uCloudlink Group Inc. Q4 FY2022 Earnings Call

Good morning, and welcome to the uCloudlink Group Inc. Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jillian Zeng of Investor Relations. Please go ahead.

Thanks, everyone for joining us on our fourth quarter and full year 2022 earnings call today. The earnings release is now available on our IR website. 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, Chaohui Chen, will begin with an overview of the company’s recent business highlights and uCloudlink’s 2023 business outlook, which will cover the earnings presentation posted on our IR website. Our CFO, Yimeng Shi, will then discuss the company’s operating highlights and financial results. 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 company's statement and the 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 measures. UCloudlink’s press release contains a reconciliation of unaudited non-GAAP measures to the 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, and good morning, everyone. Thank you for joining us on our year-end 2022 earnings call today. We appreciate everyone’s time. Year 2022 was truly a period for uCloudlink characterized by achieving great success and overcoming tremendous challenges. We are pleased to have achieved positive operating cash flow of US$4.4 million for the year ending December 31, 2022, a significant milestone for our company. As this is the first time we have done this since the COVID-19 pandemic. Having overcome the difficulties we faced during the COVID-19 pandemic and working to strengthen the diversity of our business as well as increasing its resilience with new growth opportunities. We are excited about the company’s long-term growth prospects and believe we are well positioned to be an industry leader. uCloudlink 1.0 is our international data connectivity services business, which tends to be a higher margin line of business, and the one which we believe will continue to be a key growth driver for the company. During the fourth quarter of 2022, uCloudlink 1.0 business revenue increased 48.2% year-over-year to US$7.7 million. For 2022, uCloudlink 1.0 business revenue increased 29.6% year-over-year to US$28.1 million. This improvement is a reflection of international traveler recovery across our major markets over the course of the year. This was accompanied by an increase in average daily active terminals for the uCloudlink 1.0 business during the fourth quarter and the full year of 2022. Average daily active terminals increased 20.5% year-over-year in 2022. In 2022, we became a leading 5G roaming solution provider in the wireless network industry and have continued to provide reliable and high-quality international data connectivity services in more than 140 countries, enabling a single operator entry point to access more than 300 global mobile network operators' available networks. uCloudlink 2.0 is our local data connectivity services business, which has been a significant driver of revenue growth since 2020. Over the past two years, we have continued to strengthen our presence in markets like Japan, North America, and Southeast Asia, where we have helped operators and business partners improve their data connectivity services and resolve data connection problems through our PaaS and SaaS platform based on our patent technology, including processing and HyperConn technology solutions. Our uCloudlink 2.0 business reported US$7.4 million in revenues, up 55.5% in 2022 from US$4.7 million in 2021. On the Internet of Things (IoT) side, our customers were able to realize reduced operating costs and improve data connectivity experiences through our cutting-edge IoT solutions, and we continue to explore opportunities where we can broaden the applications of our technologies for partners with IoT needs, covering application scenarios like WiFi routers, IP cameras, and electric vehicles. We continue working to close our uCloudlink 1.0 business, strengthening our leading global position in the international data roaming solutions market. Since the beginning of 2023, we have observed an accelerated recovery in international travel. The United Nations World Travel Organization expects 2023 international tourist arrival numbers to recover about 80% to 95% of pre-pandemic levels, which presents a significant opportunity for us. Following China moving away from the zero-COVID-19 policy and the subsequent opening of the national borders, we acted quickly to establish and provide data solution coverage at many of our partner airports, airlines, and travel agents, allowing us to meet the