uCloudlink Group Inc. Q2 FY2023 Earnings Call

Good day, and welcome to the uCloudlink Group, Inc. Second Quarter 2023 Earnings Conference Call. All participants will be in 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. Please go ahead.

Thanks, everyone, for joining us on our second quarter 2023 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as our newswire services. 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 the 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 Security Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and assumptions 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, 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, due to events, trends 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 and unaudited non-GAAP financial measures. The uCloudlink 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, and good morning, everyone. Thank you for joining us on our second quarter 2023 earnings call today. We appreciate everyone's time. We were pleased to have achieved positive cash flow from operations for a fifth consecutive quarter. During the quarter, we reported strong top-line growth with total revenues of $22 million, a 21.9% increase from the prior year period, and the average daily active terminals continued to increase, reaching record highs of over 310,000. During the second quarter of 2023, revenues from uCloudlink 1.0 International Data Connectivity Services business, which we refer to as our uCloudlink 1.0 business, increased by 32.5% year-over-year to $9 million. The average daily active terminals from our uCloudlink 1.0 business increased by 57.7% year-over-year, primarily as a result of the recovery in international travel. While outbound travel from China remained somewhat limited in the first half of 2023, Chinese tourists utilizing Roamingman brand services have contributed an increasingly significant amount to our international data connectivity services. Our unique 5G portable Wi-Fi terminals and various data traffic packages, from 4G to 5G, are widely recognized by the market for their ability to enhance the user experience across a broader audience, which will enable us to maintain our leading position in the global roaming market. I am pleased to share a few developments in our 1.0 business. In July 2023, we launched the GlocalMe SIM card. This SIM card is backed by our patented cloud SIM technology, which allows our customers to easily access and use multiple global data plans as needed. As of the launch, this GlocalMe SIM covers 10 major destination countries, including Japan, the United States, and Australia, and we expect to gradually expand its availability to additional countries and regions. In addition, we are initiating a pilot sale of GPS tracking-enabled roaming portable Wi-Fi terminals, which we believe will be the smallest in the world. This innovative product range covers portable Wi-Fi, GPS tracking-enabled roaming terminals, and the GlocalMe SIM card as part of our ever-expanding uCloudlink 1.0 business portfolio of offerings. This has enabled global users to achieve a leading zero roaming experience in various scenarios, catering to their cross-border data needs, driving a competitive advantage that enhances our business performance. We remain optimistic about the prospects of our uCloudlink 1.0 business and believe that this higher-margin business will continue to serve as a key growth driver in the future. Our uCloudlink 2.0 local connectivity services business, which we refer to as our uCloudlink 2.0 business, maintained continuous development, reporting $2.2 million in revenue, up by 23.1% from $1.8 million in the second quarter of 2022. During this quarter, our upgraded customer premise equipment (CPE) was commercially launched. This product enables a SIM-based transition between fixed and mobile networks, serving as a substitute for traditional fixed-line broadband and is suitable for home and office internet connection use. We are confident that the upgraded CPE will allow us to further gain market share in the fixed broadband market. What I discussed outlines our data connectivity services business. I would like to highlight our uCloudlink PaaS/SaaS solutions, which is a line of business where we see considerable attention. On the IoT side, our uCloudlink IoT module will begin to be commercially embedded into the devices of major mobile network operators in Japan within 2023, marking a significant expansion into IoT application scenarios. In addition to the embedded IoT module, GPS tracking-enabled roaming portable Wi-Fi terminals, and upgraded CPE, this offering will generate recurring PaaS/SaaS services revenues apart from data connectivity services revenue and product sales. We look forward to applying our PaaS/SaaS solutions to provide additional services, including customer management services, emergency and security communication services, and GPS tracking services, among others, expanding our user base and application scenarios while contributing to revenue growth. During the quarter, we also continued preparations for the full initiation of our in-stock comprehensive marketplace app, a centralized platform application that allows users to access our entire portfolio of services. We believe we are approaching the launch of the one-step marketplace app, which will enable us to attract more users and customers beyond just those utilizing portable Wi-Fi. We remain confident in our team's capabilities to launch the app in the near term. In conclusion, we are pleased with the progress we have made in our growth initiatives, as well as the improved financial results we have achieved in the first half of the year. We are excited to be at the forefront of innovation and expect to continue expanding our portfolio of offerings based on our innovative cloud SIM technology and HyperConn solutions, which demonstrate our strong research and development capabilities, laying a solid foundation for future growth. For the third quarter of 2023, uCloudlink expects total revenues to be between $23.5 million to $24.5 million, representing an increase of 29.1% to 34.6% compared to the same period of 2022. We will continue to play a significant role in integrating high-quality data connectivity experiences into various life scenarios, and we believe that our solutions truly enable our customers and users to enjoy a more convenient and intelligent life through better connections. I will now turn the call over to our CFO, Mr. Yimeng Shi.

