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Welcome to the Third Quarter 2020 Earnings Conference Call for Baylin Technologies Inc. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] I'll now turn the call over to Mr. Daniel Kim, Executive Vice President, Corporate Development of Baylin Technologies.
Hello, and welcome, everyone. Thank you for joining us this morning for the third quarter 2020 earnings conference call for Baylin Technologies. Joining me is our President and Chief Executive Officer, Randy Dewey; and our Chief Financial Officer, 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 2020 and 2021 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 differ materially from statements made today, so do not place undue reliance upon them.We also disclaim any obligation to update forward-looking statements, except as required by law. I ask that you read our legal disclaimers, and I'd refer you to the risk and assumptions outlined in our public disclosures, in particular, the section entitled Forward-Looking Statements and our Risk Factors in our annual information form for the year ended December 31, 2019, and our other filings, which are available on SEDAR.Q3 results were released after market yesterday. The press release, financial statements, as well as the MD&A are available on SEDAR and our website at baylintech.com.Before I turn the call over to Randy and Michael, I would like to set the stage for the substance of our discussion. We are navigating unprecedented times. As such, management has selectively restructured the company to prudently manage its costs throughout this volatility, which Michael will discuss in more detail.Furthermore, our past investments across all of our business units are bearing significant new opportunities, any of which go into volume production -- excuse me, if, any of which go into volume production in 2021, could drive significant organic growth and profitability over the near and long term.I would now like to turn the call over to Randy to provide more commentary on these significant programs and opportunities.
Thank you, Daniel. After reporting improved quarter-over-quarter financial results in the second quarter of this year, we are pleased to report our third quarter revenue, gross profit and EBITDA improved again compared to the second quarter.While quarterly financial results have improved, the coronavirus pandemic continues to have an impact. One very important macro issue is the delay of the C-band auction. It is this new spectrum that is set to be completed in December of this year. The timing outstretch, though, causing delay in CapEx in 2020, but is expected to be completed next month.This important turning point benefits us in 2 ways. First, our telecommunications customers get the coveted spectrum they need for 5G. Second, our SATCOM customers get the influx of almost $10 billion of spectrum that they are giving up. This is exciting news for us.The second piece of exciting news, we have received approval to begin -- bring in our chamber expert in Vietnam in January, the missing link to our factory completion. The third piece of exciting news is that we won a supplier status with a large U.S. carrier to support our 2021 small cell plan, which appears to be quite aggressive and begins in the first half of '21.Although, the short-term issues of COVID-19 lockdowns in Europe impacting our order book in mobile this quarter, we have made significant progress in some very key areas. I will outline in more detail some of these very positive steps later in my presentation, on the long term contracts we've won and the nature of the opportunities we are working on, and why it is generating a lot of optimism for 2021 and beyond.I would like to turn the call over to Michael to provide more commentary and details on our financial results.
Thank you, Randy. Revenue in the third quarter of 2020 was $36.6 million, an increase of 19.4% compared to the second quarter of this year and an increase of 35.8% compared to the first quarter of this year. The increases were driven by Asia Pacific and embedded, which were somewhat offset by lower infrastructure and SATCOM revenue.Third quarter revenue was slightly higher compared to the prior period, although the mix was different this year. Asia Pacific and embedded revenue represented a higher percentage of revenue in the third quarter of this year than the prior year. The change in revenue mix in the third quarter compared to the prior year resulted in our lower gross margin, 31% compared to 36%.However, due to a continued focus on cost reductions, operating expenses in the third quarter decreased by $3.3 million compared to the third quarter of 2019, resulting in adjusted EBITDA improving to $3.6 million, an increase of $2.4 million compared to the third quarter of 2019. Adjusted EBITDA for the third quarter of 2020 was the highest reported in the last 5 quarters.Operating expenses in the third quarter were slightly higher compared to the second quarter, primarily due to government stimulus relating to COVID-19 received in the second quarter, but offset by the impact of cost reductions in the third quarter.Government stimulus relating to COVID-19 in the third quarter was a very small amount, and as a result, had a very small impact on operating expenses. At this point, we are not expecting any further benefit from these programs.At September 30, we had a cash balance of $14.9 million and access to approximately $21.5 million of revolving credit facilities, of which $13.5 million was utilized. We had the option to defer the term loan principal repayment on September 30, and we elected to do so. Quarterly principal repayments of US$750,000 will resume in December.Capital expenditures to September 30 were $6.7 million, of which approximately $5 million was for the new factory in Vietnam. The construction delays have allowed us to fund the capital expenditures incurred to date from cash flow rather than additional debt.I'll now turn the call back to Randy.