recovering demand for uCloudlink 1.0 Roamingman business in China, Malaysia, and Singapore. We believe the improving macroenvironment represents a greater upside for uCloudlink 1.0 business in 2023. We will continue expanding our leading position as a 5G roaming solution provider and launch uCloudlink 1.0 products and solutions such as the eSIM solutions to satisfy the various needs of our customers and users in multiple industries. For the uCloudlink 2.0 business, we have gained more industry recognition and have continued to expand our PaaS and SaaS platform ecosystem while continuing to establish robust customer relationships for the uCloudlink 2.0 business in existing key markets like Japan and North America. We have gained more industry recognition in China, which is expected to accelerate uCloudlink 2.0 business growth. In January 2023, our Wireless Multi-Network Intelligent Connection Engineering Technology Research Center was approved as one of the Guangdong Province Engineering Technology Research Centers by the Department of Science and Technology of Guangdong Province. We believe this recognition serves as a testament to our continued technological advancement in mobile and data connectivity technologies and brings new momentum for uCloudlink to expand our presence in the Mainland China market and beyond. In the IoT sector, the company continues to serve existing partners with our superior, more reliable mobile network solutions while proactively exploring opportunities in new industries and new application scenarios, including augmented reality (AR), virtual reality (VR), and electric vehicles. We expect to see a breakthrough in the Japanese market, where we have a strong presence, helping business partners further improve their data connectivity experience in the IoT field. We remain committed to the long-term development of our PaaS and SaaS platform ecosystem, which we believe is key to the success of our mobile data sharing marketplace. With that, I would like to touch on uCloudlink's near-term initiative. uCloudlink 3.0 aims to initiate a mobile data traffic sharing marketplace application based on our efforts to build a scalable user base through our uCloudlink 1.0 and 2.0 models. This marketplace will enable users' devices to connect to any available network anytime and anywhere utilizing the Global GlocalMe app. The GlocalMe app is designed to support various application scenarios without the limitation of the device, including top-up and go GlocalMe terminals, active and go eSIM, GlocalMe data application-only solutions, GlocalMe SIM, and GlocalMe inside third-party devices for mobile Wi-Fi rental. Backed by our CloudSIM, HyperConn, and web 2.0 technologies, we aim to build a data traffic marketplace for operators, customers, and users where data traffic can be shared simply and efficiently via day-to-day market behavior. Once this marketplace application launches in the near future, we expect to continue to invest in optimizing the system on an ongoing basis, operating more state-of-the-art technologies such as blockchain technology. We are committed to the continuous development of innovative solutions and plan to expand our CloudSIM and HyperConn technology solutions to various application scenarios, including media, video conferencing, and live broadcasting. Based on these innovative CloudSIM and HyperConn technology solutions, we expect to launch more innovative products covering the diverse needs of enterprise and individual customers in 2023, one of which is the GlocalMe app on various smart hardware. Finally, I will briefly discuss guidance for 2023. For 2023, we expect total revenues between US$85 million and US$100 million, representing an increase of 19% to 40.1% compared to 2022. We expect to build a more solid financial and operational position to see better results in the future. We are pleased with our achievements in 2022, and I would like to extend a heartfelt thank you to all the uCloudlink team members for their efforts and dedication to strengthening our company. We feel confident in the opportunities and challenges ahead of us in 2023, leveraging our portfolio of advanced technology offerings and more mature commercial experience, and look forward to continuing to serve our customers and partners throughout our global market. uCloudlink remains focused on scaling our user base and constantly improving the technology and business operation model to build a mobile data traffic sharing marketplace, which will support the company's long-term growth. I will now turn the call over to our CFO, Yimeng Shi.

