Baylin Technologies Inc. (BYL) Earnings Call Transcript

[Operator Instructions] This call is being recorded on Wednesday, November 11, 2026. I will now turn the call over to Kelly Myles, Director of Investor Relations. Please go ahead.

Thank you. Hello and welcome everyone. Thank you for joining the call this morning to review Baylin Technologies' third quarter 2026 financial results. On the call today from Baylin are Leighton Carroll, Chief Executive Officer, and Clifford Gary, 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, beyond 2026 and beyond, and could include the use of non-IFRS measures. These statements are subject to risks and uncertainties. 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, 2025, and our other filings, which are available on CEDAR Plus. The Q3 2026 results were released after market close yesterday. The press release, financial statements, and MD&A are available on CEDAR Plus, as well as our website at www.baylintech.com. I would now like to turn the call over to Leighton.

Thank you, Kelly. Good morning, everyone. Thank you for joining us. Baylin's third quarter was our first full quarter with Kaelus, and you can see it in the numbers. Revenue was $35.3 million, more than double the $16.8 million we did a year ago, up some 60% from the second quarter. We delivered $0.7 million in adjusted EBITDA, our 11th consecutive quarter of positive adjusted EBITDA. Net loss narrowed to $0.7 million from $1.1 million a year ago and from $3.2 million last quarter. And the business generated $0.8 million of cash from operations compared to a small output a year ago. Contract gross margin was 34.6%, down from 43.4% a year ago and 47.1% last quarter. That's a result of a combination of product mix and cost pressure, particularly on electronic components and logistics, which I'll come back to. I've also previously shared with investors that Kaelus's gross margins were definitively lower than Baylin's business lines had historically performed, and that is also reflected in the numbers given the mix. Our wireless infrastructure business in particular has felt an effect of North American carrier restrained spending in the second half of the year, which I'll explain more in a bit. Those pressures have led to three things: our 2026 outlook, our credit facility, and the effect on the former shareholders of Kaelus. I will walk you through each of the business lines before handing it off to Cliff, who will take you through the financials and the terms of our credit amendment, and I'll come back at the end to discuss why I'm optimistic about Baylin in '27. First, let me talk about our outlook. In August, we provided a financial outlook for 2026, and then some customers, particularly in wireless infrastructure, have changed the timing of their capital spending network deployments, and a good number of orders that were designed into—that we knew were coming in the second half of this calendar year—have been deferred into '27. That doesn't mean the orders go away, but it does mean that they have been deferred. With the impact of these deferrals, we no longer believe we have a sufficient basis to support the numbers in the prior forecast. Therefore, we are withdrawing our 2026 financial outlook and we will not be providing replacement guidance at this time. Secondly, our credit facility with SAF. As a result of lower—what I just described—we did not meet the minimum EBITDA covenant for the second and third quarters combined. That, however, SAF has provided a waiver and we have agreed to amend the facility. Cliff will take you through the terms, but the key points are that we're repaying $4 million of the principal, the interest rate will increase by 1.5% until our leverage ratio comes down a touch, our minimum liquidity requirement is actually materially reduced, and our existing covenants, including the fourth quarter test, remain in place for now. We appreciate SAF working with us and we're continuing to work with them on a longer-term solution that fits the business. Our financial statements this quarter include a going concern note, which Cliff will also speak to. We will be matching our financing to the timing of recovery of our markets going forward. The operating business underneath is generating positive adjusted EBITDA and positive operating cash flow, and every dollar of EBITDA we add from here improves our leverage, which will bring our interest rate back down. Third, the former shareholders of Kaelus. As a result of the covenant miss, certain payments to the selling shareholders of Kaelus, including payment schedules on November 15th, are currently restricted under our credit facility. We have been working with SAF and our controlling shareholder to determine an appropriate path forward. I can't give you effectively what the outcome is today because we're focused on reaching a satisfactory resolution for all involved, and for certain this relates to our financing arrangements, not our operations. We continue to serve our customers, fulfill our orders, execute our integration initiatives, have the liquidity to do so, and run our business in the ordinary