Although, COVID-19 has impacted us in 2020, we stand by our earlier comments that the financial performance in the second half of 2020 will be better than the first half.While the impact of the pandemic is creating near term volatility in our business, the long term outlook for all of our product groups is exceptionally robust.For example, Wi-Fi 6 has expanded our opportunities with existing and new customers. Additionally, we have secured automotive contracts with 2 key OEMS, and we expect that these long life programs to begin volume production in the second half of '21. Combined, these wins should accelerate organic growth of our embedded products division.The reallocation of C-band from satellite operators to telecommunication providers towards 5G spectrum is driving an unprecedented product refresh across both SATCOM in the form of C-band filters and infrastructure in the form of small cell base station DAS systems, obviously, those products related to us.The delay in the auction has not helped, but the FCC has come to the final stage and expected to start early December and conclude shortly thereafter. C-band is the new spectrum that will be used mostly for 5G and the network operators need this step completed to commence a lot of capital spending.While, small cell deployments stalled in the U.S. during the pandemic, this industry is expected to trend steadily upwards beginning in 2021 through to 2025. Now that we have secured a second large carrier, we expect our infrastructure products will enjoy more robust growth and less volatility in deployments in 2021.After years of investment in an expanding product portfolio, our base station product group continues to gain significant traction with customers. We have taken a lot more steps in 2020 to cut out further OpEx and COGS, which will position us in 2021 with a lot more torque on new volumes.The other significant strategic step we announced in the summer was the launch of our Summit Series II. After 3 years of heavy investment, that product has hit the markets. We have sold and are quoting a lot of business with this industry leading technology. Our first deployment is set for Q1.The key areas that this new product is expected to benefit us is in the areas of 5G backhaul, military and its well positioning for the new LEO constellation programs that have commenced. To be clear, though, we have won 5G backhaul and military programs with this system, and these are long term contracts.Although, we have not highlighted LEO as much in the past, we can see from the major industry announcements from Amazon, SpaceX, OneWeb, Telesat, Starlink. That actually the new space race has begun. We've seen 10 years of slow growth in this segment, but we are on the cusp of a major industry shift. I'm excited about 5G and telecom, but I can tell you that LEO and SATCOM is just as exciting. I'm excited actually that we're in both.In closing, I want to keep -- for you to keep 4 things really in mind from our call. First, the pandemic has impacted our business this year, but we have not lost any major contracts or key customer relationships.Second, the pandemic is likely to continue into 2021, but the C-band spectrum reallocation completing this quarter sets the stage for significant 5G expansion in the industry. The massive MIMO market and our factory completion was stalled this year due to the pandemic. But we have found a solution that is expected to get this business started in the first half of 2021.And the fourth is the opportunities for our company in 5G, LEO, WiFi 6, automotive and military are very exciting, and we are in an enviable position. Our immediate challenges are obvious, but our long term opportunities are exciting. Baylin is battle hardened, and it is positioned to drive its very strong growth and certainly operating leverage.That concludes my formal remarks. Operator, can we please open up the call for questions.
[Operator Instructions] Your first question comes from David Kwan of PI Financial.
I was wondering just in terms of the revenue outlook. Based on the concurrent it sounds like Q4 is likely to be down sequentially versus -- I guess, versus Q3 here. It sounds like the expected declines here in Asia Pacific had a very good quarter in Q3, and in the infrastructure side, possibly SATCOM here.I guess, based on the commentary about the second half being stronger than the first half, I would suggest, I guess, at the bottom end Q4 revenue could be as low as $21 million. At the high end, it could be slightly down from Q3, so maybe about $36 million. Obviously, that's a pretty wide range there. Can you provide more color as to where you might expect revenue to kind of fall in? Or is the visibility just not there yet?
Well, certainly, that's quite a wide range you've got there. The -- obviously, commentary I said that the second half will be stronger than the first half. That we still stand by. And though this quarter, of course, you got lockdowns in only one of the 2 continents that were materially affecting us in the first half of the year. So we had store closures in North America as well as in Europe. Here we have just the impact of Europe. So that's creating some near term softness in our order book for mobile only. So, as you know we don't give guidance, but just trying to help you tighten that very large range you had there.
No, no. I understand. I guess maybe another way to ask it is, back in -- after the Q1 results, you said that you expected the revenues in subsequent -- in each of the subsequent quarters to be higher than Q1 levels, so north of $27 million. Do you still stand by that comment?
So Q4, we're not giving guidance that it's going to be as strong as Q3. Obviously, it's not. That's not what we're trying to communicate. But we are obviously not going and specifically to those numbers of the exact, we're talking about 1 of the 4 business units having one of their markets softer in the fourth quarter than the prior quarters. And, yes, that takes us -- that was the one that was the most strongest in Q3.So having that shift, though, also creates a similar dynamic, because as you've seen in the first half of the year, we had a lot of pent-up demand because of closures, and then we had a strong Q3. So if we're going to have a softer Q4 and the one basis segment, that's going to build up some demand that, obviously, will bring some benefit into Q1. So on balance, I think you have to kind of balance that in your estimations.