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the second quarter of 2023. Average daily active terminal (DAT) measures the trend of customer usage over the period, reflecting our ongoing business performance. In the second quarter of 2023, average daily active terminals reached 318,778, of which 7,386 were owned by the company and 311,392 by our business partners, up by 9% from 2,432 in the second quarter of 2022. The average DAT for our uCloudlink 1.0 and uCloudlink 2.0 businesses accounted for approximately 46.4% and 53.6% of total DAT, respectively, during the second quarter of 2023. Average daily data usage per terminal was 1.59 gigabytes in June 2023. Total revenues for the second quarter of 2023 were $22 million, representing a 21.9% increase from $18 million in the same period of 2022. Revenues from services were $14.1 million, an increase of 25.2% from $11.2 million in the same period of 2022. Revenue from services as a percentage of total revenue was 64.1%, up from 62.5% during the same period of 2022. In the second quarter of 2023, the revenue contributions came from Japan (43%), North America (29.5%), Mainland China (11.6%), and other countries and regions contributing the remaining 15.9% compared to 38.1%, 39.2%, 1.4%, and 21.3% in the same period of 2022, respectively. The revenue from Mainland China increased significantly, primarily due to the recovery of international travel by Chinese tourists utilizing Roamingman brand services. Overall gross margin was 44.9% in the second quarter of 2023, compared to 44.1% in the same period of 2022. Gross margins on services were 58% in the second quarter of 2023, compared to 56.2% in the same period of 2022. Excluding share-based compensation, total operating expenses were $3.3 million or 33% of total revenue in the second quarter of 2023, compared to a higher percentage in the same period of 2022. Our net loss decreased significantly to $0.9 million in the second quarter of 2023, compared to a net loss of $6.3 million in the second quarter of 2022. Adjusted EBITDA (non-GAAP) improved to $2.1 million during the second quarter of 2023, compared to a negative $1 million in the same period of 2022. We achieved a positive operating cash flow of $3.4 million during the second quarter of 2023, compared to $2.5 million during the same period of 2022. We successfully achieved positive cash flow from operations for the third consecutive quarter, accumulating operating cash flow of $13.9 million through these periods. In the second quarter of 2023, we continued to improve our financial performance, and we believe we are well-positioned to execute our growth initiatives. With that, operator, please open up for Q&A.

Thank you. We will now start the question-and-answer session. Our first question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead.

Thank you very much. My first question is about product sales in the quarter. They were up sequentially from the first quarter, quite a bit. Is there a particular reason for that strength in Q2 versus Q1?

So your question regarding the second quarter revenues compared with the first quarter of 2023. That's your...

Yes. But only for products, not services, just the product strength growth was strong in Q2 versus Q1. I was just wondering if there was something going on in Q2 for products that was different from Q1.

Yes. So I think there are two reasons that happened. One is because of COVID-19, which is now over worldwide, including in China, Japan, and Southeast Asia. The first quarter was just reopening in China, so there remained limited growth. This is the first reason due to the ending of COVID-19. The second reason is that worldwide, customers prepared for the summer season. These two reasons contributed to the equipment growth.

Okay. My next question is about the GPS tracker enabled portable terminal. Is that having a GPS tracker inside the terminal to prevent theft? Or does the GPS info feed into the SIM card selection?

Sorry, can you repeat your question?

Yes. The GPS tracker-enabled portable terminals. Is the GPS tracker in there to prevent the terminal from being stolen or does the GPS information feed into the SIM card selection?

Yes. Let me answer. We have newly launched a product in the second quarter, and it's a small volume launch. You can expect it to be very small, about 40 grams, smaller than a business card. So it's convenient and more portable. The Wi-Fi product functions with GPS tracking. The reason we launched this kind of product is to enhance connectivity. Our uCloudlink technology and HyperConn solutions enable improved coverage, allowing users to find lost items much easier. This better coverage on GPS information can be sent back to the server via our 4G network, allowing others to locate lost material or individuals more easily, enhancing emergency responses. So we are expanding our business from connectivity to meet the needs for better coverage and tracking.

