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Good morning. My name is Shelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Baylin Technologies Inc. Second Quarter Results Conference Call. [Operator Instructions] I'll now turn the call over to Daniel -- Mr. Daniel Kim, Executive Vice President, Corporate Development of Baylin Technologies. Sir, you may begin.
Hello, and welcome, everyone. Thank you for joining us this morning for the second quarter 2019 earnings conference call for Baylin Technologies. Joining me is our President and CEO, Randy Dewey; and our CFO, Michael Wolfe. 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 2019 prospects and financial performance, and could include the use of non-GAAP and non-IFRS measures. Although it is obvious these statements are subject to risks, uncertainties and assumptions, accordingly, actual performance could materially differ 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 legal disclaimers and refer you to our risk and assumptions outlined in our public disclosures, particularly the section entitled Forward-Looking Statements and Risk Factors in our AIF for the year ended December 31, 2018 and our other filings, which are available on SEDAR. Q2 results were released after market yesterday. The press release, unaudited interim financial statements as well as the MD&A are available on SEDAR and our website at www.baylintech.com. I would now like to turn the call over to Randy.
Thank you, Daniel. It's over half of the year behind us. It's clear that 2019 is a breakout year for Baylin in every respect; financial performance, market penetration, small cell and base station antenna launches, IoT and massive MIMO opportunities, and SATCOM integration. Q2 financial results were incrementally better than Q1 and significantly better than the second quarter of 2018 with revenue increasing 47%, gross profit increasing 35% and adjusted EBITDA doubling. The revenue increase over -- sorry, Q2 2018 is primarily due to higher revenue from the Asia Pacific and Advantech wireless products, combined with revenue from Alga Microwave, which was acquired in July of 2018. [Audio Gap] 9% in the second quarter of 2018. This [ figure ] was despite the less favorable sales mix in the quarter, which I just noted. I'd also like to turn the call over to Michael to provide you with more commentary and details on the financial statements.
Thank you, Andy. We are pleased with second quarter financial performance. Trailing 12-month revenue has increased to $161.1 million as a result of organic growth and the acquisitions we closed in 2018. Trailing 12-month adjusted EBITDA has increased to $20.2 million. As we reported last quarter, we entered into a credit agreement with RBC and HSBC, establishing our revolving credit facility up to $20 million and a USD 21 million term loan. We used the term loan advance and a portion of the revolving credit facility to repay the Crown capital loan, which was used to finance the acquisition of Advantech Wireless in January 2018. In July, we fixed a portion of the term loan interest rate until maturity of the loan in 2022. The interest rate on the term loan is 2% plus a credit spread of 2.5%, which is adjusted based on leverage. At June 30, 2019, we had a cash balance of $17.2 million and access to approximately $25.3 million of revolving credit facilities, of which $14.8 million was utilized. Uses of cash in the quarter included interest in principle on the revolving loan, term loan and convertible debentures, settlement of stock options, and an option payment relating to a business that we elected not to acquire. Our revolving credit facility is currently higher than necessary due to a delay in repatriating capital from China and Vietnam as a result of the corporate reorganization that we are completing, which has taken longer than originally anticipated. We expect to complete the reorganization in Q3, repatriate capital from Asia and reduce our short-term borrowings. As we reported yesterday, we have signed a conditional purchase and sale agreement to sell our facility in Kirkland, Quebec. We will use the proceeds from the sale, $7.1 million, to repay our revolving credit facility. In total, we currently have outstanding short and long-term debt in the amount of $58.1 million. At June 30, 2019, our net debt to trailing 12-month adjusted EBITDA was approximately 2:1. While we believe this is a conservative amount of debt relative to our cash flow from operations, we expect the leverage ratio to decline as operating cash flow increases going forward, term loan principal payments are made, and the proceeds of the Kirkland facility sale are applied against the revolving facility. The net loss for the 6 months ended June 30, 2019, of $4.2 million included the Crown capital prepayment fee, write-off of the Crown capital deferred financing charges and other nonrecurring expenses. Excluding these items, we generated net income of $768,000. I'll now turn the call back to Randy for his concluding remarks.
