uCloudlink Group Inc. Q1 FY2023 Earnings Call

Thanks, everyone for joining us on our first quarter 2023 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com as well as our newswire surveys. I will give a brief introduction to our uCloudlink management team. Mr. Zhiping Peng is our Co-Founder and Chairman of the Board of Directors; Mr. Chaohui Chen is our Co-Founder, Director and Chief Executive Officer. Mr. Yimeng Shi is our Chief Financial Officer. Mr. Chaohui Chen, our Co-Founder and CEO, will begin with an overview of the company’s recent business highlights which will cover the earnings presentation posted on our IR website. Mr. Yimeng Shi, our CFO, will then discuss the company’s operational 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 statements with effect 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 includes discussions of unaudited GAAP financial information as well as non-GAAP measures. UCloudlink’s press release contains a reconciliation of unaudited non-GAAP measures to the most directly comparable GAAP measure. I will now turn the call over to our Co-Founder and CEO, Mr. Chaohui Chen.

Thank you, Jillian, and good morning, everyone. Thank you for joining us on our first quarter of year 2023 earnings call. Today we appreciate everyone's time. We are pleased to start off 2023 with strong first quarter results, which is the first time that we achieved both positive net income and positive cash flow generated from operations with growth in revenue since the outbreak of the COVID-19 pandemic. The average daily active terminals continue to be in an upward trend and reached a historic height of over 300,000 in this quarter as we continue to expand our global PaaS and SaaS ecosystem, reflecting the accelerated market demand for uCloudlink services across the global market. uCloudlink 1.0 is our international data connectivity services business, which tends to be a higher margin line of business and has historically been one of our key growth drivers. During the first quarter of year 2023, uCloudlink 1.0 business revenues increased 38.5% year-over-year to US$7.8 million. We are delighted that our uCloudlink 1.0 business demonstrates significant growth as a result of accelerated international travel recovery across our major markets, particularly in Japan. We also have observed increased demand from our 1.0 Roamingman business in mainland China and Southeast Asia, which are historically strong markets with wide coverage. Roamingman brand average daily active terminals for uCloudlink 1.0 business increased by 55.3% compared with the same period of year 2022, which indicates the significant growth of our business. We remain optimistic in our ability to further grow our uCloudlink 1.0 business, thereby solidifying our leading global position in the International Roamingman Solutions market, and we look forward to serving our users globally as the market continues to pick up. uCloudlink 2.0 is our local data connectivity services business, which focuses on local residents and solving challenges among the carriers. This business took off during the pandemic as we seized opportunities in the local markets by offering reliable local data connection services. Over the past two years, we have continued to strengthen our presence in local markets, including Japan and North America, where we help operators and business partners improve their data connectivity services and resolve data connection problems through our PaaS and SaaS platform based on our patent technologies, including cloud SIM and HyperConn technology solutions. Our new uCloudlink 2.0 business reported US$2.2 million in revenues, up by 37% in the first quarter of year 2023 compared to US$1.6 million in the same period of year 2022. We received recognition from business partners in established markets like Japan and North America, and we continue our efforts in expanding our PaaS and SaaS Platform ecosystem. We expect our high-quality, reliable data connectivity services based on our innovative HyperConn technology will receive more industry recognition and applications, especially in the mobile and fixed broadband industry. We expect to launch more innovative HyperConn products catering to the needs of a diverse set of mobile virtual operators, business partners, and individual customers in the near future. On the Internet of Things (IoT) side of our business, we have shared updates on multi-application scenario support by our IoT Mobile module, including WiFi routers, IP cameras, etc., which have been welcomed by our customers in various markets for their competitive advantages. In Japan, we are actively working with our business partners to explore and expand application scenarios for the IoT business to further improve the data connectivity experience for their customers. At the same time, our team continues to leverage existing resources in research and development to develop uCloudlink 3.0 business. The one-stop mobile data traffic sharing marketplace application is planned to launch in the fourth version in the near future, which leverages our efforts in building a scalable user base through our uCloudlink 1.0 and uCloudlink 2.0 models. This marketplace enables end user devices to connect to available networks anytime, anywhere, utilizing the GlocalMe app's new version. We remain confident in the market conditions ahead for the demand of year 2023, and we're prepared to take advantage of the peak season of international travel during the summer. We believe our track record of delivering reliable and high-quality data connectivity experience and our history of introducing innovative products and solutions enable us to maintain a leading position in the international data connectivity services industry. We are always committed to the continuous development of innovative solutions and plan to expand our uCloudlink and HyperConn technology solutions to more application scenarios. Our business aims to deliver value-added services to our customers by continuously improving their mobile data connectivity experience. And we'll continue to execute our growth strategies with our expanding portfolio of offerings. I will now turn the call over to our CFO, Mr. Yimeng Shi.