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the fourth quarter and the full year of 2022. Average daily active terminals (DAT) is an important operating metric for uCloudlink as a measure of customer usage trends for each period, which is reflective of our business environment. In the fourth quarter of 2022, average daily active terminals were 297,884, of which 2,299 were owned by the company and 295,585 were owned by our business partners, up 12.2% from 265,595 in the fourth quarter of 2021. uCloudlink 2.0 service accounted for around 62.1% of the total DAT during the fourth quarter of 2022. Average daily data usage per terminal was 1.68 gigabytes in December 2022. Total revenue for the fourth quarter of 2022 was US$19.6 million, representing an increase of 11.6% from US$17.6 million in the same period of 2021. Revenue from services in the fourth quarter of 2022 was US$12.5 million, an increase of 30.3% from US$9.6 million in the same period of 2021. Revenue from services as a percentage of total revenue was 63.9% during the fourth quarter of 2022, up from 54.8% during the same period of 2021. During the fourth quarter of 2022, Japan contributed approximately 43.7%. Mainland China contributed 3%, and other countries and regions contributed 53.3% of total revenue, compared to 37.4%, 3.1%, and 59.5%, respectively, in the same period of 2021. Overall gross margin improved to 51.3% in the fourth quarter of 2022, compared to 31.0% in the same period of 2021. Our gross margin on services increased to 59.4% in the fourth quarter of 2022, compared to 46.1% in the same period of 2021. Excluding share-based compensation, our total operating expenses decreased to US$10.4 million, or 33% of total revenue in the fourth quarter of 2022, compared to US$10.9 million, or 62% of total revenue in the same period of 2021. As a result of a more favorable business mix and significantly decreased operating expenses, we reported a narrowed net loss of US$1.1 million in the fourth quarter of 2022 compared to a net loss of US$15.5 million in the same period of 2021. Similarly, adjusted EBITDA improved to US$1.6 million during the fourth quarter of 2022, compared to negative US$5.1 million in the same period of 2021. We were proud to achieve positive operating cash flow of US$5.2 million during the fourth quarter of 2022 compared to negative US$3.2 million during the same period of 2021. Moving to the 2022 financial results, total revenue for 2022 was US$71.4 million, compared to US$73.8 million in 2021. The decrease was primarily due to a decline in sales of certain terminals and data-related products, partially offset by an increase in international and local data connectivity services. Revenue from services for 2022 was US$46.2 million, an increase of 22.3% from US$37.8 million in 2021. Revenue from services as a percentage of total revenue was 64.7% during 2022, up from 31.2% during 2021. In 2022, revenue from international data connectivity services was US$28.1 million, and local data connectivity services were US$7.4 million, increasing by 29.6% and 35.5%, respectively, year-over-year. This increase in revenues from data connectivity services was mainly attributable to the gradual recovery of international travel and the continuous development of local data connectivity services. Overall gross margin improved to 45.5% in 2022, compared to 29.6% in 2021. Our service gross margin increased to 56% in 2022 compared to 43% in 2021. The increase in service gross margins during 2022 was primarily attributable to a more favorable business mix, with a larger proportion of revenue coming from international data connectivity services, which tend to have higher gross margins. In 2022, we streamlined our business operations, which led to significantly reduced operating expenses. Excluding share-based compensation, total operating expenses decreased to US$34.4 million, or 48% of total revenue in 2022, compared to US$47.1 million or 64% of total revenue in 2021. In 2022, our net loss was US$19.9 million compared to US$46 million in 2021, showing significant improvement. Adjusted EBITDA was negative US$2.3 million during 2022 compared to negative US$22.6 million in 2021. During 2022, our CapEx was US$0.4 million compared to US$0.9 million in 2021. For the full year 2022, we achieved positive operating cash flow of US$4.4 million compared to negative US$21.7 million during 2021. Moving on to balance sheet items, our cash and cash equivalents and short-term deposits increased to US$15.1 million at December 31, 2022, compared to US$8.1 million at December 31, 2021. We're pleased to have strengthened the company's financial position over the course of 2022, and we are well positioned to continue growing our business in the near term. With that, operator, let's open it up for Q&A.