Thank you, Michael. So to provide some additional detail on revenue, I'd like to add, Asia Pacific revenue in Q2 continued to be positively impacted by the successful launches with a major APAC customer. Infrastructure fell short of expectations due primarily related to customer delays. Embedded is performing quite well, despite a decrease in one of the major customer orders. That sales decrease was made up substantially with other customers, and some of the recent wins and diversification plans in that business unit have been very successful. Advantech Alga continued to perform well. The lead times and custom delivery issues at Advantech that existed when we acquired the business have decreased substantially and moving towards some very positive momentum. The higher Asia Pacific revenue as a percentage of total revenue has resulted in a lower-than-targeted gross margin. Gross margin was 36.7% in the quarter. We expect gross margin to increase going forward as infrastructure embedded in SATCOM revenues continue to grow. As stated, adjusted EBITDA in Q2 was $5.7 million compared to $2.9 million in the prior year. We continue to be pleased with the progress that has occurred at Advantech wireless since the acquisition in January 2018, and in particular, over the last 6 months. Adopting several of Alga Microwave's best practices has resulted in significant improvements in Advantech Wireless' operations. There are several issues in the industry that we're continuing to monitor closely. Obviously, smartphone sales; the impact of the T Mobile-Sprint merger; and the small cell deployment rates. These issues may have impacted on Asia Pacific revenue and small cell deployments, but we are confident that we have been able to successfully navigate through those issues, and that opportunities in front of us significantly outweigh any concerns that we have and that we may encounter. Although we are facing some headwinds, the trajectory of Baylin for the second half of 2019 continues to be quite positive. That concludes my formal remarks. And with that, I would like to turn the call back over to the operator.
[Operator Instructions] Your first question comes from the line of Kevin Krishnaratne from Paradigm Capital.
I wanted to hone in on the Infrastructure division. Clearly, that was a good source of strength for you in 2018. It looks like expectations to date have been a little bit short. Still, I'm wondering, bigger picture stepping back, how you think about expectations for the year, if there's any way you can kind of quantify things. And if you could talk about some of the customer delays that you saw as well as, I know that there were some industry issues with regards to small cell launches or deployments in the second quarter, if you could just comment on anything there.
Sure. So it's pretty well-publicized that some of the rate of deployment of small cells has slowed down a bit compared to what was some of the expectations that were coming out of sort of the last quarter of last year, as we've predicted for 2019 deployment. So there was certainly a little bit of a slowdown on that front. And a lot of it's related to network timing issues, site acquisition issues. Some of them is probably issues that have been going on. But those things are clearing up. And we have seen, particularly since the middle of May, maybe towards the end of May, a notable pickup on that. Will it get back to the rates that were originally expected? Not likely, but there's going to be a significant amount of deployments that are going to happen in the second half of the year. So we're still quite confident in our second half of the year as it relates to the embed -- or sorry, the infrastructure group.
Okay, great. I want to dig in a little bit more on the infrastructure again. And as much as the small cell may have been weak, correct me if I'm wrong, but a good chunk of the business is on DAS. And if I think about looking at one of your competitors, CommScope, they've been talking about this year and maybe next, being a good upgrade opportunity for deployments in large stadiums and venues. And just on the back of those comments I saw a couple of weeks ago, you had a win for Canadian stadiums. I'm just wondering if you could just talk about the DAS opportunity and what you see there and how the growth in that business is looking.
That segment of the Infrastructure group has -- we have no concerns there. And you quite rightly pointed out that there's been a number of deployments in some of our DAS competitors and some of the main sort of DAS system providers are quoting strength in that segment. We see the same thing. That is not it. There's no softness when it comes to iDAS or outdoor DAS for us. We have been announcing some wins, but not all wins. We've got a number of deployments in that area. So that's not the concern. The only concern has just been small cell deployment rate. And as well, if you also may recall, we did launch base station antennas. That was just recently that we launched a number of products. We will continue to do so over the balance of the year. But we chose to accelerate small cell at the end of last year, development in exchange -- at the reduction of some of the base station product development. So that, unfortunately, because of the small cell slowdown in deployments, somewhat hit us. But however, we've now been back on the development track for our base station antennas and they've now launched products. So timing wasn't necessarily perfect for us on that front, but we have the trajectory of this industry. And where small cells are going and where base stations are going, certainly favors Baylin's product road map, for sure. But timing was a little unfortunate in the last 6 to 9 months, but we've -- where the industry is going, we don't see that as being an overall trajectory concern for sure.
