uCloudlink Group Inc. Q3 FY2023 Earnings Call

Hello, and welcome to the uCloudlink Third 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. Please go ahead.

Hello, everyone, and thank you for joining us on uCloudlink’s third quarter 2023 earnings call. The earnings release and our earnings presentation are now available on our IR website. Joining me on today’s call are Mr. Zhiping Peng, our Co-Founder and Chairman of the Board of Directors, Mr. Chaohui Chen, our Co-Founder, Director and Chief Executive Officer, and Mr. Yimeng Shi, our Chief Financial Officer. Mr. Chen will begin with an overview of our recent business highlights. Mr. Shi will then discuss our financial and operational highlights for the third quarter of 2023. They will all be available to take your questions in the Q&A session that follows. 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 unaudited GAAP financial information and 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 Mr. Chen. Please go ahead.

Thank you, Jillian, and good morning, everyone. Thank you for joining us today. We appreciate everyone taking the time. We delivered another strong set of results during the quarter, highlighted by a 31% year-on-year increase in total revenues to $20.9 million, and the sixth consecutive quarter of positive cash flow from operations. Average daily active terminals, our key operational metric, increased once again to a new all-time high of over 320,000. This was a well-rounded performance across our entire business. During the quarter, we continued to consolidate and develop our new uCloudlink 1.0 International Data Connectivity Services, driving an excellent performance in this segment. Total revenues from uCloudlink 1.0 International Business increased 42.7% year-on-year to $11.4 million. The recovery of international travel is creating significant tailwinds for this business, with growth from Japan and mainland China as significant growth drivers during the quarter. While Chinese outbound travel remains soft, Chinese international travelers during the peak summer holiday season increasingly chose to use our Roaming Man brand services, accounting for a growing share of our International Data Connectivity Services. Because of that, revenues from mainland China increased to 7.2% of our total revenues during the quarter, compared to 2.4% during the same period last year. This strong performance was enabled by the continuous development of our technology products and services offerings and the value-added services. During the quarter, we consolidated our leading position as a 5G roaming solution provider as cross-border travelers continue to discover our 5G portable Wi-Fi terminals, 5G terminal packages, and the unparalleled user experience they provide. One of our most popular mobile Wi-Fi devices is now equipped with artificial intelligence service assistance, especially designed for Chinese cross-border travelers, meaning our products are not just data traffic connectivity terminals, but also intelligent travel assistants. We launched a GlocalMe SIM card, which currently offers coverage across 10 high-demand travel destinations and a GPS tracker-enabled portable Wi-Fi terminal. This, we believe, is currently a small list of its kind in the world. In addition, we piloted an eSIM solution in October 2023, which will enable us to certify a wider range of data connectivity needs from our customers. Taken together, we believe our high-margin uCloudlink 1.0 business will remain a key driver of our business as the long-term recovery of international travel continues. We are confident that our expanding and upgrading portfolio of products and services will help us and our business partners achieve further market share gains and enhance our leadership in the international data roaming business. We are working on expanding from data connection to more daily life application scenarios by enriching our portfolio offerings. Our Internet of Things (IoT) solutions are a key part of these strategies. During the quarter, third-party devices utilizing uCloudlink’s CloudSIM technology powered by IoT solutions entered the market in Japan. Besides embedding our IoT module in third-party devices, we also expect to cooperate with major IoT module manufacturers on integrated CloudSIM technology. We also continue to conduct commercial testing of our highest performance 5G customer premise equipment (CPE), which we expect to launch in the near future. The upgraded CPE provides home and office internet connections, ensuring perfect seamlessness between fixed and mobile networks, making it a reliable substitute for traditional fixed broadband offerings. We believe this new offering will bolster uCloudlink’s position in the fast-growing market for home and office internet connectivity, helping us expand our user base and gain additional market share in the fixed broadband market. In addition, we launched retail sales of our GPS-enabled portable Wi-Fi terminal in Hong Kong during this quarter, which marks the beginning of our new efforts to provide more daily life services. We believe these GPS-enabled devices will become indispensable assistants in consumers’ daily lives, offering an easy way to keep track of personal belongings and monitor the location of family members, including elderly relatives, children, and pets. As I mentioned before, our offerings such as CloudSIM products, the GlocalMe SIM card, and an eSIM solution will help us launch various hyper-connectivity solutions compatible with CloudSIM, soft SIM, and eSIM technology in the future. To sum up, we believe our new offerings open up a new range of application scenarios for our solutions and hold significant long-term growth potential. Many of these solutions are designed not just to generate revenue from product sales and data connectivity services, but also through PaaS and SaaS revenue that recurs on a monthly, quarterly, and annual basis. Our team is working diligently to expand our offerings to serve a broader customer base and a wider variety of use cases. We also believe that we are well positioned to create a mobile data marketplace that will define the mobile data connectivity experience. All of our efforts are geared towards strengthening the competitive advantages that will facilitate the development of this marketplace, our growing user base, our extensive relationships with global mobile network operators, and our innovative technologies. We will continue building out our offerings and working towards our objective of enabling everyone to enjoy a more intelligent and convenient life through reliable and high-quality data connections. For the fourth quarter of 2023, uCloudlink expects total revenues to be between $22 million and $26.2 million, representing an increase of 12.2% to 33.7% compared to the same period last year.