Thank you, Mr. Chen. And hello, everyone. I will go over our operational and financial highlights for the first quarter of 2023. The average daily active terminal (DAT) is an important operating metric for uCloudlink as it measures the trend of customer usage over the period, reflecting our ongoing business performance. In the first quarter of 2023, average daily active terminals were 304,121 a month, of which 3,483 were owned by the company and 300,638 were owned by our business partners, up by 11% from 273,870 in the first quarter of 2022. The average DAT for our uCloudlink 1.0 and uCloudlink 2.0 business accounted for around 42.7% and 57.3% of the total DAT, respectively, during the first quarter of 2023. Average daily data usage per terminal was 1.62 GB in March 2023. Total revenue for the first quarter of 2023 was US$18 million, representing an increase of 15.3% from US$15.6 million in the same period of 2022. Revenue from services in the first quarter of ‘23 was US$12.9 million, an increase of 31.4% from US$9.8 million in the same period of 2022. Revenue from services as a percentage of total revenue was 71.7% during the first quarter of 2023, up from 62.9% during the same period of 2022. During the first quarter of 2023, Japan contributed 43.1%, North America contributed 33.6%, mainland China contributed 5.1%, and other countries and regions contributed the remaining 18.2% of the total revenue, compared to 40.2%, 37.9%, 1.9%, and 18% respectively in the first quarter of 2022. Overall gross margins improved to 47.8% in the first quarter of 2023 as compared to 37.4% in the same period of 2022, and our gross margins on service increased to 60.5% in the first quarter of 2023 from 49% in the same period of 2022. Excluding the share-based compensation, our total operating expenses decreased to US$6.9 million, or 38% of total revenues in the first quarter of 2023, as compared to US$9.3 million, or 60% of total revenue in the same period of 2022. We realized net income of US$2.1 million in the first quarter of 2023, which represents a significant improvement in our bottom line results compared to a net loss of US$7.9 million in the same period of 2022. Similarly, adjusted EBITDA improved to US$2.1 million during the first quarter of 2023 compared to negative US$3.9 million in the same period of 2022. We are pleased as this is the first time we achieved positive net income since the outbreak of the COVID-19 pandemic, and adjusted EBITDA has remained positive for three consecutive quarters. We have achieved positive operating cash flow of US$1.6 million during the first quarter of 2023, which compared to negative US$4.4 million during the same period of 2022. We have significantly improved our bottom line in the first quarter of 2023 and have generated positive cash flow from operations for four consecutive quarters. Our strengths in financial position enable us to execute our growth strategies. With that, operator, let's open it for Q&A.

The first question today comes from Theodore O'Neill with Litchfield Hills Research.

Thank you very much. Can you hear me? Okay? Yes, good. Congratulations on the good quarter. I have three questions for you. The first on gross profit, I can see that the overall margin was better in the quarter because you had a greater mix of services. But I wanted to understand the margins got better on both products and services. Is that due to pricing, or were there some efficiencies in the products?