course. With that, let me return to the business. Kaelus: In its first quarter with us, Kaelus delivered strong revenue and is certainly a significant reason why our revenue doubled in the quarter. It also has changed the shape of the company. A year ago, almost half of our revenue came from the United States. It was about 28% with Sweden and Australia now among our largest markets. In a world of tariffs and trade uncertainty, diversification matters. For the fourth quarter, we expect Kaelus to continue generating solid revenue, and there's an absolute focus on improving the gross margins relative to the recent periods, the wireless infrastructure customer base, broadening Kaelus's own customer base, and improving underlying cost structure and margins. All of this is going to be a focus on cross-selling. Wireless infrastructure: Obviously, a very challenging quarter. In the wireless infrastructure business last year, the first half of the year has been a really good business for us. I think I've talked about that on previous calls. Really towards the mid part of this year, the North American carriers started redirecting their capital towards fiber in support of AI data center buildouts, and that has delayed and reduced spending on the wireless infrastructure we supply. We expect the volumes in the fourth quarter to remain below historical levels and the full year to be softer than a very strong '25. But this is a timing story, not a technology story. We are a multibeam small cell antenna, and this remains very competitive, particularly combined with Kaelus's antennas, RF conditioning, synchronization, and test and measurement products. We now offer a far broader range of solutions than before. We also expect carriers to resume spending in '27, and when they do, we'll be ready. It makes sense. There's an absolute immense amount of spend going on in AI data centers, particularly in the United States. Companies like AT&T and Verizon have significant fiber assets and they're chasing those data centers. Wireless needs don't go away, and wireless data growth doesn't stop. We have significant areas of the country and projects for various carriers that we know we are designed into that have been deferred. That means there's an expectation and there's a timeframe around those expectations for '27. That doesn't mean '27 will be like '24 or '25, but it does mean it will not be like the back half of this year. Our custom antenna solutions business was softer than a year ago as some customers delayed orders due to chipset availabilities and higher component costs. In many respects, some of that is also a collateral impact of the amount of spending going on in AI. That said, we expect fourth quarter revenue to be comparable to third quarter and full year revenue to still be similar to 2025. The business we are bidding on remains at an exceptional level, and we actually have pretty good visibility into '27 that this is going to continue to be a solid business for us. Satcom has been a wild ride. This is a business I'm increasingly encouraged by. Their backlog built significantly in the late second quarter and into the third, driven by multi-million dollar orders for our Genesis amplifiers across high-power broadcast, government, and defense applications, particularly defense. Revenue for this quarter was below last year, and adjusted EBITDA was comparable to last year and improved from the second quarter, as customers moved from legacy lower-margin products to the new Genesis line. We expect better mix and better margins over time. We've also been on the record saying that we've taken steps this year to size the Satcom organization to current demand. We've been streamlining costs so that the business can protect profitability while being able to respond quickly as demand recovers. Full year Satcom will still come in below 2025, but the outlook for the fourth quarter is more favorable and the direction is clearly in a more positive direction. Across the company, we ended the quarter with a backlog of $50.9 million, two and a half times where we started the year. Down from last quarter, reflecting the revenue we shipped this quarter to slower order intake in wireless infrastructure, but it remains a strong base heading into the fourth quarter. Now let me touch on the macroeconomic environment because it's affecting everyone in the industry. Oil and fuel prices remain elevated with the disruptions in the Middle East, and that's flowing through transportation production costs. Obviously, the AI data center phenomenon is causing price spikes across a wide range of electronic components, including memory chips. We've been responding with cost control, procurement operations, cost discipline, and operational efficiency. In some cases, we have had discussions that previously would never have happened with customers about increasing prices. It is a unique time in our markets. You can see some of that discipline in our working capital; our cash conversion cycle improved to 39 days from 58 days at the end of last year. With that, I'll turn it over to Cliff to take you through the financials in the more detail.

