uCloudlink Group Inc. Q1 FY2022 Earnings Call

Hello, and welcome to the uCloudlink Group Inc. First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jillian Zeng, Investor Relations of the Company. Please go ahead.

Thanks, everyone, for joining us on our first quarter 2022 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 management 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 operation 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 factors 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.

Thank you. Pages 4 to 12 contain similar contents as the earnings presentation of the first quarter of the year 2021. We still encourage you to review the quarter one year 2022 earnings presentation uploaded to our Investor Relations website with some latest updates. Hence, I will now elaborate on the past similar to quarter four earnings results, but we are still focused on our most recent developments in the fourth quarter. Please turn 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 packaging solution to minimize the unit cost of data traffic, as data packages from a single operator or across mobile network operators and mobile virtual network operators are priced differently. This is attributable to our large SIM card pool and our ability to acquire data packages at local wholesale pricing from operators and partners. We further differentiate ourselves with our market network reselection and combination technologies, which could ensure high-quality data connectivity and improve user experience. The uCloudlink 1.0 business monetization model includes retail to consumers, rental or selling to the end user; wholesale to businesses for our partners; and our PaaS and SaaS services, such as CRM, billing management, devices, selling, and rental management, etc. For wholesale to businesses, we can act as a reseller or provide commission services to our business partners. We allowed our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fee. During the first quarter of the year 2022, our 1.0 business revenues have slightly increased by 2.2% compared to the same period in the year 2021. As international travel restrictions around the world continue to abate over time, the number of daily active terminals for the 1.0 business has increased during the first quarter of the year 2022, indicating that more and more customers are using our products and services. With an increasingly diversified geographic market, we are positive that revenues from 1.0 business will steadily grow and exceed the pre-COVID-19 level in the future. We will continue to develop and enrich our 1.0 product offerings. Our goal, as always, is to provide the best quality products and services for our global customers, ensuring better international data connectivity. 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. Its business monetization model is similar to that of uCloudlink 1.0 with a massive potential local user base. Our new HyperConn technology contributed to the further development and growth of our uCloudlink 2.0 business. 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 great growth potential, such as with local partners in China, the U.S., and Japan. In the past quarter, we have continued to strengthen our presence in our existing markets, including Japan, North America, and Southeast Asia, where we have had operators improve their data services and solve the data connection problems through our PaaS and SaaS platform. We provide high-quality data connections for 5G applications in response to the increased demand for better connectivity services. Furthermore, as people adapt to the new normal, our products and services provide better performing solutions for remote work and learning, which require reliable connectivity as well. We adapt ourselves to the evolving market by introducing innovative products to address various 2.0 business application scenarios. During the first quarter of the year 2022, our various IoT solutions, which have successfully started to gauge customer interest and are being perceived as reliable and high-quality data connectivity services in markets like Japan and North America, achieved further recognition. Our revenues from the 2.0 business increased 185.4% compared to the same period in the prior year. Our customers were able to realize reduced operating costs and improved data connectivity experiences through these cutting-edge IoT solutions, and we continue to explore new business prospects to serve a broader spectrum of partners with IoT needs. 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 collaborations with local partners. Let's move to Page 15. Based on our innovative cloud SIM and HyperConn technology solution, we continue to develop and broaden our portfolio of offerings with new products and services, such as our first self-developed terminals and third-party devices. Our HyperConn technology solution has been well received and relies on relative products, including industry Wi-Fi routers, IP cameras, power supplies, emergency services, live broadcasting e-commerce, and Autopilot, augmented reality, virtual reality, AR, VR and cloud computing, etc., are gaining recognition proven by a growing user base across a wider spectrum of industries. In the first quarter of the year 2022, we promoted more innovative 5G products in countries and regions such as the U.S., Japan, and Europe. Furthermore, we have a leading global 5G roaming solution, which is an easier roaming solution for carriers, and we are one of the few companies that can provide 5G products with a global band and global roaming. These reflect our market confidence and continue efforts on elevating our user experience as this new product equipped with our innovative 5G technologies marks not only the gradual recovery but also a new beginning for our growth path in the post-pandemic era. On the IoT side, we apply GMI, GlocalMe Inside solution in IP cameras commercially, and it has been promoted among multiple markets. Going forward, we plan to launch more innovative products and services. uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market through our mature 1.0 business and the newer 2.0 business. uCloudlink is promoting the long-term development of the PaaS and SaaS ecosystems, which has been recognized by various business partners. Revenue contribution increased by 7.8% in the first quarter of the year 2022. Additionally, we have entered two new regional markets during the period. Our PaaS and SaaS platform is built upon uCloudlink 1.0 and 2.0 business lines, and its growth reaffirms our ability to construct a healthy ecosystem. This requires our nonstop efforts in maintaining and expanding a strong partnership base, which includes mobile network operators, mobile virtual network operators, SIM card providers, our business customers, and more. We remain confident in our business development teams and our research and development team to address the diverse needs our customers have posed to us. In the remainder of the year 2022, we expect PaaS and SaaS platform revenue to grow into a more significant driver of uCloudlink's business. We will continue to enlarge its marginal efforts and improve margin profiles. We are able to reduce operating expenses and decrease the net loss through streamlining our business operations, including optimizing labor costs compared to the fourth quarter of the year 2021. Going forward, we expect to further lower operating costs as a way to improve our operating and financial performance. We believe that from connected to better connections, uCloudlink is a significant driving force in the transformation of the increasingly advanced information area. 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 the business and financial highlights.

