uCloudlink Group Inc. Q4 FY2021 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to uCloudlink Group Incorporated Fourth Quarter and Full-Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question-and-answer session. Today's conference call is being recorded. I would now like to turn the conference call over to your host today, Ms. Jillian Zeng, Investor Relations of the Company. Please go ahead.

Thanks, everyone, for joining us on our fourth quarter and full-year 2021 earnings call today. This earnings release is now available on our IR website at ir.ucloudlink.com as well as via newswire services. I will give a brief introduction to our uCloudlink team. Zhiping Peng is our Co-Founder and Chairman of the Board of Directors; Chaohui Chen is our Co-Founder, Director, and Chief Executive Officer; Yimeng Shi is our Chief Financial Officer; Zhu Tan is our Vice President of Marketing and Sales. Our CEO will begin with an overview of our Company and business highlights, which will cover Section 1 of the earnings presentation posted on our IR website. Our CFO, Yimeng Shi, will then discuss our operational highlights and financial results as presented in Sections 2 and 3. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other facts not under the Company's control, which may cause actual results, performance or achievements of the Company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the Company's filings with the SEC. The Company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Please also note that uCloudlink's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. uCloudlink's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our Co-Founder and CEO, Mr. Chaohui Chen. Please go ahead.

Yes, thank you. There is similar content to the earnings presentation of the third quarter of the year 2021. I will focus on our technology and recent developments. Let's move to Page 13. uCloudlink 1.0 is our international data connectivity services business, which has had a strong track record of high gross margins and profitability with ongoing growth potential. We have established an intelligent wholesale-to-retail repackaging solution to minimize the unit cost of data traffic, in that as data packages of a single operator or across mobile network operators, mobile virtual operators are priced differently. This is attributable to our large SIM card pool and our ability to acquire data packages at local wholesale prices from operators and partners. We further differentiate ourselves with our multi-network reselection and combination technologies, which could ensure high-quality data connectivity and improve user experience. uCloudlink 1.0's business monetization model includes retail to consumers, rental or selling to the end user; wholesale to business partners; and our PaaS and SaaS services, such as CRM, billing management, device selling and rental management, etc. For wholesale to business, we can act as a reseller or provide commission services to our business partners. We allow our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fee. In the year 2021, we strive to accelerate the recovery of our 1.0 business, which was reflected in the positive trends in the daily active terminals called DAT of 1.0 business growth, as the number of international travelers increased in various markets, and our 1.0 business revenue increased in the third quarter of the year 2021 year-over-year. The revenues of our 1.0 business in our North American and European markets increased during the first quarter of the year 2021 year-over-year. Although the total revenues from the same line of business experienced a year-over-year decrease in the same period due to the impact of the COVID-19 virus. Despite the impact the pandemic has had on our 1.0 business, it has also created opportunities for potential growth, including the demand for mobile data related to travel, tracking, vaccination records, digital passports, and COVID test reports. We also anticipate that we will see fewer competitors in the post-pandemic market, but we cannot assure you that the 1.0 business will not be negatively impacted by the COVID-19 pandemic in the year 2022. We remain confident in the prospects for international travel with worldwide vaccination continuing to progress and more and more countries opening their borders to tourists in the year 2022 and beyond. With that, I would like to reiterate our vision for the 1.0 international data connectivity business. Our plan is to not only continue providing existing high-quality 1.0 offerings but to size a big market share with the development of more innovative products and services. Let's move to Page 14. uCloudlink 2.0 is our local data connectivity services business and has become a new driver of revenue growth since the year 