Thank you, Leighton, and good morning, everyone. Looking at our quarterly results, for the third quarter, revenue was $35.3 million compared to $16.8 million in the prior year quarter. The increase was driven primarily by the inclusion of a full quarter of Kaelus's results. Gross profit was $12.2 million compared to $7.3 million in the third quarter of 2025. Gross margin was 34.6% compared to 43.4% in the prior year period. The decrease primarily reflects the product mix in the quarter together with higher component costs and broader inflationary pressures. Operating expenses were $13 million compared with $7.6 million last year, reflecting the inclusion of Kaelus and $0.6 million of acquisition-related expenses. Adjusted EBITDA was $0.7 million compared to $0.6 million in the prior year period, representing our 11th consecutive quarter of positive adjusted EBITDA. Net loss was $0.7 million compared with a net loss of $1.1 million in the third quarter of 2025. For the first nine months of 2026, revenue was $73.4 million, an increase of 26.4% compared to the prior year period. Gross profit was $29.3 million, an increase of $3.6 million. And adjusted EBITDA was $3.8 million compared with $4.7 million in the prior year period. On the balance sheet, our net debt was $12.7 million at the end of September '26, compared with $12.4 million at the end of December 2025. Total debt increased to $24.1 million, mainly reflecting the first advance under the SAF term facility, which was used in part to repay our previous RBC facility in full and to fund the Kaelus acquisition. Total assets were $114.5 million at the quarter end, reflecting the addition of Kaelus. As Leighton mentioned, subsequent to the quarter end, we amended our credit agreement with SAF. The principal terms of the amendments are: - A waiver of the minimum EBITDA covenant for the second and third quarters of 2026 combined. - A $4 million principal repayment on the term facility, which was funded from the blocked account. - A minimum blocked account balance of $4 million, which required us to make an additional deposit of $2 million into that account. - A reduction of the minimum liquidity requirements to $4 million from the $8 million that applied in the third quarter, with the blocked account balance now counting towards that liquidity requirement. - An amendment fee of 50 basis points on the principal outstanding after the $4 million repayment. - A 1.5% increase in the interest rate beginning in the fourth quarter of 2026, until the senior leverage ratio calculated on a last quarter annualized basis falls below 3.5 to 1. There were no other changes to the credit agreement. All existing covenants, including the fourth quarter 2026 tests, remain in place. In our financial statements, we have disclosed the material uncertainty related to going concern, reflecting the covenant matter and the need to reach a longer-term agreement with our lender. We continue to work constructively with SAF towards a mutually acceptable long-term solution. I'll now turn the call back to Leighton.

Thank you, Cliff. 2026 has been a year of transition and investment for Baylin. The acquisition of Kaelus and the beginning of integrating it is meaningful to the company. We've expanded our technology portfolio, more than doubled our backlog from the start of the year, and extended our track record of positive adjusted EBITDA. Markets remain challenging, and we have work to do with our lender clearly. But when I step back from the quarter, I see a company that is very different, much stronger strategically than it was a year ago. And as we head into '27, a few things give me real confidence for the future: 1. We'll have a full year of Kaelus integrated into the company in conjunction with Galtronics, selling a much broader portfolio to a much broader global customer base. 2. We expect carriers to resume infrastructure spending in '27. It's one lesson from my career over the many years working in wireless. Wireless carriers cannot ignore their networks. It just ends badly for them over time. They will rotate away at times, but they have to continue to invest. The wireless infrastructure business has been operating well below its potential this year, and when that spending returns, we've been working to make sure that we are positioned so that it comes back with real operating leverage. 3. Satcom: We have a strong backlog, we have a new product line, we manufacture in the U.S. and Canada, we have a leaner cost structure, and the margin profile has consistently been improving. 4. Exposure to markets with long-term momentum: Defense and government communications through Satcom, communication and synchronization and anti-jamming technology with Kaelus also opens up defense and government spending as well. There's a clear path on the balance sheet. Obviously, this is a challenging quarter, but as our EBITDA recovers, our leverage comes down, our financing costs go down, and we have the flexibility to invest more in growth. Beneath all of that, the long-term demand drivers in our markets are firmly in place: continued investment in wireless connectivity and network capacity, defense, and some of the other products that we have. Our job between now and then is clear: protect our margins, convert our backlog, integrate Kaelus, continue to focus on competitive advantage and competitive positioning, and work with SAF on a durable long-term financing solution. Our focus is on execution, profitability, cash generation, and delivering long-term value for our investors. To our employees in Canada, the U.S., Sweden, China, Australia, Finland, and elsewhere, we appreciate everything you do to help us operate. Thank you. This has been a demanding year, and you continue to step up. To our customers and suppliers, thank you for your ongoing support. And to our shareholders, thank you for your continued confidence in Baylin. We know there's work to do, and we're focused on doing it. Operator, we're now pleased to take questions.