Just to add to that in terms of the commentary on small cells. The softness that we have experienced has been 100% industry-related. We don't believe we've lost any market share with any of our key customers. And so this is what we believe to be a transitory impact, where we would expect to pick up in the second half. And as Randy suggested on the base station side, this is a new market opportunity for us that as we continue to launch new products and we have a number coming up this year and that program will continue to accelerate going to 2020, you expect that could be a very good contributor to growth in that division.
Okay, great. That's great to hear. Just switching gears over to mobile, get to see the strength there. Is there a way that you can talk about the growth there at your largest customer there. Can you kind of quantify if that's the amount of content that you're seeing, on a per smartphone basis, with the customers that increasing? Like are you seeing the dollar amount increase, or is it more like just a broad number of units being sold? How do you think about what you might be seeing in terms of content dollar per device now? Where do you see that potentially going as you move into 5G?
Well, certainly, the number of antennas per phone is going to increase with 5G coming on and some of the other expansions, and of course, the talk of millimeter wave inside phones. So there's -- the antenna count continues to climb in smartphones, and will continue so over the next couple of years. We're seeing strength just because we've got 1 -- two things going in our favor. One, the Asia Pacific group has done a really good job of diversifying their customer base there and the opportunities. So they're making new movements into new markets, which has provided certain strength, for sure, out of that Asia Pacific mobile group. And as well, with the opportunities that we've found ourselves into and some of the new volumes that we've been benefiting from and certainly favorable for us. But we're continuing, as talked about many times before, is that we continue that diversification strategy, and that has certainly played out well, and our growth is continuing to accelerate at the moment versus your -- where we were 12 and 24 months ago.
Do you -- on mobile, do you continue to expect to see maybe not the same strong growth over Q3 and Q4, but do you continue to see strength there over the balance of the year? If you look to some of the comments, it was Qualcomm last week. They sort of brought down marginally so their device shipment guidance for the back half of the year. And a lot of that was pointing to those Asia Pacific customers may be putting off their 4G launches on hold and just waiting for 5G, so there's kind of like a shifting going on. I'm just wondering if you're seeing anything there and what your expectations are for the remainder of the year in mobile?
So yes, we're satisfied with the consensus from the mobile group for the balance of the year, which was certainly not the same number as the first half of the year. We had a lot more strength in the first half of the year than we will in the second half of the year with the mobile group. However, that being said, we have also found our way into some new opportunities that will start to play out in Asia Pacific in the first half of 2020 and will gain strength over the following quarters after that. So our Asia Pacific Group has done a fantastic job of diversifying and getting awarded into new opportunities that we still see growth year-over-year in Asia Pacific, but the second half of the year won't be certainly as strong as the first half of the year just because we won some additional programs that weren't necessarily anticipated. So -- but the second half of the year as it relates to the consensus is still well intact. We have -- we do not have concerns on that front.
Your next question comes from the line of Gavin Fairweather from Cormark.
I just want to circle back on the mobile division. I noticed that you're investing in a bit more equipment in Vietnam. I think you gave some commitments for after the quarter to buy some new equipment. Can you just remind us how much capacity you have there just given some of the recent growth that we've seen?
Yes. Well, as many people have seen in Asia, there's been a vast amount of opportunities moving into Vietnam and us having got into Vietnam and have built a factory and have a fair amount of capacity and space availability, we've been finding ourselves into new opportunities and new markets in Vietnam as a result of having been an early entrant into that market as a manufacturer, so -- and as a designer. So we're actually full of opportunities in Vietnam as a result of that. So some of our investment in equipment is to help us continue with our diversification strategy and not just being a mobile factory in Vietnam, but being a mobile factory plus other types of infrastructure products that are being manufactured in Vietnam. So we're quite pleased with that diversification strategy. I mentioned to Kevin earlier, the Asia Pacific group is continuing to find new opportunities, and a lot of migration that's happening between China and Vietnam has starting to play into the favor of Baylin. And us having built the factory when we did a few years ago has really benefited us because we were one of the earlier adopters of the Vietnamese strategy.