Sorry, I guess, I wasn't trying to compare it to Q3. Like I said, it sounded like the commentary that it would be down -- Q4 would be down versus Q3. But back in Q1, when revenues fell to $27 million, I think, you had indicated that you expected each of the following quarters to be higher than Q1 levels, so higher than $27 million. I'm just wondering whether you still believe that will be the case.
Well, that's for you, obviously, in your model to figure out. We're trying to help you at least kind of come close to where we're looking at. But we certainly don't -- as you know, we don't give guidance as a company, that's been our stance going forward. So we are talking about 1 of the 4 business segments having a softer quarter for one of the markets that are softer. So it does create some near term volatility, I guess, in the next couple of months as we close out the year. But it is building up demand for the first quarter.
I was wondering, just given what's going on with COVID here, just any changes in customer behavior, maybe particularly as it relates to, say, inventory levels. Like, do you find any customers are carrying lower amounts of inventory running little bit leaner, just given the demand is a lot different now than it would have been, say, a year ago?
Yes. No doubt. There would certainly be a lot more cautiousness on the end customer perspective on inventory. Of course, anything that's -- like in mobile, where it's B2C, they're being bit more -- certainly bit more cautious. So we do see that certainly playing out. This year, though -- what's interesting in my view, this year is, of course, we were all caught by surprise. It's the first time we had such a global pandemic. But we're seeing a lot more thoughtfulness in 2021 as they're planning to -- actually have to coexist with this virus for some period of time. No one's expecting the vaccine to be the full silver bullet here. So -- but now you're seeing purposeful planning. And I think that, that's what's exciting.Of course, we knew that 5G spectrum was required here and the C-band thing was probably -- maybe a bigger deal than maybe some of the capital markets appreciate it. But now that there's a solution that's now there, that's going to change a lot for us. And so, there's going to be a lot of capital being spent by telco carriers this quarter to buy their slices of that spectrum and then that money then flows into SATCOM. So it's going to take 2 sides of our business that were affected by this and infuse capital into one and provide clarity on spectrum for the other.So, naturally, next year for us is going to be -- there's much more purposeful engineering happening. Lot more things happening right now that set the stage for next because we know how to live with this virus to some degree, and there's planning going forward. So we're pretty optimistic, as you can tell on the call, because of all the things that we see and the activity level that is happening on the engineering side and the products that we've released.So, yes, there's certainly near term issues, but when I look at it, I feel very strongly that we've got a very robust order book for next year. We've got a lot of -- still some uncertainty. But the amount of activity that's going on right now in our space is pretty exciting.
I guess, it kind of ties into my next question. It sounds like there's a lot of stuff going on -- positive stuff for next year. Could you maybe talk about what the 2 or maybe 3 initiatives that you think could have the most significant impact next year?
Sure. So, clearly, it's going to be clearing up the spectrum for small cell. Small cell is been slower this year than expected. We had some issues related to the municipality delays of approval of small cell sites, but then layer on that, that you have no decision on the actual C-band. Well, those 2 things have now cleared up, and there's a lot more abilities now to -- in that area. So we're going to see a natural pickup.And then I also announced earlier in the call that we've won a second carrier that has a very aggressive small cell strategy. So, you take those 2 and combine it, then your -- our expectations in our infrastructure group are significant for next year. And on the back of some 2 very important things that have sort of call it cleared the deck a little bit. So that's the first one.The second one is that we didn't talk so much about embedded. I did reference Wi-Fi 6 in my earlier comments. However, I should spend a second to explain what that really actually means. So Wi-Fi 6 has always been -- it's a new unlicensed spectrum. It's got a lot more -- because it's higher frequency, it's got a lot more data transmission and performance capabilities.Wi-Fi 6 was scheduled to be rolling out over a lot more time than it -- but as a result of the pandemic and more people working from home and more bandwidth now coming into homes, they've now pulled in a lot of these Wi-Fi 6 platforms. And so this year we spent, I think, we it would probably be, call it April-May where we had a very stark shift in of all the work that we were doing in that division is all slanted towards Wi-Fi 6. And now those platforms and things are now scheduled to than have pulled in earlier, and now we're seeing a significant shift into Wi-Fi 6 products as a result of this.So, though, our embedded group didn't really lose a lot of momentum this year, they were the one division of our 4 that we're really -- where we were expecting. But they've had these shifts in Wi-Fi 6 that are setting the stage for them to actually see some improvement next year over what they were maybe currently -- historically projecting for '21.That, coupled with the fact that we have now won these automotive contracts, and now that group is now moving into embedded antenna systems inside of cars, and we've won 2 contracts with 2 large car OEMS, and those are set to start next year in the second half. So you couple those 2 things together for our embedded group, and those are -- that would be the second one that I'm pretty excited about.Then the third is the Summit Series II. That was a very important and strategic investment that we made as a company, 2.5, 3 years ago when we bought Advantech. That was a very strategic step that we took. It took that much time and effort with a very concentrated group to develop this system. We have launched it. We -- and the initial reaction to it has been very strong, very positive, and we are set to deliver our first system in Q1.That -- then the momentum of that, coupled with the industry changes in LEO and all the new platforms and opportunities that are coming have really given us -- and I would say, a very enviable position in the industry. And we are, in some respects, first to market on some of the things that we can offer.