And our first question will come from Theodore O'Neill of Litchfield Hills Research. Please go ahead.

Thank you very much. My first question is about the gross profit. You're showing improvement year-over-year and sequentially in gross profit margin, and I was wondering if you could give us some insight into why that's improving so nicely here?

Yes. Thanks, Theo. Yes this is Yimeng Shi. I will give more context on the improvements in gross profit margins. Generally, the improvements came from our service mix. As we disclosed in our statement, we have a larger portion of international connectivity services in our total service mix, and these international connectivity services have higher gross margins than local connectivity services. Additionally, we have seen a significant portion of our revenue coming from PaaS and SaaS, which also contributes to higher gross margins. Over the past years, we have made significant efforts in research and development to control data consumption usage, and we’ve also maintained stable pricing on the commercial side. This overall contributed to improved gross margins compared to 2021. We expect this trend for higher gross margins for services to continue into 2023 as we anticipate that revenue from international connectivity services will materially increase.

Thank you. And my next question is about the balance sheet. You're showing a year-over-year large decline in accounts receivable. Can you explain what's going on there?

Yes. That's correct. In 2022, we put significant efforts into cash collections from accounts receivable stemming from current year 2022 sales. Additionally, we focused on agents' accounts receivables backward from the 2021 sales. As a result, the balance of accounts receivable decreased significantly because of our efforts in cash collections from customers. We plan to keep this focus on cash collections from both current and previous sales moving forward. We have good customer pools in the Japanese and U.S. markets, which makes the cash collection cycles very important for us to ensure quick cash inflow to support our operations and business growth. Thank you.

Thank you very much.

The next question comes from Vivian Zhang of Diamond Research. Please go ahead.

Good morning. This is Vivian Zhang from Diamond Equity. Thanks for taking my questions and congratulations on the achievements you made last year. So my first question is that China lifted its zero-COVID policy and pandemic travel restrictions in December last year. It is expected that international travel will further recover and rebound as well. So, how do you think this will affect your company’s business and your revenue in 2023 and beyond?

Yes. I’m Chaohui Chen, CEO of uCloudlink. So yes, we can see the whole world, including China, is opening its borders. We can see a small rebound from the China Spring Festival to the Chinese New Year. However, I think the fourth wave of rebound from the COVID-19 pandemic will occur around Labor Day on May 1. The whole year, we forecast that China will see only around 40% recovery due to the time it takes for processes like passport and visa approvals. Based on this, our revenue forecast for 2023 aligns with our expectation of about 40% recovery this year, while we anticipate full recovery next year. If conditions improve further, we could achieve even better results. For Southeast Asia, regions like Japan and Korea have opened up as early as in Europe and the United States. This year, we estimate that East Asia and China could see a recovery of at least 40% to 50%. Next year, we expect full recovery. That’s our expectation.

Okay. Thank you, Mr. Chen. My next question will be about product. Are there any products the company plans to launch or update in 2023? If so, can you briefly introduce them?

Yes. Despite the challenges of last year, we continued to invest heavily in research and development. This year, we are set to launch the leading 5G product in the industry, currently the only one that can roam on all 5G networks globally. This will strengthen our position among commercial business travelers. Additionally, next month, we will introduce the world's smallest product, which is compact and smaller than a credit card, making it highly portable for improvements in both international and local networks as well as roaming. We also have new products coming for mobile broadband and fixed broadband convergence, featuring 5G and high-capacity customer premises equipment. Furthermore, we will launch a marketplace for the 1.0 solution app to accommodate diverse customer needs for roaming, beyond just CloudSIM, which will assist in expanding our customer base and enhancing engagement. We have many new solutions planned this year, particularly in the IoT sector, including products like IP cameras and industrial motors, among others. A variety of IoT-centric products will integrate our CloudSIM solution to enhance reliability and connectivity, leading to advantages in cost savings and management.

Okay. Got it. Thank you for the detailed information. Just to make sure these products and hardware updates will be launched to global markets, right?

Yes. Our technology will gain more recognition from the Chinese government and among more applications, especially within the Japanese market. We believe that we can achieve broader growth this year.

Okay, thank you. So 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.

Thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink’s Investor Relations through the contact information provided on our website or contact the Investor Relations firm. We look forward to speaking to you again on our next quarterly call. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.