uCloudlink Group Inc. Q2 FY2022 Earnings Call

Hello, and welcome to the uCloudlink Group Inc. Second 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 today’s event is being recorded. I now would like to turn the conference over to Jillian Zeng, Investor Relations. Ms. Zeng, please go ahead.

Thanks, everyone, for joining us on our second quarter 2022 earnings call today. The 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 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 the 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 the 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 the 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, Jillian. Page 4 to Page 12 are similar contents as the earnings presentation of the first quarter of 2022. We still encourage you to review the second quarter of 2022 earnings presentation uploaded to our Investor Relations website with some latest updates. Hence, I will now elaborate on the past similar to the first quarter of 2022 earnings release, but we are still focused on our most recent development in the second quarter. 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. During the second quarter of 2022, our 1.0 business revenues have increased by 40.1%, compared to the same period in 2021. As international travel restrictions around the world continue to abate over time, the average daily active terminals for the 1.0 business have increased during the second quarter of 2022, compared to the second quarter of 2021. The average daily active terminals have increased by 23.6%, a testament to the faster recovery of our 1.0 business, which indicates that more and more customers are using our products and services. With our innovative global 5G roaming solutions, we hope to strengthen our leading technological position in providing reliable high-quality international data connectivity services in more than 140 countries, powered by our PaaS and SaaS platform enabling a single operator entry point to access more than 300 global mobile network operators and web networks. We remain positive about the ongoing recovery and growth of global tourism demand and expect revenue from 1.0 business to steadily grow in the future. 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 growth is built upon our efforts in exploring market opportunities such as the cost of the pandemic and the new normal lifestyle that people are getting more accustomed to. The development of 5G applications and in the IoT area, our ability to improve network convergence, data connections, and cooperation with intelligent hardware manufacturers are key factors. In the past quarters, we have continued to strengthen our presence in our existing markets, including Japan, North America, and Southeast Asia, where we help operators and business partners improve their data connectivity services and solve data connection problems through our PaaS and SaaS platform based on our patented technologies including cloud SIM and HyperConn technology solutions. During the second quarter of 2022, our various IoT solutions such as industry WiFi loaders and IP cameras have gained increasing recognition in various markets, actively extending our footprint into more industries, including power, emergency services, autopilot, etc. This is reflected by a 52.6% increase in the 2.0 revenue during the second quarter of 2022, compared to the same period in the prior years. Our customers were able to realize reduced operating costs and improved connectivity experience through our cutting-edge IoT solutions, and we continue to focus on exploring 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. In the second quarter of 2022, we continued to promote our existing portfolio of innovative 5G products in countries and regions such as the U.S., Japan, and Europe. We are now one of the few companies able to provide 5G products with a global radio band. In terms of the IoT side, the IP camera, which was priced with our GMI solution, was commercially launched in the fourth quarter of 2022 and has now been promoted in the international market, receiving recognition for innovative technologies. Going forward, we plan to launch and provide more of these types of innovative products and services. uCloudlink positions itself as a pioneering technology solution provider in the data connectivity market based on the mature 1.0 business and newer 2.0 business, which is a more long-term development of the PaaS and SaaS ecosystems, recognized by various business partners. We remain confident in our business development teams to empower the building of our PaaS and SaaS ecosystem, as well as our research and development teams to address the diversified needs our customers hope to see. In the coming quarters, we expect the PaaS and SaaS platform revenues to grow into a more significant driver of our business and continue to enlarge its marginal effect, improving margin profiles. We are pleased to announce that our total revenue reached $80 million during the second quarter of 2022, which is slightly above our previous projection range due to a faster than expected recovery of international data connectivity services and the development of local data connectivity services. We successfully achieved positive operating cash flow for the fourth quarter since the second quarter of 2020 during the COVID-19 pandemic. We are confident in our financial and operational position to see better results in the future. We believe that from connected to better connections, uCloudlink is a significant driving force in the transformation of increased information access. We are committed to building a more connected future for more customers and users to make a positive impact in the service and 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. Hello, everyone. I will quickly go over our business highlights for the quarter ended June 30, 2022. Average daily active terminals for the second quarter were 292,432, including 1,223 owned by the company and 291,209 owned by our business partners, representing an increase of 23.6% from 236,553 in the second quarter of 2021. Our uCloudlink 2.0 service accounted for around 68% of total daily active terminals during the second quarter of 2021. Average daily data usage per terminal was 1.58 gigabytes in June 2022. Next, I'll turn to Page 18, which shows the global diversification of our business. We had around 99% of total revenue from outside Mainland China. During the second quarter of 2022, Japan contributed to around 38.1% of total revenue. For other countries' revenue, the U.S. market had the largest contribution to our business, and we will continue to expand other markets such as Europe and Southeast Asia. During the second quarter of 2021, we had 8.3% of the total revenue coming from Mainland China, 32.6% of total revenue came from Japan, and 39.1% of total revenue came from other countries and regions. Next, I’ll turn to Page 20. So, I will go through our financial highlights of the second quarter of 2022. Service-related revenue as a percentage of total revenue was 62.5% during the second quarter of 2022, compared with 48.5% during the second quarter of 2021. Revenue from international data connectivity service and local data connectivity service increased by 48.1% and 52.6% year-over-year respectively. This increase in revenues from data connectivity service was mainly attributable to the gradual recovery of international travel and the continuous development of our local data connectivity service business. Next, let’s move to Page 21, which shows the revenue breakdown of our two business segments, mainly revenue from service and sales products. Our total revenue decreased by 6.3% from $90.2 million in the second quarter of 2021 to $18 million in the second quarter of 2022, primarily due to a decrease in sales of data-related products and others. Revenue from services was $11.2 million, representing an increase over 20.7% from $9.3 million for the same period of 2021. The increase was primarily attributable to the rise in revenue from international data connectivity service and local data connectivity service. Next, let’s turn to Page 22 for gross margins of our business. Our service gross margin increased to 56.2% in the second quarter of 2022, compared to 45.4% in the same period of 2021. Our overall gross margin was 44.1% in the second quarter of 2022, increased from 28.1% during the same period of 2021. The increase in service gross margins during the second quarter of 2022 was primarily attributed to the highest margin profile from international data connectivity service. Let’s now 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 41% in the second quarter of 2022, compared with 61% during the same period of 2021. We had further streamlined our business operations, including optimizing labor costs, and our total operating expenses excluding share-based compensation decreased to $7.3 million in the second quarter of 2022, compared to $11.8 million in the same period of 2021. Next, I’ll turn to Page 24. Operating cash flow turned positive during the second quarter of 2022 and was $2.5 million, compared to negative $6.1 million during the same period of 2021. This is primarily a result of our ongoing efforts, improved margin profile, and controlled operating expenses. Our cash and cash equivalents and short-term deposits were $12.2 million as at June 30, 2022. Our CapEx was $0.2 million, compared to $0.3 million in the same period of 2021. Let us move to Page 25. Net loss during the second quarter of 2022 was $6.3 million compared to $8.2 million during the second quarter of 2021. Adjusted EBITDA was negative $1 million during the second quarter 2022, compared to negative $5.5 million during the second 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.