Okay, that's helpful. And then maybe we could switch gears to Advantech. I know you've been working on some new products, particularly some new summit products. Just wanted to check in and see what the timelines are for those to be released out to the market, and to what extent you started to socialize that with some of your customers?
So yes, we continue to do a lot of work with product integration. There's been some great momentum in that business. I think we've mentioned in prior calls that getting everybody into the same facility was just a Herculean effort that was accomplished at the end of last year. And then getting all the resources together has really proven to be quite beneficial in the first half of the year, as we've seen a lot of the product consolidation work happening at a greater rate. I would say the integration checklist has got many checkmarks, and there's still things to be done, but there's a lot of good work that's happened, and we're seeing it in the strength of the actual revenue in the first half of the year versus the first half of last year. It's a substantial growth for sure. We see in the second half of the year, there'll be a few more things to be done on the integration list, but the lion's share of it will be completely over by the end of the third, into the fourth quarter. So we're quite pleased with the progress that Advantech has, for sure, and getting them into the same facility was an important and fundamental step for us.
Okay. And then just lastly for me on the embedded side. It wasn't clear. Did you mention that there was some kind of customer program change that you saw in the quarter? And can you just speak about your expectations for the balance of the year for that segment?
Yes. We had one major platform that got shifted out in timing, and we were expecting it to start in February, and it's going to only start in the second half of the year. So -- and it was a fairly substantial platform. But all the loss in the timing of that revenue was made up by the strength of other customers. So our embedded group actually was ahead of plan in Q2. And they had a bit of a shortfall in Q1, it wasn't much. And so they're pretty much within a hair of our expectation at this point in time. And that platform has now started. So we're going to continue to see strength in the embedded group in the second half of the year.
Your next question comes from the line of Andrew McGee from National Bank.
Just wanted to start with the infrastructure group and the spending environment, especially with the one customer that you said might have been a bit short in the quarter. Is that the same customer that has been, I guess, delayed in their spending in Q4 and Q1? Or is this an additional customer?
Well, it's -- as Daniel pointed out earlier, it's a bit of an industry concern. It's more the overall. There's been less small cells deployed across the industry than was originally projected when we were looking at the forecast at the end of last year for what 2019 would produce. So it's really more of a, one, a bit of a slowdown on small cell deployments. At the same point in time, it was a shift towards base station antennas for the first half of this year to help us solve some of the network needs in the earlier stages. So we're just more subject to overall market condition at this time. But that market condition, we think, is pretty short-lived. This is more of a timing issue, and we have already started to see a good pickup. So will it pick up to the rates that were is originally projected? Probably not for the second half of the year. But then those will just have to be made up in 2020. So that's why I'm saying the overall trajectory is still intact. A timing slowdown industry-wide because of other sort of factors is kind of what we're subjected to at the moment. But it's not -- there's no systemic concern in any way.
Right. And given that the network needs to be built at some point in time, is there any potential that you see where there could be a budget flush? Or do you expect that it would be more to 2020?
I'm sorry, I couldn't quite hear your question. Could you repeat it?
Yes. No, that's no problem. Just thinking about how the network needs to be built no matter what at some point in time. And I completely understand that either pushes into 2020 or if it's this year. I'm just wondering if you're seeing any potential for a budget flush.
Not quite sure about that. But to your earlier point of your question, this network has to be built. And certain things when -- especially when you come to a huge network shift, where you're moving from 1G to the next G, moving from LTE to 5G is a Herculean effort and a mammoth opportunity. At the same point in time, there's a lot of engineering and there's a lot of things that have to be worked out. And those things are being worked out. And there's lots of trials. There's lots of work happening. There's lots of things that have to be yet decided. The standards for 5G are almost set, but not fully. They'll be done by March of next year. So there's still some things to be worked out. This is a bit of a transitory year because of that. But to your point, the network has to be built. It will get built. So the fact that there's a bit of a lull, I guess, is what I would call it in 2019, is not a bad thing for Baylin, because now, we have the benefit of being able to get a lot more of these products out and ready for market when the pickup really begins, like the strength of that pickup. So though the network continues to be built every day, maybe it's not at the same trajectory for certain things like small cell and a few other things. But those -- the strength of those will return, for sure.