[Operator Instructions] And your first question comes from Daniel Rosenberg from Paradigm Capital. Please go ahead.

Hi, good morning, Leighton and Cliff. My first question just comes around the gross margin level. So you mentioned product mix. Can you elaborate here, which products, as well as inflation, and on the components, how much of the pressure was due to that versus product mix?

Sure. So it's actually, you could take product mix and say part of that is Kaelus. And it certainly is. And then obviously having Kaelus fully under the tent for Q3, they had a good revenue quarter, and it is 100% correct to say their margins were on a historical basis lower than Baylin's. So that is certainly part of the story. Mix also matters in other places, and I'll give you an example. We've talked about wireless infrastructure not being at the same level as it was last year, but there's also some mix that has happened there as well, meaning we saw in wireless infrastructure more customer demand for, for example, in-building wireless products, and in-building wireless products historically have a lower margin than say some of the other products we sell. So the mix component was pretty significant, as you saw here. What we have seen in terms of component pricing and component pricing effects on margins, we've actually done, I would argue, a pretty good job of managing that, and I would say it is a really small part of the overall gross margin story. I would say it this way, if anything, we've seen that affect demand in certain places not because it's affected us, but because it's affected our end customers for certain things they needed to acquire. But it is not a major portion of the gross margin story.

Okay. And then as a follow-on to that, at Kaelus, on the margin profile you're seeing there, how do you fix that? Is it a pricing issue? What do you attribute it to?

Yes, well, it's a good question. It's multiple things. So I would say it this way: One, a significant portion of Kaelus's revenue has come from some of their newer products. And one of the things that I learned about Kaelus is that when they launch products—and this is a pretty consistent pattern of behavior over their lifetime—they would launch a product, get it to market, start to sell it, and accept a lower margin structure, and then over time work through that product to improve its margin and underlying cost structure. Now, that's part of the story. Another part of the story is they use a significant amount of contract manufacturing in their production processes, right? Whereas Baylin does—we use contract manufacturing when appropriate, but we also do our own manufacturing in-house because we have found that gives us better quality control in some respects and allows us to work on cost controls for our benefit as opposed to a CM who may be working on cost controls for their benefit to maximize their profit. You can imagine we are looking at that and saying, okay, what can we insource? What can we bring in to improve the margin profile of those projects? Number three, and there's the engineering design. It's a longer step, but part of our process is designed for manufacturability, and this isn't at the top of our priority list in this space to drive margin improvement. But it is on the list to just say, okay, let's look at the products, and maybe there isn't anything we would change. But it still needs to be evaluated with a look at, is this the most efficient way to manufacture? Is this cost structure optimal? Are we working with our underlying suppliers and vendors to maximize profitability? Those are all things that we are currently looking at.

Okay, and then on the backlog, I'm wondering if the margin profile of your backlog is this kind of what we should expect going forward as you work through the backlog? How much variability can you have, or improvement can you have, given the things you just said in the coming quarters?