I guess the last question I got, maybe more for Mike. Just talking about further cost reduction activities. Any color you can provide in terms of magnitude and timing would be appreciated.
Yes. As we've reported, we've been really looking at cost reductions for -- really, it started at the end of last year, and we're continuing to do that. In terms of magnitude and timing, it gets a little tricky, because we are always looking at cost reduction opportunities, obviously, and we'll continue to do it. But it will partly depend on what our ongoing outlook looks like for H1 or the first half of next year, and the timing of some of the initiatives that Randy has announced or commented on, and this ramp-up of our facility in Vietnam -- the new facility in Vietnam. So all of those things could have an impact on operating expenses.And while we're continuing to look at them, we are being careful that we don't want to make any cuts that will impact or put at risk anything that we've landed and executing on, or anything that we're working on and -- or to try to win. So it's a bit of a balancing act, and we're going to be closely looking at it and continue to closely look at it.So, directionally, I think you -- we would say that we expect costs to continue to decrease. But in terms of magnitude and timing, it's really uncertain at this time.
Thank you, David.
[Operator Instructions] The next question comes from Bill Zhang of Raymond James.
So for Asia Pacific, you mentioned it was going to be affected in Q4. How is it being impacted sequentially? And what are you thinking for 2021, flattish, up or down? Any color there?
So we've -- I think we've answered that a little bit earlier on David's commentary. But to talk about 2021, we've more -- this is a business unit that has been at somewhat flat levels for the last number of years, and we don't expect that to change in 2021. What we are certainly expecting is that, because of some of the hits in Q4, it's going to translate into a pent-up demand for Q1.So our expectation is that this change that we're talking about is somewhat temporal and that Q1, we'll see some rebounds. Similar to what we've seen in this year, the same sort of thing happened to us in Q2. And then in Q3, we had a rebound. So we're not -- we're expecting similar sort of issues for us there.
And for the Massive MIMO, you mentioned the engineer will go in for calibrations in Q1, operation starting in Q2. So when can we expect to recognize revenues, in more late Q2 or Q3?
Yes. No, the timing of it is exciting for us as we've been -- this has been the missing link, as I said earlier. So getting that in there and getting that done, we're only getting one engineer in there as opposed to the 3 that we needed. So it will take a little bit longer, but getting it done in Q1 is certainly reasonable, even with what we've got happening today. So into operations and getting things sort of finalized in early Q2 with an eye to seeing the start-up of revenue in the second half of Q2.
And then I know this was asked before, the $3.3 million savings for OpEx over the year, is that like a good run rate to use? Or should we expect it to decrease or increase in that?
Okay. This going to Michael?
Well, I mean, the last 3 quarters have been roughly $11 million. Some of the cost reduction initiatives that we've made in the last little while haven't been fully realized yet, and as I mentioned, we are still looking at other ones. Expecting dramatic decreases in the short term. But again, it's going to depend on timing of certain initiatives and how they play out in 2021. And if things get postponed or if they start earlier, that will impact our decisions on making some cost cuts. But, directionally, over the next couple of quarters, we do expect a downward trend on OpEx.
There are no further questions at this time. I will now return the call to our presenters for closing remarks.
Thank you very much, and thank you, everybody. I know this, obviously, was an interesting and difficult year in many respects. But we're glad to give our report today, just knowing the exciting 4 things that I talked about earlier and the trend that things are going. So we've moved ourselves into this position that we find ourselves today, in an enviable one.With the long term opportunities well intact, customers still in place, contracts still there. And for us, the OpEx changes and the things that we've done to make sure that we really grind down our operational costs as best we can, and that we haven't been bashful whatsoever on that front. And now we've got the company positioned for 2021 to see some improvements there, and we're looking forward to reporting those to you in the future. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.