -- bluntly, a bit difficult to manufacture and a challenge for the business. And in some cases, they're really complex. Now the flip side of that is with how we've positioned this business and where we're focused on high-power applications, where we're focused on the new product lines, which are going to be easier to manufacture, lower cycle times, simplified supply chain, we are already winning in generating revenue in those.

We're starting to see the ramp of those products, which is cool because I don't want the Satcom Business Line to be doing the revenue it's doing today, I want more. But I want more at a higher-margin profile, which is based on this -- or predicated on this new product stack coming to market and us working in Kirkland to improve our efficiencies overall.

All those things are important to us. They're going to lay the table for what the journey looks like for 2024. And when you have the funnel of business that we have for that, that's a business I do honestly get excited about.

Now as I say that, in the short term, look, we've been making a lot of improvements. I do expect that our overall revenue and adjusted EBITDA in '23 will be better than 2022. I take nothing away from what the team has accomplished in this year, even though the overall corporation is having a challenging back half of the year, our Satcom unit has done well year-over-year, and we're pushing for more.

Obviously, then it comes to our Mobile & Network business. And the issue is it is just down. And we have been cutting. We have been streamlining, we have been setting the table. And the table set for next year is based now on 3 things: our primary customer having more strength in 2024 and they are on the record of saying that they expect that to be the case.

Number two, winning a disproportionate number of projects, in other words, winning a disproportionate amount of market share for 2024, so we can start to see the growth within that legacy mobile product line. And then number three, win additional business outside of that primary customer in things that effectively rhyme with the embedded product line that we have here in North America, and improve the overall margin profile and revenue diversification of that business.

Those -- all of those things are underway, not going to be perfect for a bit of time. It certainly has hurt us this year. There's no question. We would be, in my opinion, very positive in terms of overall operating results despite all the things that we've talked about, that there are challenges. We would be having our seventh -- excuse me, our eighth quarter of positive adjusted EBITDA. It is what it is. We're fighting through it, and that business is going to get back on its feet.

Overall, we have been working to fix the challenges and continue in that business and then maybe the final punch line here is that we have said previously, and this continues to be the case. All options are on the table for the Mobile & Network business in part because of the service as much as it has this year, and in part because we're engineering a turnaround and are playing to our core. And think that a lot of the things that we're doing with our core businesses should be special in our future.

With that, look, it was a challenging quarter, and I'm personally not satisfied with the results. I don't think anyone on our team is. Believe it or not, I actually want to thank the employees of Baylin Galtronics and Advantech. When we were looking at this quarter and seeing things early on in it, it looked bad. It could have been worse. And the team really sucked it up and did a lot of things to help us minimize issues in this quarter and set the table for the future.

I do like where we're going. I do like the foundation we built, but it's a challenging environment. And unfortunately, it's probably going to be challenging in at least the coming quarter. If not for just a touch longer.

With that, I think that concludes our results -- concludes the comments on the results. We continue to have a sense of urgency, and I'm looking forward to better times ahead. Operator, I'm happy to take questions.

[Operator]

[Operator Instructions] Our first question comes from Daniel Rosenberg from Paradigm.

[Daniel Rosenberg, analyst]

My first question is around the Rights Offering. Without understanding how the end results here looks like, I was wondering do you feel that this is what you guys need in terms of getting the balance sheet to where -- to sure footing, so that operations can get to -- overall operations can get to profitability? Or is this kind of a bridge for next year to rebuild and move onward from there. Just trying to understand how you're thinking about it.

[Leighton Carroll, executive]

Yes, Daniel. One of the encumbrances that the business has had -- and look, let me just say thank goodness for Jeff, Mr. Royer, and his support of this business. His steadfastness and commitment is exceptional, and it has made a world of difference.

Now the truth of the matter is the elephant in the room for -- even for our stock price has been the amount of debt on the books relative to business performance, right? And relative to cash generation, well, when you are using a substantial amount of cash to service a Term Loan, from -- that was put there by legacy management and that loan was not de minimis. Guess what? It eats cash and it prevents you from getting to free cash flow.

Part of the journey that we're on with this effort is not just to set up for growth and have working capital to lean into some of the new opportunities that are coming in. I mean, I want to be the dog that catches the bus and says, okay, now what? Because we just won X or Y, a huge program, right? But then alternatively, guess what, free cash flow is king. That is where we're going.

Hard to know -- how can we, that is the mission. And by substantially addressing and improving the balance sheet, reducing the amount of capital that we have -- that we've been applying to debt service. In my opinion, it is going to not just set up the business for next year, but it really does take a significant headwind away from us that we've been dealing with for the past 2.5 years. That's the goal. That's the mission. This is part of that journey.