Thank you, Mr. Chen, and 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 March 31, 2022. The average daily active terminals in the first quarter were 273,870, of which 1,430 were owned by the Company and 272,442 were owned by our business partners, representing an increase of 33.5% from 205,082 in the first quarter of 2021. Our uCloudlink 2.0 service accounted for around 69.5% of the total DAT during the first quarter of 2022. Average daily data usage per terminal was 1.74 gigabytes in March 2022. Let's all turn to Page 18, which shows the global diversification of our business. We had around 26% of total revenue from outside Mainland China. During the first quarter of 2022, Japan contributed to around 40% of total revenue. The U.S. market had the largest contribution to our business as we continue to develop our U.S. business, and we will continue to expand to all markets such as Europe and Southeast Asia. During the first quarter of 2021, we had 6% of total revenue from Mainland China, 58% of the total revenue from Japan, and 36% of total revenue from other countries and regions. Let’s all turn to Page 20. I will go through our financial highlights for the first quarter of 2022. Service-related revenue as a percentage of total revenue was 62.9% during the first quarter of 2022 compared with 47.4% during the first quarter of 2021. Revenue from local data connectivity service and PaaS and SaaS service increased 185.4% and 7.8% year-over-year, respectively. 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 service. Revenue from PaaS and SaaS as a percentage of total revenue also increased to 15.8% during the first quarter of 2022 compared with 12.9% during the first quarter of 2021. Let us move to Page 21, which shows the revenue breakdown of our two business segments, mainly revenue from services and sales of products. Our total revenue decreased by 11.8% from US$17.7 million in the first quarter of 2021 to US$15.6 million in the first quarter of 2022. This decrease was due to the negative impact on local governments from resurgences and subsequent lockdowns in certain cities in China, including where our main manufacturers are based, which has impacted our revenue from sales of products. Revenue from services was US$9.8 million, representing an increase of 17.2% from US$8.4 million for the same periods of 2021. This increase was primarily attributable to the increase in revenue from local data connectivity service. Let’s turn to Page 22 for gross margins of our business. Our service gross margin increased to 49% in the first quarter of 2022 compared to 35.9% in the first quarter of 2021. Our overall gross margin was 37.4% in the first quarter of 2022, increased from 31.3% during the same period of 2021. The increase in service gross margin during the first quarter of 2022 was primarily attributable to the increase in our PaaS and SaaS service revenue and data connectivity services, which have higher gross margins than other business lines. Let us move to Page 23, which shows the breakdown of our operating expenses, excluding share-based compensation and others. Excluding share-based compensations, operating expenses as a percentage of total revenue was 60% in the first quarter of 2022 compared with 71% during the first quarter of 2021. We have further streamlined our business operation, including optimizing labor costs, and our total operating expenses, excluding share-based compensation, were decreased to US$9.3 million in the first quarter of 2022 compared to US$12.6 million in the same period of 2021. Let’s now turn to Page 24. Operating cash flow was negative US$1.4 million during the first quarter of 2022, compared to negative US$6.7 million during the first quarter of 2021, and our cash and cash equivalents and short-term deposits were US$11.2 million as of March 31, 2022. Our CapEx was US$6,000 compared to US$0.1 million in the same period of 2021. Let us move to Page 25. Net loss during the first quarter of 2022 was US$7.9 million compared to US$15.4 million during the first quarter of 2021. Adjusted EBITDA was negative US$3.9 million during the first quarter of 2022 compared to negative US$6.7 million during the first quarter of 2021. As mentioned above, the company is working towards improving these bottom-line results and financial positions. With that, let me conclude today's presentation. Thank you and we will start our Q&A session.

We will now begin the Q&A session. The first question comes from Vivian Zhang with Diamond Equity Research. Please go ahead.

Good evening. This is Vivian Zhang from Diamond Equity Research. Thanks for taking my questions. So my first question is that can you give us some additional color on your Internet of Things solutions and its market opportunity?

Mr. Chen, can you answer the question?

Yes. For international business, we believe that we can see the stronger daily active terminals (DAT) as we can observe the data recovery. In the first quarter of the year 2022, we can see the data performance. From our product side, we know that with our normal cloud SIM solution, we now have the HyperConn solution. HyperConn means that we can provide a much better experience for multi-network handover. Previously, it took more than ten seconds, and now it can go down to milliseconds, which is a remarkable improvement of the new product and service. Now concerning 5G, we provide the 5G product. We are currently one of a few vendors who can provide a global 5G network roaming solution. This is due to our 5G product being compatible with almost all countries' 5G radio bands and also with 5G roaming capability, which is very rare in the industry. All these preparations put us in a good position in recovery after COVID-19.

Okay. I see. So my second question is regarding the COVID-19 impact because we've seen some Chinese cities like Shenzhen reopening in the second quarter after the lockdown, but some controls may continue to be in place in those cities. Do you think there will be some recovery in revenues from sales of products in the second quarter, or will these controls continue to affect your launch and manufacturing of 5G products given that your main manufacturers are based in Guangdong, China?

Yes. It was impacted in the first quarter, especially in both Shenzhen and Shanghai because our supply chain is significantly affected with part of our partners located in these regions. It was impacted by the lockdown during COVID-19 in China. However, we believe in Guangdong, recovery is already underway. I think in the second quarter, there won't be any significant problems given the current scenario. We have also relocated parts of our supply chain from Shanghai to Shenzhen. Therefore, in the second quarter, we believe the impact from COVID-19 will almost disappear. I think the average impact from the first quarter to the second quarter will be significantly better. This situation is also affected our new device product delivery, which was delayed due to the lockdown in the first quarter for our manufacturer, and this delay has impacted our revenue and delivery. The source of our orders largely originated from the last quarter, which was heavily impacted by the Omicron variant of COVID-19. I believe the second quarter will show much better performance.

Okay. That's all. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Jillian Zeng for any closing remarks.

Okay. Thank you once again for joining us today. If you have any further questions, please feel free to contact uCloudlink Investor Relations through the contact information provided on our website.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.