Thank you, Mr. Chen. Hello, everyone. I will now walk you through our operational and financial highlights for the third quarter of 2023. Average daily active terminals (DAT) measure customer usage trends and reflect the overall performance of our business. In the third quarter of 2023, average daily active terminals were 325,078, up by 9.3% from the same period last year, and composed of approximately 12,000 owned by the company, and 313,000 owned by our business partners. The uCloudlink 1.0 and uCloudlink 2.0 businesses accounted for around 50.4% and 49.6% of total CAT, respectively, during the third quarter of 2023. Average daily data usage per terminal was 1.56 gigabytes in September 2023. Total revenues for the third quarter of 2023 were $23.9 million, representing an increase of 31% from $18.2 million in the same period of 2022. Revenue for services was $16.6 million, an increase of 31.9% from $12.6 million in the same period of 2022. Revenue from services as a percentage of total revenue was 69.7%, up from 69.2% during the same period of 2022. During the third quarter of 2023, Japan contributed 44.2% of total revenue. North America contributed 26.3%. Mainland China contributed 17.2%, and other countries and regions contributed the remaining 12.3%, compared to 35.1%, 41.5%, 2.4%, and 21%, respectively, in the same period of 2022. Revenue from mainland China increased significantly, primarily driven by Chinese travelers using Roaming Man brand service as they increasingly resumed outbound international travel. Overall gross margin was 51.2% in the third quarter of 2023, compared to 47.7% in the same period of 2022. Gross margin on services was 35.9% in the third quarter of 2023, compared to 37.9% in the same period of 2022. Excluding share-based compensations, total operating expenses were $8.7 million, or 36% of total revenue in the third quarter of 2023, compared to $7.3 million or 40% of total revenue in the same period of 2022. We recorded net income of $3.5 million in the third quarter of 2023, compared to a net loss of $4.6 million in the third quarter of 2022. Adjusted EBITDA non-GAAP improved to $4.1 million during the third quarter of 2023, compared to $0.9 million in the same period of 2022. We achieved positive operating cash flow of $2.8 million during the third quarter of 2023, compared to $1.2 million during the same period of 2022. We successfully achieved positive cash flow from operations for a sixth consecutive quarter, accumulating operating cash flow inflow of $16.7 million through the previous six quarters. In summary, our financial performance continued to improve during the third quarter, and we believe that we are well positioned to execute on our strategic growth initiatives.

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

Hello, this is Vivian Zang with Diamond Equity Research. Congrats on the strong quarter. Here are my questions. First, could you elaborate on what drove the margin expansion in the quarter, particularly margin on products sold? Was it a price increase or product mix? And is this expansion sustainable? Thanks.

Thanks, Vivian. I'll answer your first question regarding the improvements in gross margins. As you see, the overall service margin improved significantly compared to the same period last year. The major contributions came from the sales of products and the mix of sold products. So, the improvements in sales productivity contribute overall to this quarter’s gross margins. For service gross margin, there was a slight fluctuation compared with the same period last year, so we can expect the recovery in international travel to resume in the coming year. The International Connectivity Service gross margin is one of our highest gross margins in our categories. We expect this service gross margin to remain at a similar high level in the fourth quarter of this year. The gross margins on sales products will depend on the mix of products sold to customers. Thank you.

Okay. Got it. Thank you. My second question will be about the new launched products. Can you share with us more information about the portable Wi-Fi terminal and how you expect this new product to drive the company's growth?