Andrew, I can add a little bit color to that in terms of if you look at a Tier 1 carrier in the U.S., they've been very vocal about their buildout. As it relates specifically to FirstNet on their last conference call, they suggested they're now 60% done that buildout. They expect to be 70% done by the back half of this year. And what's interesting, and I don't believe a lot of people picked up on this, is this is a 700-megahertz deployment of densification antennas. However, they have built in within their system the ability to software upgrade to 5G. So this full build-out for this coverage within the U.S. will be their Trojan horse to 5G with a simple software upgrade switch.
Okay, that's great. And then keeping with infrastructure, and in your press release, you mentioned that you had some 5G contract wins, which I think came earlier than most of us were expecting. I'm wondering, is this at the Tier 1 level? And then secondly, the 5G contracts compared to, say, a traditional 4G win. How is the gross margin profile for those contracts looking at as we think about it early days?
So absolutely. It is a Tier 1 win. Everything still is at sub 6. So we're not talking about millimeter wave yet at this point in time. So all of the 5G work that's happening even at the highest level within the ecosystem here, is still at the sub-6 level. As you know, there's still spectrum auctions happening at the higher frequencies. So all the work that's happening today is really in the advanced range, which is going to be, call it, 2.7 to 3.5 sort of range. And those continue -- the work continues to be happening there. The lion's share of the initial launch of 5G is going to be really focused on the mid-band range. And then, of course, down the road, they'll figure out exactly how the millimeter wave applications will come. So we've been beneficiary of 5G wins in our mobile division. At the same point in time, we've been the beneficiary for 5G in the infrastructure side as well. And as well, we're starting to do a fair amount of work in the embedded side. So 5G is going definitely across the 3 divisions quite powerfully, I think, over the next couple of years. And then ultimately, as the SATCOM industry figures out their play within 5G, which a lot of that work is happening right now, that's going to be another opportunity for us, just the application of LEO and MEO, and some of those constellations and their application within 5G. So basically, across all 4 Baylin's subsidiaries, there's a lot of opportunities for us for sure.
Okay, that's great. And then my last question might be more for Michael. As you -- I know you guys don't segment out your verticals in your statements. But I'm wondering if you can just give us like a cadence of growth by each of the segments on a year-over-year basis. So just for helping us out in modeling purposes. That would be it.
Well, we're actually not report -- or Randy, sorry were you going to go ahead?
No, go ahead.
We aren't going to report the growth by segment. Just for a whole bunch of reasons, we just don't find it's something that we want to continue to do. So sorry about that, but we aren't going to give that information.
Okay. I'll pass the line.
Just to put a little extra on that, Andrew, for you. Obviously, we're pretty happy with the momentum year-over-year. Our 47% revenue increase in just trailing 12 months year-over-year, we're at 42%. So we continue to see growth and momentum in the business. Certain businesses are a little stronger than expected, and some are maybe a little weaker than expected. But overall, we continue to grow and everything is -- continues to be up and to the right, which is what we're pretty excited about. What I'm really pleased about is, as I mentioned, was the example of the embedded group, where we may have one customer with the program delay, but we have the resilience now with a lot more diversification in our customer base to be able to find revenue in other areas to offset any shortfalls in one side. And as Baylin continues to build out with the 4 divisions that we have, 4 companies that we own today, we're having a lot of good opportunities to be able to manage growth and continue to grow. So the fact that we're up in the 40% growth rate is pretty remarkable and exciting for Baylin. That's, I think, the overarching message for sure.
Your next question comes from line of Bill Zhang from Raymond James.
I wanted to talk a bit about the Kirkland lease. Specifically, could you give us a breakdown of much that's going to cost you guys going forward?
I'm not sure if it's the line, Bill, but I didn't quite make out your question. Could you repeat it?
Yes, sure. So it's for the Kirkland lease. How much is it going to cost you guys going forward? Hello?