[Daniel Rosenberg, analyst]

And then with respect to Mobile & Network, has the thought changed around the strategy there? Networking was once thought as kind of a growth area. Is it becoming a drag and your focus is really now on the Satcom, as kind of the growth engine. So just wondering if you shifted your view in terms of that business line, I guess, around Network Infrastructure specifically.

[Leighton Carroll, executive]

Yes. So Daniel, if I can, I'm going to just talk broadly about the 4 and why I think like I do. So if you take the 4 and you brought them down to what they are fundamentally based on, right, the Infrastructure business, the Embedded business in the Satcom business, they are all different flavors of RF engineering where we have unique intellectual property.

And if you're playing your cards correctly and you position yourself well, you can have really nice businesses, good stable margin profiles, yes, you'll have to weather a storm occasionally like we're dealing with that I talked through on the infrastructure side.

But guess what, in the long run, they're good businesses, and you can set yourself up for a lot of success. The Mobile & Network business, we don't have nearly the level of intellectual property and that business has clearly hurt us in 2023. When I think about where we are going to be 2 years from now, there's probably a few outcomes.

One, the Mobile & Network business as it's back on its feet, or potentially we've looked at a different strategic alternative and worked to monetize that business, so to speak, so that we further improve our balance sheet. I think those are both reasonable outcomes. You either fix it or you address it, one or two.

And that's when we talk about strategic alternatives, it's kind of what we're talking about. We have to evaluate those things. And it's hurting us like it has this year, it's wholly unacceptable and we have to address it, right? So that's number one.

Number two, with the remaining 3 businesses, the Embedded business, which is home networking in principle, it has been, certainly when I got here was very principally home networking. We have been working to diversify that business. And the team, in my opinion, has done a good job of that. Going into the automotive space, going into this, not just Land Mobile Radio public safety space, but other applications, other use cases, will drive growth in that business, albeit that Embedded business, while nicely profitable, the growth is -- it will never explode suddenly in growth.

It will be very linear in its pattern of behavior. So -- and by the way, I like these businesses. Why? They are straightforward. You know what you're doing. You can see what's coming and you make money. Businesses that make money are a positive thing in my business sense, it's a good business. So it's -- to me, it will remain core. It's just not going to be our growth engine.

Wireless Infrastructure is having a very unique cycle right now. And I've lived in that industry for a long time. And there -- this cyclicality of Infrastructure, Network Infrastructure, Wireless Network Infrastructure has been there for decades, right?

Every 10 years, there's another G. Whether it's 3G, 4G, 5G, and guess what we're already seeing conversations on what the heck 6G is going to be. The point of that is you have these down cycles, and we have a unique environment where carrier spending, in particular, is muted. It's more muted in North America than it is, I would say, in Europe, but even Europe is somewhat muted because of guess what, the high interest rate environment.

So what we focus on is how do we improve the margins and set ourselves up for when we think carriers will start coming in and how they're coming in, right, which is a really important facet for us.

So the point of that is, I actually think the wireless infrastructure business because of the amount of work that's gone into product development because of the niches we play in, right? We're not going to try to be Ericsson or CommScope, in my opinion, that would be a fool's errand. But by playing in places that matter, in use cases that matter where you can maximize value, I actually think that business can see good growth in our future, and I think we will have good margin attainment in our future within that business.

Let me come to the Satcom business. And this is -- I think your point in -- your read is correct, Satcom is unique because of the amount of work we've done on positioning, and sure we've done a lot of work on improving margins and then working on our production issues, but the positioning in the new product stack that we have coupled with where we see certain things going in the market in terms of opportunities, yes, I think Satcom is going to be unique. Because particularly going into 2024, it has the opportunity of course, not the guarantee, but has the opportunity to have some really interesting growth trajectory in front of it. So hopefully, that answered your question and like everything at Baylin is kind of the normal 4-part answer.

[Operator]

[Operator Instructions] There appear to be no further questions. I'll turn the conference back to the speakers.

[Leighton Carroll, executive]

Okay. First of all, thanks for everyone for attending. I know the results this quarter are not what we all would want. I'll come back and just maybe say 1 -- 2, 2 things. One, I remain pretty bullish on the future of this business and what we've been working through. It's going to be a bumpy ride for a little while.

So we're pretty open about it and what we're dealing with. The flip side of that is we're doing a Rights Offering, to in my opinion address one of the bigger challenges the business has had, at least since I've been here.

And the belief in our business, in my opinion, is demonstrated by the fact that our Chairman will be participating in the Rights Offering, several of our Board members are going to be participating in the Rights Offering, and guess what guys I'm participating.

So hopefully, that's a bit of a vote of confidence to share about where we think we're going to be going and what we're up to and honestly what we're trying to build for the long term. I hope everyone has a great day and appreciate everyone's time.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.