Yes. So, first, I think we launched the 5G product this year in the last quarter, so in Q2, quite successfully, and this is what’s leading to faster growth for our global roaming high-performance Wi-Fi. This has helped us achieve a good market share because currently this is almost the only portable Wi-Fi available in this market for global roaming. Second, we launched a small, business card-sized portable Wi-Fi. This portable Wi-Fi can enhance our market position in the international business because we can combine our large Wi-Fi and smaller Wi-Fi together, providing more flexibility to meet the various needs of family packages. For example, several family members can use one package for a big device, or they can independently use the smaller device. This means more choices and giving users more flexibility. Another product is our artificial intelligence integration into our Wi-Fi. This means that for Chinese travelers, using services like ChatGPT in China is difficult due to the need for a foreign number to register. This barrier is there. With our solution, we are working with this service provider to integrate AI into our Wi-Fi, allowing our users to use ChatGPT while traveling from China to the world. We’re also providing a SIM card business because we know that even though the portable Wi-Fi can provide the best connection, some users still want a simple solution without the need to carry an extra device. Thus, we provide the SIM card option for them. Our SIM card business can download different countries' portfolios, and combined with our CloudSIM enables these devices to roam freely in more than 10 countries. I believe that in the next quarter, we will be providing more countries to meet customer needs for convenience. By the way, our solution can also integrate more services in the future, like enhanced calling, making travel easier for both Chinese and foreigners.

Okay, that makes sense. Thank you so much for the detailed information. That's all my questions.

The next question will come from Theodore O'Neill of Litchfield Hills Research. Please go ahead.

Thank you very much, and congratulations on a strong quarter. My first question is about the growth rate of terminals versus data. So, the terminal growth rate was strong at 9.3% in the quarter, but the total data consumed was less than 1%. Should those two things be related? Does it have any significance that one’s much larger than the other?

Hi. Thanks, Theo, for your questions. Let me first explain a bit about these two metrics. Yes, you mentioned that the metrics are daily active terminals, right? The data active terminals have achieved a new high of over 220,000. The increase of about 9.3% may not seem significant, but revenue generation is quite strong despite this growth rate in terms of daily active terminals. That means, yes, daily activity is a very important operational metric. It indicates how much our users and partners utilize the terminals to generate revenue. Thus, the revenue generation relies on the usage of our terminals to provide better connections. This reflects strong indications of future revenue generation and growth. The figure of 320,000 in daily active terminals supports our revenue generation at a fast growth pace. That's why we are developing more new products to satisfy customer requirements. So, as our new products are described by Mr. Chen, we expect this will support more active terminals in the market, and thus our service revenue will grow as daily active terminals increase.

Okay. I understand. The next question is about the IoT. In your prepared remarks, you spoke about the expanding number of third-party devices powered by IoT solutions in Japan during the quarter. Is there any particular end-use application for those IoT, or is it broad-based?

Yes. Our IoT, I think for the Japan case, is achieved by a partner. They apply this solution for the end user, to enhance the reliability of network connectivity potentially. This is a launcher phase, and we believe they will scale up in the future. As for the IoT in Japan, I just mentioned earlier, we embed our solution into the module manufacturer, meaning our CloudSIM technology is embedded into these modules. As more module providers embed our GlocalMe technology, I believe these smart modules will understand the value of reliable connections globally. This creates a strong need for connectivity in smart devices such as smart cards and smart chargers. These smart devices need monitoring for their operation. We provide the best and most competitive connection. That’s why I believe this part will gain significant traction next year and beyond.

And my last question is about cash balance. You are building a good-sized cash balance here. I wonder if you have plans for acquisitions, dividends, or similar?

Yes. As we mentioned, we have achieved positive cash flow from operations for a sixth consecutive quarter. We are accumulating operating cash inflow of $16.7 million through the previous six quarters. Our current cash balance is over $20 million. Yes, we are seeing good growth rates. We expect to maintain this trend to continuously generate cash flow from operations to improve our financial position. We want to have enough cash balance to support the company’s future growth and expansion. So far, we do not have specific targets to announce regarding acquisitions or similar actions. Our focus is on enhancing performance to generate more cash flows and strengthen our position.

Thank you very much.

Yes, I believe that our business 1.0 and new product launches will enable us to generate more revenue and strengthen our cash position. First, we want to make the company stronger and healthier. Additionally, we will consider any potential opportunities in the future, which are currently under consideration, but the priority is to make the company stronger and healthier.

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

Well, 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. We look forward to speaking to you all again on our next quarterly call. Thank you.

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