2020. This business monetization model is similar to that of uCloudlink 1.0 with a massive potential local user base. Our new HyperConn technology contributed to further development and growth of our uCloudlink 2.0 business, and we have expanded the business scope of our local data connectivity services. Currently, our innovative HyperConn technology is widely accepted by mobile network operators and business partners in various industries with greater growth potential, such as with local partners in China, the U.S., and Japan. Our 2.0 business shows a greater deal of resilience with proven high demand and growth potential during the pandemic. We help operators improve their data services and solve data connection problems through our PaaS and SaaS platform. We provide high-quality data connection for 5G applications in response to the increased demand for better connectivity services. Furthermore, as people get used to the new normal, our products and services provide better-performing solutions for remote work and learning, which require reliable connectivity as well. For example, our new tablets equipped with HyperConn and Cloud SIM technology have been put to use in new industries such as education. We have made progress through the HyperConn solution with mobile and fixed broadband business under various application scenarios such as home broadband. For example, our mobile and fixed broadband business cooperation with one of our major network operators in China has been successfully launched and distributed to more provinces. We also plan to invest more in GlocalMe Inside, which we call GMI, in smart devices by cooperating with more intelligent hardware manufacturers. In addition, we have extended our footprint into more application scenarios, including but not limited to Internet of Things, IoT modules, industry Wi-Fi routers, IP Cameras, smart devices, emergency services, live broadcasting e-commerce and Autopilot, etc., and are actively exploring new business prospects to serve a broader spectrum of IoT applications. We expect our 2.0 business to grow with the support of our innovative Cloud SIM and HyperConn technology as we continue to introduce our solutions, services, and products to the market and strengthen our cooperation with local partners. Let's move to Page 15. Based on our innovative Cloud SIM and HyperConn technology solutions, we continue to develop and broaden our portfolio of offerings with new products and services, such as our self-developed terminals and third-party devices. For example, after we unveiled our new HyperConn technology and products in June of the year 2021, we launched these solutions and products to the markets in the second half of the year 2021, such as Numen, the world’s first HyperConn 5G mobile Wi-Fi and Genie, a tablet device in the third quarter of the year 2021 and Mini Turbo, a portable Wi-Fi Hotspot equipped with HyperConn in the fourth quarter of the year 2021. Our IP Camera, IPC has completed testing and is expected to launch commercially soon. Our HyperConn technology solution has been well received and related products are gaining recognition as proven by a growing user base across a wide spectrum of industries. Going forward, we plan to launch more of these types of innovative products and services. uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market. In the year 2021, we made it a priority to invest in research and development, most notably in technologies like Cloud SIM and HyperConn that are compatible with various application scenarios, both of which greatly reinforce our technology advantages. Our mature 1.0 business and newer 2.0 business will together promote the long-term development of the PaaS and SaaS ecosystem, which has been recognized by various business partners. As stated in our earnings release, we anticipate growing total revenue for the full-year of 2022 by 15% to 35%, to a range between US$85 million to US$100 million versus total revenue of US$73.8 million in the year 2021. The company expects to improve financial covenants with the support of our commercialized HyperConn technology and related 5G products, the continuous business expansion of our existing portfolio of diverse IoT application scenarios as well as the ongoing efficient improvement strategy implemented since the fourth quarter of the year 2021 to reduce operating expenses. We believe that from connected to better connections, uCloudlink is a significant driving force in the transformation of the increasingly advanced information era. We are committed to building a more connected future for more customers and users, and we strive to make a positive impact in serving the global user community. I will now turn it over to our CFO, Yimeng Shi, who will go through business and financial highlights.