So we will answer your questions one by one. You just raised the first question, right? Yes, regarding the gross profit, you will see we improve gross profit and gross margins in the past couple of quarters. So that's massive improvements on a quarter-to-quarter basis. For the service gross margin, it is improving depending on a mix of the service categories. So that's a mixture of the three categories of main service revenues. One is the international roaming connectivity service; one is local connectivity service; and the PaaS and SaaS service. The improving gross margins will reflect the proportions of the revenue generated from international roaming service and from PaaS and SaaS, which are growing faster than the local connecting service. So that's where we get the improving results of the gross margins. We look forward in the near future this year because the borders have been opened for most countries, so people can move cross-border more freely than before. We expect there will be more revenue generated from the international roaming connectivity service. If you zoom into the proportions of international roaming service, it will be improving in the future. We expect the overall service cost margin will improve a bit, or at least remain stable in the following quarters for this year. That’s my opinion.

Thank you. My next question is about the research and development expense. It says in the prepared remarks that you had a decrease of $0.2 million in testing and certification expenses. Can you give me some insight into how that number for testing and certification? I would have thought it would sort of go up and down with new products, but can you give us a little more sense of how that goes up or down, quarter-to-quarter?

Yes, I shall answer your first half part regarding the decrease in expenses. Our CEO may give some colors on the new product. Yes, we report the streamlining of operations since the year 2021, and that's reflecting our overall headcount is decreasing compared with the year 2022. So the number of headcounts has been cut off for some certain parts for improving our operational efficiency, and that's reflecting on a comparable basis. Our overall expenditures have decreased on a year-over-year basis, and that's a similar story for R&D functions. We invested a lot in the past couple of years, and we invested huge sums in research and development functions, which support our new features and upgrades on the platform. We will still invest in R&D to support the development of new products. Regarding the new product developments, our CEO will give some more color on that.

Yes, I'm Chaohui Chen. I will add some comments because two years ago we invested in R&D. You can see our loss from two years ago was due to the heavy investment in R&D. We have finished all the development and by the end of last year, we started to control the costs and R&D investment. But this did not impact our new product launch this year. In my presentation, I already mentioned—we will launch some new HyperConn products in the near future catering to mobile broadband and fixed broadband. This is a huge opportunity for the mobile broadband operator market. I think in the next quarter we are prepared to launch this new series of products. We will continue this HyperConn product launch to enhance high-quality, reliable services because no matter if it is fixed broadband or mobile broadband, the network will face failures. Once failures happen, we can help to improve the experience. This is a unique solution. We expand the HyperConn connection product to different scenarios for carriers, for cable carriers, fixed broadband carriers, and mobile broadband carriers. We will also launch new products for the 1.0 business to enhance, making it more convenient, more compact, and more compatible with 5G, both these two directions. We will also launch more new products to meet the 1.0 fast growth market. For IoT, we will launch an IoT product to improve the reliability where we apply HyperConn technology. We know technologies like autopilot require very reliable connections. In this regard, we have made many breakthroughs, and we hope in the coming quarter we can deliver good news to everyone. Once our growth recovers from the pandemic, our R&D will also maintain stable investment, and our new product launches will also be a focus due to historical investments. I believe we will achieve good results and a bright future for our HyperConn and cloud SIM.

Okay, thank you. And my last question is about accounts receivable. You have done a remarkable job at keeping receivables low relative to revenue. Is that primarily because the services are prepaid?

Yes, I think the improvements on the balance of accounts receivable depend on a couple of factors. The first one is we pay more attention and effort toward improving our business terms, as you mentioned, with prepaid terms and shorter credit terms. We have some larger orders from good credit customers, which also contribute to this improvement. The second part is we focused on collecting cash from agents and accounts receivable, as some customers who suffered during the pandemic a year or two ago are now recovering gradually and generating more cash flow. Our efforts on cash collections have achieved positive results, helping to improve the balance of accounts receivable. The third part is we're selling more to individual customers via e-commerce, using our website, which generates prepaid cash before they use our service. This also varies as contributors helping our management. We will maintain these management strategies in the future. I expect our operating cash flow will keep this positive trend in the coming years.