Oh, thank you very much. That completes my questions. Thank you.

Our next question comes from Vivian Zang with Diamond Equity Research. Please go ahead.

Vivian with Diamond Equity Research. Congratulations on the nice quarter. I have two questions for you. The first one is about the operating expenses because, in the quarter, the research and development expenses decreased by over 36% while sales and marketing expenses increased over 40%. So can you explain why this happened? Does this indicate that the company's spending will be more focused on marketing?

Yes. Yes, you have pointed out well. The figures tell how we manage our headcount-related costs and other business-driven expenses. Yes, for R&D, we're managing tightly on the increased headcount. Even this year, we expect business activities to increase and revenue to grow. We're managing this program with tight cost control measures. So the R&D headcount is not increasing as expected due to revenue growth expectations. On the other side, as you observed, our sales and marketing expenses have increased compared to last year because we are increasing headcount in sales. The Roamingman brand service contributes significantly to revenue for Chinese outbound tourists. This headcount increase is in our budget, reflecting our growth and controlled activities.

Yes. Let me add more comments. I think our Q2 major revenue still comes from our traditional products, but especially for our 5G product, which is quite popular because we are the only one currently launching the 5G worldwide connection. This is quite popular and has generated good revenue. In addition to traditional products, in the second quarter, we launched three new products. This demonstrates our strong R&D capabilities. We can launch three new products within one quarter, and these new products just launched at the end of the second quarter. I believe in the next two quarters, and in the following year, we will see more revenue and users generated from these new products. The three products I mentioned—our GlocalMe SIM, the upgraded CPE, and the smallest card-size Wi-Fi product—will integrate with daily life and secure a high-level network. Thank you.

Okay. I understand. My next question is, could you elaborate on what drove the company's revenue growth in China and your product and growth strategy there? The proportion of our revenue from China increased significantly this quarter. Can we expect this growth momentum to continue? Thank you.

Yes, as we disclosed in the third-quarter guidance, the growth rate will be around 30% compared to the same period of 2022. We expect this to be the peak season due to holidays and the recovering Chinese outbound tourist market. Some of our products are in peak demand, contributing to this year's growth. The main driver for our gross revenue in the third quarter remains international travel. This will also enhance our service gross margins and strengthen our overall financial position in terms of operating cash flow and adjusted net income.

Yes. I would like to add a few more comments. First, we have seen reports from the government indicating that in the first half of the year, only 30% of China’s outbound tourists have recovered. During the next holiday, such as National Day, we anticipate this figure will be closer to 50%, representing a larger group. Another reason is related to visa issues and potential conditions during COVID-19. Even with this limited percentage of recovery, we have already seen significant revenue. We believe that once the visa and passport challenges are resolved, we will see better revenue from the Chinese market for the Roamingman brand in the third and fourth quarters.

Hi, this is from Great Wall Securities. I have a question about the PaaS/SaaS service because we see this part of revenue doesn't show obvious increases compared to the first quarter. I want to know the process of the PaaS/SaaS service development at this time.

Yes. In the second quarter of 2023, our service revenue segment increased significantly, with a mix of three main types of service revenues: international roaming connect service, local connect service, and PaaS/SaaS service. Among the three categories, roaming service had the highest growth rate, while PaaS/SaaS service was in third place. The growth of PaaS/SaaS services is tied to our monetization business models. We have three main business models: B2C retail, B2B2C wholesale, and the PaaS/SaaS platform. The choice of business model influences which revenue category generates the most income. We don't double charge wholesale packages to partners and PaaS/SaaS platform clients. However, overall, our activity is growing in line with total growth. As we disclosed, we launched three new products in this quarter, including the GlocalMe SIM card and the smallest GPS-enabled portable Wi-Fi. Our IoT modules delivered to a primary mobile network operator in Japan will generate additional future PaaS/SaaS services. Overall, the momentum for PaaS/SaaS revenue growth remains strong.

Yes. I think because we launched new products and services, we expect our PaaS/SaaS revenue to pivot. Traditionally, this revenue stemmed from connection services and data volume, but now it shifts into new areas, such as GPS tracking and high-resolution services. This transformation offers unique services, including emergency services. These services, like high-quality connection insurance, align more with people's needs and will lead to more revenue generation in the PaaS/SaaS sector in the future.

Yes. I got it. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Jillian Zeng for 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. We look forward to speaking with you again next quarter. Thank you.

Thank you.

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