uCloudlink Group Inc. Q3 FY2022 Earnings Call

Hello, and welcome to the uCloudlink Group Inc. Third 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 now would like to turn the conference over to Jillian Zeng, Investor Relations of the Company. Please go ahead.

Thanks everyone for joining us on our third 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 the 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 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 provision 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 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 have similar content as the earnings presentation of the second quarter of 2022. We still encourage you to review the third quarter of 2022 earnings presentation uploaded to our Investor Relations website with some latest updates. Hence, I will focus on our most recent developments in the third 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 third quarter of 2022, our 1.0 business revenues increased by 30.1% compared to the same period in 2021. The revenue of our 1.0 business in Japan and Southeast Asia market increased significantly, and the Mainland China market recovered slightly during the third quarter of 2022 year-over-year. International travel distribution around the world continues to improve over time across our major international market with North America opening up followed by Europe and later Southeast Asia. One of our key markets, Japan, has also recently announced the lifting of restrictions for foreign travelers effective last October. Consequently, the number of average daily active terminals for the 1.0 business has increased during the third quarter of 2022 compared to the third quarter of 2021. The average daily active terminals for our 1.0 business has increased by 25%, showcasing the accelerated recovery of demand for uCloudlink's high-quality information as data products and services. Currently, we are providing reliable and 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 over 300 global mobile network operators in our network. Going forward, I remain positive that our 1.0 business will continue to be the key growth driver of our revenues, as well as bottom-line results. Let's move to Page 14. uCloudlink 2.0 is our local data connectivity services business and has become a new source of revenue growth since 2020. Its growth is built upon our efforts in exploring market opportunities, such as the post-pandemic new normal lifestyle that more people are getting used to. The development of 5G applications in the IoT area, our ability to improve network conversions and data connections, along with cooperation with intelligent hardware manufacturers to implement GlocalMe Inside, etc. In the past quarters, we have continued to strengthen our presence in our existing markets, including Japan, North America, and South 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 patent technologies, including CloudSIM and HyperConn technology solutions. As we shared in our latest quarterly report, we take pride in our ability to adapt ourselves to the evolving market by introducing and upgrading innovative products to address various 2.0 business application scenarios. Our 2.0 business revenue reported a 38.7% increase during the third quarter of 2022 compared to the same period in previous years. Our customers are able to realize reduced operating costs and improve data connectivity experiences through these cutting-edge IoT solutions. We continue to focus on exploring new business prospects to serve a broader spectrum of partners without the need. For example, uCloudlink is working with a global leading cloud platform to provide better connectivity services for smart ramping. During the third quarter, we turned our efforts into upgrading our current portfolio of offerings to provide a better learning experience for IoT customers and prepare these products and solutions for more diverse application scenarios. We expect our 2.0 business to grow with the support of our innovative CloudSIM 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 now move to Page 15. uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market based on our mature 1.0 business and newer 2.0 business, we promote long-term development of our PaaS and SaaS ecosystem, which has been recognized by various business partners. We remain confident in our business development team to empower the building of our PaaS and SaaS ecosystem and in our research and development teams to assess the diversified needs posed to us by our customers. We are pleased to announce that we maintained a positive operating cash flow for the second consecutive quarter during the third quarter of 2022. We successfully achieved a positive adjusted net income non-GAAP for the first time since the global outbreak of the COVID-19 pandemic in the second quarter of 2020. Our total revenue reached $18.2 million during the third quarter of 2022. In the first quarter of 2023, we expect to further improve our total revenue to be between $19 million and $22 million, representing an increase of 8% to 25% compared to the same period of 2021. We expect these improvements to allow us to build a more solid financial and operational position and see better results in the future. We believe that connected to better connections, uCloudlink is a significant driving force in transforming the increasing 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 the business and financial highlights.