By the way, the situation and finance of our customers are much better compared to during the pandemic, so they are willing to accept our better payment conditions.

Hello, this is Vivian Zhang with Diamond Equity. Congrats on the great quarter. Most of my questions have been answered, but I still have one left, which is regarding your new business, the mobile data traffic sharing marketplace application. Can you give us a specific update on this business and when do you expect it to be launched and generate meaningful revenue? Thank you.

Okay, yes, currently we primarily sell both local and international data. This data is high quality and reliably crosses carrier networks. That's currently our business model. However, I know that people may not be willing to carry extra MiFi devices. Our GlocalMe Inside technology, including eSIM and softer SIM, has many characteristics. Even though their connection quality may not be as good as our cloud SIM, they have their advantages, such as convenience. We have already developed our data traffic sharing marketplace concept. We will launch this marketplace, which contains several technologies, including physical SIM, cloud SIM, eSIM, and also software SIM. We can provide various data connectivity solutions that meet different users' requirements for convenience, pricing, and quality. For example, with iPhones, we can provide our MiFi solution to offer a better connection for families and simultaneous use. But also, you can embed our soft SIM or our eSIM solution within the device. We aim to educate customers that all these technologies are available under our brand and can meet their requirements. With the launch of this version of the marketplace, we will leverage it to expand our user base. Currently, 20% to 30% of people know us; another 70% to 80% have not used our technology yet. This new version of the marketplace will help meet the different needs of users. Our initial plan is to launch the first version of the GlocalMe app marketplace soon, and then we will replicate this to our partners.

The next question comes from an unidentified analyst with China Great Wall Securities.

Hi, I'm from China Great Wall Securities. Can you hear me? I have a question about the SaaS and PaaS sector. According to your first-quarter report, the revenue for PaaS and SaaS hasn't seen much growth year-on-year or quarter-to-quarter. What are the plans and outlook for this sector for the entire year? This is a key focus for our company, and I would like to know about our strategies for PaaS, client expansion, and technology development in this area. Thank you.

Okay, thank you. First, I will answer these questions and then our CEO will provide more supplementary comments. For the first quarter, it seems that PaaS and SaaS revenue is still growing compared with last year, with a small percentage growth of 3.7% compared to the same period last year. However, underlying this figure, our daily active terminals have reached a historic high of over 300,000, and our revenue from service, generated from 1.0 and 2.0, has increased massively compared to last year. For example, the international roaming service grew over 38.5% year-over-year, and uCloudlink 2.0 grew 37% year-over-year. In our business models, PaaS and SaaS play a central role in building a global ecosystem to support our business partners in providing better high-quality connectivity services, either for international roaming or local markets. This gives us a more flexible business model with our partners. They can either pay for a PaaS and SaaS service or buy data packages from uCloudlink. We will treat this overall service package in one pool to track our growth trend. In the future, we will provide guidance, which will show a growth trend around $85 million to $100 million in revenues. This guidance indicates we anticipate growth in PaaS, SaaS, and 1.0. Yes, so I would like to add some more comments because the recovery from international travel post-COVID-19 is step-by-step. At this point, our partners prefer using our data services rather than immediately increasing their PaaS and SaaS capacity. This explains why our data traffic has increased significantly while platform revenues have not grown proportionately. I believe that starting from the second or third quarter, as recovery stabilizes in countries like China, Japan, and in Southeast Asia, our international roaming business will show more apparent growth, which will lead to an increase in corresponding PaaS and SaaS revenues. Additionally, our newly launched solutions will also contribute to PaaS and SaaS revenues in the upcoming quarters. Also, the marketplace we are launching will further encourage PaaS and SaaS growth as we replicate this approach to our partners, which should drive increased revenue across all sectors.

This concludes our question-and-answer session. I would now 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 Investor Relations through the contact information provided on our website. Or contact our Investor Relations firm. We look forward to speaking to you again on our next quarterly call. Thank you.

Thank you.

Thank you.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.