Yes, thank you. And today's first question comes from Vivian Zhang with Diamond Equity.

Good evening. This is Vivian Zhang from Diamond Equity. Thanks for taking my question and congrats on the progress you made this quarter. So, my first question will be about the gross margin. We saw the gross margin on both services and sales of products increasing this quarter, so I would like to know what's the reason for the increase? Will you continue to maintain the gross margin at this level in future quarters? Thank you.

Yes. Thanks, Vivian. Regarding the gross margins improvement in the second quarter, first of all, there's a gross margin on service. That's a massive improvement compared with the same period last year. As we explained in the earnings release, our revenue generated from the international data connectivity service increased significantly compared with last year. The gross margins related to the international data connectivity service is much higher than that of local data connectivity service, and that’s a major contributor to the improvement of service gross margins. We expect international travel to continue recovering as more countries open their borders to travelers. So, we anticipate generating more revenue from international data connected service in the future. Therefore, we expect our service gross margin to maintain a similar level and potentially improve in the future as we achieve more revenue from international data connectivity service. Additionally, our product gross margin is improving as well, mainly due to the mix of product sales related to high-end product selling like 5G products to the market. This quarter, we delivered a significant amount of 5G-related products to the market, and we expect this trend will carry on in the following quarters and years.

Yes. So, I have some more comments about this point. In the R&D side, we also put a lot of effort to improve our margin, improve our operations, and the efficiency of our data usage and the combination. And this has also increased our margin capability. Another factor is that we are implementing some new designs and replacements to optimize the hardware, which improves the profitability of our hardware and data connection together.

Okay, I understand. Thank you for that. My second question is about the partnership you announced in the second quarter. Can you provide more details on this partnership and what it means for shareholders? Specifically, I am referring to the partnership with the unidentified company.

So, which two partners?

Yes, for the partnership you published.

Last year, we entered into a partnership to utilize our technology to enhance efficiency and connectivity quality in the Internet of Things space. This is just the start, and we anticipate that more partners will recognize the value of our technology in the future. Our core technology ensures comprehensive coverage for IoT devices and reduces operational costs thanks to the reliability of our network connectivity. We look forward to collaborating with more partners in the future. As highlighted in our presentation, we have already integrated our services into products such as IP cameras and WiFi loaders, and we are applying our technology in autopilot systems as well. We believe that improvements in connection quality and lower operational costs will be crucial for our IoT applications and will help attract more partners. That’s just a starting point. And now we have more partners in this area. For the second partnership, we're working with Ctrip because you can see that global tourism and travel are recovering. Before the COVID-19 pandemic, we were already a significant partner working with Ctrip, as we are the largest channel for mobile WiFi hotspot rentals in the Chinese wireless market. Therefore, we are preparing for the recovery of travel from COVID-19. We are not only preparing for recovery in China, but also in the U.S. and Southeast Asia, as we are expanding our deep cooperation to accommodate the post-pandemic travel scenario.

Okay. Got it. That helps. Thank you. Okay. That's all my questions. Again, congrats on the quarter.

Thank you. There are no further questions. Thank you once again for joining us. If you have further questions, please contact our Investor Relations or contact our Investor Relations firm.

Thank you.

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

Thank you.

Thank you.