Thank you, Mr. Chen. Hello, everyone. Let us turn to Page 17 for our business highlights. The left-hand side of the slide shows Daily Active Terminals, DAT, as of December 31, 2021. Average daily active terminals in the fourth quarter were 265,595 including 1,585 owned by the company and 264,010 owned by our business partners, representing an increase of 28.7% from 206,400 in the fourth quarter of 2020. Our uCloudlink 2.0 service accounted for around 69% of the total DAT during the fourth quarter of 2021. Average daily data usage per terminal was 1.73 gigabytes in December 2021. Let us turn to Page 18 which shows global diversification of our business. We had 97% of the total revenue from outside Mainland China. During the fourth quarter of 2021, Japan contributed to 37% of the total revenue. For other countries’ revenue, the U.S. market had the largest contribution to our business with further development of our U.S. business, and we will continue to expand other markets such as Japan, China, Europe, and Southeast Asia, etc. During the fourth quarter of 2020, we had 5% of total revenue coming from Mainland China, 47% of total revenue coming from Japan and 48% of total revenue coming from other countries and regions. Let us turn to Page 20. I will go through our financial highlights of the fourth quarter 2021. Service-related revenue as a percentage of total revenue was 54.8% during the fourth quarter of 2021 compared with 52.9% during the fourth quarter of 2020. Revenues from PaaS and SaaS services increased 43.5% from US$1.9 million in the fourth quarter of 2020 to US$2.7 million in the fourth quarter of 2021. This increase was primarily due to the expansion in the number of our business partners that use our PaaS and SaaS services to provide local data connectivity services. Revenues from PaaS and SaaS as a percentage of total revenue also increased to 15.2% during the fourth quarter of 2021 compared with 10.9% during the fourth quarter of 2020. Let us move to Page 21 which shows the revenue breakdown of our two business segments, namely revenue from services and sales of products. Our total revenue increased by 3.2% from US$17 million in the fourth quarter of 2020 to US$17.6 million in the fourth quarter of 2021. Revenue from services were US$9.6 million, representing an increase of 6.8% from US$9 million for the same period of 2020. This increase was primarily attributable to the increase in revenues from local data connectivity service and PaaS and SaaS service. Let us turn to Page 22 for the gross margins of our business. Our service gross margin increased to 46.1% in the fourth quarter of 2021 compared to 41.2% in the fourth quarter of 2020, and our overall gross margin was 31% in the fourth quarter of 2021 compared to 31.4% during the same period of 2020. The increase of our service gross margin during the fourth quarter of 2021 was primarily due to the increase of our PaaS and SaaS revenue, which has the highest gross margins over other business revenues. Let us move to Page 23, which shows the breakdown of our operating expenses excluding share-based compensation and others. Excluding share-based compensation, operating expenses as a percentage of total revenue was 62% in the fourth quarter of 2021 compared with 83% during the fourth quarter of 2020. The past few years have been a peak time for research and development, and we will optimize the research and development cycle and continue to improve our operation efficiency of our business. Let's all turn to Page 24. Operating cash flow was negative US$3.2 million during the fourth quarter of 2021 compared to negative US$5.5 million during the fourth quarter of 2020. Our cash and cash equivalents and short-term deposits were US$8.8 million as at December 31, 2021. Our CapEx was US$0.2 million during the fourth quarter of 2021 compared to US$0.4 million during the fourth quarter of 2020. CapEx as a percentage of revenue decreased from 2.2% during the fourth quarter of 2020 to 1.3% during the fourth quarter of 2021. Let's all move to Page 25. Net loss during the fourth quarter of 2021 was US$15.5 million compared to US$12.4 million during the fourth quarter of 2020. Adjusted EBITDA was negative US$5.1 million during the first quarter of 2021 compared to negative US$7.9 million during the fourth quarter of 2020. With that, let me conclude today's presentations. Thank you, and we will start our Q&A session.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Our first question today comes from Lisa Thompson from Zacks Investment Research. Please go ahead with your question.

Hi, good evening. Thank you for that presentation. So I have a number of questions about the quarter. First, could you just tell us what's the current fully diluted share count now that you have a convertible debenture?

Hi, Lisa, can you repeat the question?

Yes. What's the current fully diluted share count now that you've issued a convertible debenture?

Yes, we will disclose that convertible – that diluted shares taking into account this convertible debenture issuance in this January. So that figure will be disclosed in the first quarter only released this year.

Okay. So this is the number. All right, as far as cash burn, where are you now? Is it $1 million a month or less than that?