Yes, sorry. Michael, do you want to take the question?
It's a net lease, and it's the -- it will be $465,000 a year.
$465,000 a year. Okay, sounds good. And with the, I guess, the $7.1 million that you've received. I know you guys have said that you would use that to pay down some of the debt. Is that 100% of the proceeds will go towards that? Or will it go to its other uses as well?
Well, it hasn't closed yet. But when it does, we will be applying that to the revolving line on a short-term basis and then use it as necessary for growth opportunity. So we can redraw it as needed.
And your last question comes from the line of David Kwan from PI Financial.
Question on the mobile or Asia Pacific business. I think, historically, we've seen that revenue be more second half weight, I think, roughly 60-40. Is that something this year we could see that switch, I guess, just based on your commentary?
I guess as a sort of total year? Yes, that's probably a good way of looking at it, actually. It would end up being more like the 60-40, but with the -- as it traditionally was. But as a result of some accelerated opportunities that we landed, it's kind of switched that balance. But overall, the trajectory for the second half in mobile is within -- we're comfortable with the consensus on that number. But your view of that is probably on a total annual basis is probably pretty close.
Yes. Okay, perfect. And on the base station side, obviously, we probably expect that to ramp up in the second half of this year and into next year. Can you provide some color as to -- or maybe quantify that? Is it something where you would, at least in the very near term, expected to offset maybe some of the slowdowns that you've seen on the small cell side?
Well, we hadn't, and nor it was in any of the consensus, I think, built around base stations being a part of revenue for 2019. The fact that we have it launched and we are through the -- in the throes of the inoperability testing with the carriers for adoption, that, I would still view it as not necessarily having any contributions in Q3. Getting through that and being successful at that through the third quarter is going to be an important milestone for us. Getting sales and revenue in Q4 for some of those core products that we just developed is really going to be our short-term goal. But I wouldn't necessarily view it as a strategy to improve our shortfall as it relates to small cell. I would really, just more view that as a growth strength for 2020 for Baylin.
That's helpful, Randy. And then on the satellite connectivity business, it looks like that's not rebounded nicely here and kind of back to unlikely through the pre-acquisition revenue levels. How should we think about that business going forward in terms of growth? And to what extent was the strength that you saw in particular, this past quarter, I guess, have benefited some of the issues that you guys saw last year?
Well, so certainly, getting the inning back to strength -- hold on. I'm plagued with a little bit of a cold here. So we're quite pleased. One, because we've really streamlined that business and got it focused back on its core, which historically, they had a lot of ancillary businesses that were low volume and low revenue, but not necessarily complementary to the core of the business, which was a solid-state power amplifier business at the high-power to the SATCOM industry. I would say streamlining that business and getting it focused back on its growth area of strength was a really critical step to be taken. And then as well as was pointed out earlier on the call, the move towards systems has been, for us, in an important step. So the growth rates in the SATCOM industry haven't necessarily been double-digit growth. They've always been around single-digit growth. I certainly would want to look at us in that frame for our SATCOM division. But if we make a good pivot into the systems applications, that could certainly change that. So -- but we've got work to do and we haven't launched all those products. There's lots of R&D happening as we speak. And now, we're confident in 2020, we'll have some pretty exciting new products.
There are no further questions at this time. I'll turn the call back over to Mr. Dewey.
Thank you very much, operator. So for us, the 3 key takeaways that I think is going to be very important for folks on the conclusion of this call is, first and foremost, growth year-over-year. 47% is continuing that strength. EBITDA doubling is obviously an important milestone to be achieved in the second quarter, and we have very good momentum in the businesses, no doubt. And the second thing is that the latest acquisition has gained strength, and we're moving through integration with purpose. We're quite bullish and confident on where we're taking that business over time. And then, thirdly, the launch of the BSA products is certainly getting carrier acceptance and bolstering that, and expecting sales to start in the fourth quarter this year is going to continue to add strength and momentum as we move into 2020. So growth, integration and new product launches are really at the core of Baylin's organic growth strategy, and we're seeing good strength and momentum in the business. So again, thank you very much for your participation on the call and for the interest that you've shown.
This concludes today's conference call. You may now disconnect.