Thank you, Mr. Chen. Hello, everyone. I will quickly summarize our business highlights for the quarter that ended on September 30, 2022. The average number of daily active terminals for the third quarter was 297,501, which includes 1,522 owned by the company and 295,979 owned by our business partner. This represents a 16.2% increase from 256,124 in the same quarter of 2021. The uCloudlink 2.0 service accounted for approximately 65% of the total daily active terminals during the third quarter of 2022. The average daily data usage per terminal was 1.71 gigabytes in September 2022. We had around 98% of our total revenue coming from outside Mainland China. In this quarter, Japan contributed about 35.1% of our total revenue, while the American market was the largest contributor among other countries, indicating the growth of our business in the Americas. We plan to continue expanding into other markets, such as Europe and Southeast Asia. During the same quarter last year, our revenue derived from Mainland China was 3.7%, with 46.6% from Japan and 49.7% from other countries and regions. Now, let's discuss our financial highlights for the third quarter of 2022. Service-related revenue comprised 69.2% of total revenue, up from 34.2% in the same quarter of the previous year. Revenue from international data connectivity services and local data connectivity services increased year-over-year by 30.1% and 38.7%, respectively. This growth was largely due to the gradual recovery of international travel and the ongoing development of our local data connectivity services. Our total revenue decreased by 5.7%, going from $19.3 million in the third quarter of 2021 to $18.2 million in the third quarter of 2022, mainly because of reduced sales of certain terminal and data-related products. However, revenue from services increased to $12.6 million, reflecting a 20.5% rise from $10.5 million in the same period last year, driven by higher revenue from both international and local data connectivity services. Our service gross margin improved to 57.9% in the third quarter of 2022, compared to 43.5% in the same quarter of 2021. Overall gross margin increased to 47.7%, up from 28.3% during the same period last year, which stemmed from a higher margin profile in international data connectivity services. Regarding operating expenses, excluding share-based compensation, they represented 40% of total revenue in the third quarter of 2022, down from 61% the previous year. We have streamlined our operations and optimized labor costs, with total operating expenses excluding share-based compensation decreasing to $7.3 million from $11.8 million last year. Operating cash flow turned positive for the second consecutive quarter at $1.2 million, compared to negative $5.7 million the previous year, thanks to our efforts to enhance margin profiles and control expenses. Our cash and cash equivalents, along with short-term deposits, stood at $12.5 million as of September 30, 2022, with capital expenditures of $0.1 million, down from $0.3 million in the same quarter of 2021. In terms of net loss, we reported $4.6 million for the third quarter of 2022, an improvement from $7.0 million in the same quarter last year. Adjusted EBITDA for this quarter was positive at $0.9 million compared to negative $5.4 million in the previous year. This marks the first time since the onset of the COVID-19 pandemic in the second quarter of 2020 that we achieved a positive adjusted net income and adjusted EBITDA on a non-GAAP basis. As noted earlier, the company is focused on enhancing its bottom-line results and financial position. In October, we announced the early redemption of a convertible debenture, reflecting our increased confidence in our financial improvement. We are optimistic about our ability to execute strategies that will further strengthen our financial and operational position. With that, I will conclude today's presentation.

The first question comes from Vivian Zhang with Diamond Equity Research. Please go ahead.

Good morning. Congrats on that quarter. So my first question is that, what's the reason why the company can continue to generate positive operating cash flow for the second consecutive quarter? How will this affect the company?

Yes. Yimeng Shi will be answering the questions. Yes, in the second quarter, we maintained the positive operating cash flow following the second quarter of 2022. The main reason came from two aspects. First, our margin profile has been improving quarter-over-quarter as we illustrated in our presentations; our service gross margins and overall gross margins have reached the highest levels. So that contributed to our gross profit amount significantly increasing. The second point is that we have maintained control of our operations processes and streamlined our business operations. As we demonstrated, our operating expenses decreased significantly compared to the same period last year. Those are the two main contributions to our second quarter's positive cash flow. We expect this trend of positive cash flow to also be achieved in the fourth quarter of this year. We believe our financial position has been improving and supports our growth in the future.

Yes, by the way our international business recovery. This is a high-margin business. We are also getting more high-margin business.

Okay, got it. Can you share with us what measures you have taken to control costs and achieve positive adjusted net income and EBITDA?

Yes. The similar reasons as our positive operating cash flow. The gross margin and overall gross margin improved significantly. Our operating expenses have also decreased at the same time. So combining these factors together, we achieved a positive adjusted net income and positive adjusted EBITDA. We expect this improvement to carry on in the fourth quarter and next year as well. The company's current situation is set to improve on this basis.

Okay. Can you elaborate on the specific measures you've taken to decrease operating expenses? Because we saw that operating expenses decreased significantly, but what measures have you taken?

Yes. As we noted in the release, the main decrease in amount came from the headcount-related cost. Our headcount has been reduced compared with the same period last year. We report that the headcount number in the presentations is around 300. Compared with last year's headcount, we have reduced the number, but our operational efficiencies have improved. This number of headcounts supports our year-end outlook and also helps us achieve our growth next year.

Okay. Got it. My last question is that compared with the Japanese and Chinese markets, the proportion of revenue from North America has increased a lot this year. So can you share with us the growth of the North American market? And what are the drivers for the growth there?

Yes, I'm Chen speaking. The North American data is quite revealing. Our North American market increased significantly from last year by several million, and this year we forecast it to be more than $10 million. That's a big increase. There are several reasons; one is the U.S. recovery from COVID-19, leading to a growing requirement for international travel; that's one reason. Another reason is that the coverage of networks in the U.S. market is not as good as in China and Asia. Thus people need better coverage and better traffic management in local networks, particularly for 5G. We launched the world's first 5G solution, which has become popular in this market. Lastly, the local market, including IoT, has specific requirements for better coverage, which is increasing. Our product provides superior coverage and quality compared to other products. As a result, we are gaining more market share in the North American market.

Okay. Got it. Can you share with us who your main competitors are in the North American market?

Yes, there are, in different areas, we have different competitors. There are some competitors like Sky Long, which have similar technology. However, we can provide a much wider product line and much better quality because we come from the telecom industry, and we understand how crucial quality is to the market. We invest significantly in our products, which is why we are currently the only vendor who can provide a global 5G solution. No other product can match this. Furthermore, our customers understand our quality and our patent position, which helps us explore the U.S. market quickly and increase our market share.

Okay, I see. Thank you. That's all my questions.

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

Okay. Thanks everyone for joining us. If you have any questions, please contact uCloudlink's Investor Relations through the contact information provided on our website or through our Investor Relations firm. Thank you, everyone.

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

Thank you.