In the fourth quarter of 2021, we burned US$3.2 million for operational cash flow. As of December 31, 2021, the company had cash and cash equivalents and short-term deposits, US$8.1 million and short-term investment at US$12.6 million. So in January 2022, the company completed an issuance of a convertible debenture through private placement with proceeds of US$4.7 million based on the company's projection of cash flow and the existing balance of cash, cash equivalents, short-term deposits and short-term investment. I think the company's – companies have sufficient funds for sustainable operations. And the company has taken measures to successfully execute its business plan, which includes increasing revenue while controlling operating expenses to generate positive operating cash flow and obtaining funds from external sources as well. So we expect the cash burn rate will be improving this year materially. And so we expect that with our guidance and others, we will manage the cash flows in a healthy position for this year.

So do you think you'll get to cash flow breakeven by the end of the year?

That's what we are expecting, and management will make efforts to achieve that target.

All right. As far as the income statement, could you say what was that $8.7 million in other expense? What caused that?

You mean the breakdown of the operating expenses?

Right.

Hi, Lisa. Can we discuss the figures after this call? Is that okay?

Okay. It's not an easy answer. So also could you give an update on – do you still have the education order for tablets in Japan, or has that been canceled? And when might that start?

Can I pass the question to Mr. Yeo, or Chaohui Chen to answer the question?

Okay.

You asked about the pad contract in Japan, right?

So can you repeat your question? Yes, it's about pads in Japan, right?

Yes.

Yes. The pad order in Japan is still ongoing. But because the schools in Japan have restarted face-to-face education again, the speed is a little bit slower than our expectation, but it is still ongoing.

Okay. And is there an explanation for why revenues in Japan are declining?

Yes, I think it's clear because – of course, when the COVID-19 happened, local requirements were huge. But because face-to-face meetings and in Q2, Q3, and recovery in Q4, the situation with the COVID-19 virus got worse again. But before that, we saw the pandemic improving with vaccinations and new medicine coming out. So face-to-face meetings, education, and remote working decreased in Japan.

Okay. And my final question is, are there any more products you plan to launch soon?

Yes. Yes, you can see that we have Numen, which is the fourth 5G product, the workforce 5G with the HyperConn solution, that can switch between Wi-Fi, all the 5G, and 4G networks. So this launch is in the third quarter. And because the radio band is only with Asia and the European radio band, we don't have global radio band at the moment. And recently, we launched our new product, which we call U 5.0 with global radio band at a more competitive price to accelerate the 5G key product launch. That's one part. And the second part, we have more, like a CPE IoT module with HyperConn inside. So we are launching – as I mentioned in the fourth quarter, we finished testing for more IoT products such as the industry router. So we launched in the fourth quarter of the year 2022. And a new module, more competitive module will launch in the fourth quarter of year 2022. Moreover, we have an IP camera product that launched in the fourth quarter of the year 2021. That’s more products to come up, including the 5G and more IoT products. And we also have more HyperConn products in our international roaming Wi-Fi as well.

All right. Great. That's something to look forward to. Thank you. That's all my questions.

And our next question comes from Vivian Zhang from Diamond Equity.

Hello, everyone. Thanks for taking my questions. So we see the company maintained top-line growth during the second half of last year, with partnerships with business partners and the PaaS and SaaS business growing. So we want to know why the company is expecting a 4% to 21% year-over-year decrease in the first quarter of 2022 revenue. What's the main reason for the decrease in outlook?

The guidance for the first quarter of this year, 2022, is between $40 million to $17 million. That's a decrease compared with the first quarter of 2021. Yes, as we said, the COVID-19 has impacted the supply chain; not just this quarter, but some lockdowns occurred in China, in Shenzhen and Dongguan, which gives us some difficulty for manufacturing and delivery of orders at hand. That's one reason that we are aware of recently. So we expect the first-quarter guidance—a little drop compared with last year.

Yes. So mainly it's because of two reasons. One is because of the Omicron COVID-19 variant. And the second is because of the lockdown in China, specifically in Shenzhen and Dongguan, which heavily impacted our revenue. So we believe that in the second quarter, more countries will open their borders and the impact from the COVID-19 variant will decrease.