Yes, so within the backlog itself, we are focused on selling things that will drive improvement, and even in the backlog that we already have, and in the future, selling things that will generate a higher percentage of gross margin. So I'll give you an example. I talked about wireless infrastructure and that we've seen a very large shift into in-building wireless, particularly in Q3, which had a lower margin profile. One of the phenomena we have seen is that, particularly with the U.S. carriers, there will be some markets that will have additional capital availability, and they will, going into the fourth quarter, want to meet demands that they have that they haven't been able to allocate capital to. We actually just sold nine multibeams to a U.S.-based carrier in two specific markets for that exact reason. Those have higher profitability than, say, an in-building wireless antenna. We expect, as we get to '27, and wireless carriers need to focus on infill, densification, better seamless coverage, we're hearing that from two of the big three in the United States, those will drive into products that have higher profitability just innately even without doing margin improvement. So the mix should be changing in the future from what we've seen in the back half of this year. That is our expectation. Number two, when Kaelus came fully under the tent and we're in early June and we're looking at backlog and we're looking at margin profile, our focus was very, very clear. We need a margin improvement program. We started a top-10 margin improvement program with the leadership team of Kaelus. They pushed back, fully bought in, understand why we need to do this, built the plan, and they are already executing on the plan. Number three, customer diversification: they tend to be dominated by a smaller handful of customers than Baylin historically has been. And some of those customers are 800-pound gorillas in their industry, which means they're going to apply a lot of pressure on you about your margin profile. When you're dealing with a Nokia, when you're dealing with an Ericsson, that is a very normal behavior. Diversifying the customer base and having relationships with a broader portfolio of customers, not only does it add resilience, it provides you with opportunities to further strengthen your margin through direct selling outside certain avenues.

Okay. So, I guess the, you know, the gist of this margin story is the adjusted EBITDA covenant got tripped here. So, in terms of fixing that, how much do you think needs to come from Kaelus's side versus from Baylin's side versus synergies?

Another good question. It's really a combination of both. I would tell you that Kaelus, as great as they have been on revenue, they absolutely have work to do on the margin structures. And we've been very straight up with the leadership team, who are now part of our team, that this is going to be a priority and we've got to work on this together. Separately, on the Baylin side, we have been working to and need to continue to work on getting the Satcom margin structure improved. It's part of why we did the Genesis line, it's part of why we've been streamlining costs. That remains, while we've made progress, that remains an opportunity. Number three, infrastructure being down significantly is also certainly an impact on margins because the infrastructure unit out of Baylin has our strongest gross margin profile. As that spending starts to materialize as we get back to '27, that will by itself have a material impact on the overall structure. So it's really a combination of things to address this. We feel good about where we're going. We feel good that wireless carriers are going to need to spend. You can go, Ericsson has a great study on this. Wireless data usage doesn't go away, and by the way, as physical AI becomes a reality in our lives—and that's not a right now thing—the utilization or the impact of that on wireless networks is going to increase, even on the, particularly on the uplink side of the equation, there's going to be a lot of pressure on the wireless networks. Those are all good things for us. Those are things that we solve for our customers.

Okay, thanks for that. And then just going back to the agreement, so you waived some covenants for Q2 and Q3, but I believe they're still in place for Q4, and so we're in November now. I guess what could you say to the potential being on side versus negotiating, you know, further negotiations with your lending partner?

Yeah, so one of the details on this, I think the detail matters. We obviously were on side for Q2. So how would we say we're on side for Q2, Q3? The way that the covenant structures worked this calendar year is they were effectively compounding—maybe compounding is not the right word, but the Q2 covenant, we were on Q3 covenants, it was a higher bar, Q2 plus Q3, and that's where there was a miss and we received the waiver, we negotiated, we signed the amendment. As we go towards Q4, if in particular in North America, if Q4 rhymes with Q3, we expect we will need to negotiate a revised structure, and the idea is not to negotiate a revised structure for Q4 that every quarter have a negotiation. It's how do we support—and I do truly appreciate SAF and their support of Canadian businesses—we will be discussing a structure for the go-forward business, not just Q4, so that, you know, A, not only do we have the liquidity in the short term, but there's a clear pathway where, as the company performs, there's a deleveraging, the availability is there, and we continue to build a business. Because look, at the end of the day, and I've told investors, you know, prior to certainly the earnings release, things would be choppy. They certainly have been. The strategic rationale about the acquisition, what it means to the business, and in combination with our broader business, the upside that it provides, how this changes how customers look at us with our broader capabilities, this is a good acquisition for the company, and I do think in the long term, the direction is going to pay out for us. Unfortunately, we live in a world where people are enamored with AI data centers and chasing them.