Okay. I understand. So my second question is regarding your ongoing restructuring. Can you provide some additional color on why the company adjusted the revenue structure and local business in China? And will this affect the company's future revenue in China as well? Thanks.

Yes. As we disclosed this year, we continue to evaluate our business plan, and we have decided to adjust our business model in China, yes. So on March 17, 2022, the equities of the AE were transferred to Shenzhen uCloudlink Technology Limited. The original agreements were terminated. We believe this restructuring will not affect our uCloudlink 1.0 international data connectivity service in China. So we will transfer and carry out the PaaS and SaaS platform service in China in cooperation with local business partners, such as we invested in Beijing Huaxiang Lianxin Technology, which has the required license to provide local data connectivity services in China. So that's why we adjusted the model in China, similar to Japan. Our PaaS/SaaS ecosystem and services apply to cooperate with local partners in China, Japan, and other regions of the world. This adjustment gives us a more secure position in compliance and operation and positions us to cooperate with local partners to do business in the local market.

Okay. That's all my questions. Thanks.

And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink Investor Relations through our contact information provided on our webcast or Equity Group Investor Relations.

And ladies and gentlemen, I apologize. This is the conference operator. We do have a late joining question from Jakob Kurtz from Greenridge Global. Jakob, please go ahead with your question.

Hi. So daily active terminals continued to increase in the current quarter, but total data consumed slipped compared to the third quarter. Should we expect to see both numbers rise over the course of 2022?

This data consumption per daily active terminal will change in terms of the package selling mix and different target policy that the customers choose. So that's a change in its statistical figure. We cannot accurately forecast this data consumption per daily active terminal will be increasing. We cannot give a clear forecast with this kind of consumption and average daily terminal.

Okay. And then my next question, assuming travel restrictions stay roughly similar to what they are now in China for the remainder of 2022, what percent of total revenue do you expect from 1.0 and 2.0?

Specifically, you mentioned these revenues from China, Mainland China?

Sorry, what was that?

Alright. Can you clarify your question?

Assuming travel restrictions stay similar to what they are currently in China for the remainder of the year, what percent of total revenue do you think 1.0 and 2.0 will account for by the end of the year?

Yes, COVID restrictions are still implemented in China, across the cities. So the Chinese borders have not opened to the outside. We don't know when China will open its borders. But we do expect that the borders will reopen and be lifted in the U.S., European, and some Asian countries like Japan, Singapore, and others. As you are aware, we run our business across worldwide; we have a diversified business for more than 50 countries and regions. So yes, China's contributions are smaller at this moment. The risk outside of Mainland China is when international travel is recovered due to countries opening their borders. We expect that our international connected service will improve outside of China this year. That will give us growth and improve our profitability as well for this year.

Yes. I have some more comments from the previous question. So for the China market, we don't expect 1.0 business recovery, as we think it may be the end of this year or next year before we start to open China's borders. That's our forecast in the worst-case scenario. We don't think that will happen in China for the whole year. So that's one. In China, we are mainly focused on our 2.0 business and IoT business. So that's in China. For international business, we don't have very opportunistic data. For example, we don't think that under the COVID-19 impact, the borders will open quickly. We anticipate that in Q2, some countries will open their borders. But mostly, we believe that other countries outside China will start opening in Q3 or Q4. That's our assumption.

Okay. And then my next question, the markets outside of China and Japan have been showing strong growth recently. Are there any countries or regions driving this? And do you expect to see growth continue to be faster in these regions?

Yes. Once we resolve the two pronged challenges—one is about the regulation challenge, and also for the IoT market. Once we recover 1.0 in China, we believe we will regain fast growth in China.

For others, the potential for fast growth is expected in the Japan market, U.S. market, and European markets, which will be the main growth drivers for the business this year.

Okay, awesome. And then last question. Was the settlement with CMO Holdings completed?

Sorry, can you repeat?

That was, yes, last year. So we launched the agreement last year. It was peaceful, and no more mediations are required.

Okay. Thank you. I appreciate it. That's all.

Thank you.

Thank you.