uCloudlink Group Inc. Q4 FY2023 Earnings Call

Good day, and welcome to the uCloudlink Group Inc. Fourth Quarter and Full Year 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 fourth quarter and full year 2023 earnings call. The earnings release and our earnings presentation are now available on our IR website at ir.ucloudlink.com. 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 fourth quarter and full year 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 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, 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. 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. We appreciate everyone taking time out of your busy day. We are very pleased to report another strong set of results in year 2023, highlighted by a 19.8% increase in full-year revenues to US$85.6 million. 2023 was a milestone in the turnaround of our business following the COVID-19 pandemic. With operating cash inflow of US$6.5 million and net income of US$2.8 million. Our international data connectivity services business continued to recover in year 2023. In our major markets, China and Japan, we are seeing early signs of a recovery in outbound tourism and business travel following the COVID-19 pandemic. More Chinese tourists are beginning to use our Roamingman brand services again, and the recovery in Japan is gaining momentum. Our market share in these major markets is growing, which will create significant growth opportunities for us going forward. With one of the most extensive 5G roaming networks in the world that covers 55 countries and regions, our competitive local full-speed 5G roaming solutions not only offer extensive coverage but also significantly enhance the user experience, which further expands our user base and cements our leading position in the roaming market. While working to turn around our business over the past years, we leveraged our existing research and development resources and cutting-edge technologies to explore business opportunities beyond portable Wi-Fi terminals and build and expand a comprehensive array of data connectivity solutions to satisfy a wide range of users' needs. In addition to significantly enhancing the travel experience by catering to the diverse data connectivity needs of various users, we will also offer more intelligent and convenient live applications like item tracking, pattern management, and emerging communication, among others, through our GlocalMe Life solutions business. We believe that these solutions will expand our market reach and help us establish a broader presence. Our 'Better Connection Empowers Better Life' mission is leading us to extend our business beyond the travel sector to various aspects of daily life, thereby generating long-term sustainable growth. To drive this transformation, we plan to reorganize ourselves into four distinct product lines in the year 2024. They are GlocalMe mobile/fixed broadband, GlocalMe SIM, the Internet of Things (IoT), and GlocalMe Life solutions. We believe this business reorganization will allow us to operate in a more agile fashion, take advantage of emerging opportunities, and enable us to engage with a broader user base with a robust slate of new products and solutions coming in the future. Please allow me to tell you more about what’s happening and what’s to come at uCloudlink. Let me go into a little more detail on the new array of product lines we have planned for the future. First, we will continue to strengthen the foundation of our business, GlocalMe mobile/fixed broadband, with an expanded offering of innovative cloud SIM technology, hyper-connectivity solutions, and additional value-added services that improve the user experience. We believe that we are uniquely positioned to expand our share in the roaming market. In addition, we plan to introduce commercial-grade dual broadband Customer Premises Equipment (CPE), which supports local fixed networks as well as multiple mobile networks from all major operators. It will be able to maintain connectivity even when fiber-optic lines fail or are disrupted. Our 5G CPE will be large-scale and commercial, which will unlock additional opportunities in the mobile/fixed broadband space. Second, GlocalMe SIM solutions, including our over-the-air (OTA) SIM and eSIM solutions, will evolve into our innovative “All SIM” solution, which will allow us to engage with a broader end-user base beyond those in the portable Wi-Fi terminals market. Our pioneering “All SIM” solution is poised to break out of cross-carrier restrictions and empower every smartphone. Third, our GlocalMe Life solutions business has an exciting slate of product announcements planned in the future, which will bring seamless connectivity into various high-frequency daily life application scenarios, as I mentioned earlier, such as pet management, item tracking, as well as emergency communication. Finally, we will also integrate these cloud SIM technology and hyper-connectivity solutions into our IoT business. Leveraging both proprietary and third-party smart modules compatible with mainstream chipset platforms, our IoT business will empower terminals and third-party devices, allowing them to intelligently select and dynamically switch between multiple local carriers worldwide. This diverse array of solutions, we believe, will help expand our business beyond portable Wi-Fi terminals and drive growth in the future. Because of the changes we’re making, our customers will enjoy a more intelligent and convenient life through our high-quality data connections for a range of everyday scenarios. I would like to review our guidance for the first quarter and full year 2024. We are optimistic about our future growth prospects following this business reorganization. However, we also recognize that we are only just beginning this transformative journey and these initiatives will take time to mature. For the first quarter of 2024, we expect total revenues to be between US$17.5 million and US$18.5 million, representing a decrease of 2.8% to an increase of 2.8% compared to the same period in 2023. For the year 2024, we expect total revenues to be between US$95 million and US$112 million, representing an increase of 11% to 30% from that of year 2023.

Thank you, Mr. Chen. Hello everyone, I will go over our operational and financial highlights for the fourth quarter and full year of 2023. Average daily active terminals is an important operating metric for us as it measures customer usage trends over each period, which is reflective of our business performance. In the fourth quarter of 2023, average daily active terminals were 316,207, of which 10,075 were owned by the Company and 306,132 were owned by our business partners, representing an increase of 6.2% from 297,884 in the fourth quarter of 2022. During the fourth quarter of 2023, 47% of daily active terminals were from uCloudlink 2.0 local data connectivity services, and 53% were from uCloudlink 1.0 international data connectivity services. Average daily data usage per terminal was 1.55 gigabytes in December 2023. Total revenues for the fourth quarter of 2023 were US$21.7 million, representing an increase of 10.8% from US$19.6 million in the same period of 2022. Revenue from services was US$14.9 million, representing an increase of 19.1% from US$12.5 million in the same period of 2022. Revenue from services as a percentage of total revenues was 68.7% during the fourth quarter of 2023, up from 63.9% during the same period of 2022. During the fourth quarter of 2023, as a percentage of our total revenues, Japan contributed 43.1%, North America contributed 24.3%, mainland China contributed 16.5%, and other countries and regions contributed the remaining 16.1%, compared to 43.7%, 33.9%, 3.0%, and 19.4%, respectively, for the same period in 2022. Overall gross margin improved to 52% in the fourth quarter of 2023 from 51.3% for the same period of 2022, while gross margin on services increased to 60.1% in the fourth quarter from 59.4% for the same period of 2022. Excluding share-based compensation, total operating expenses increased to US$11.6 million, or 53% of total revenues, in the fourth quarter of 2023, compared to US$10.4 million, or 53% of total revenues, in the same period in 2022. Net loss was US$1.8 million in the fourth quarter of 2023, compared to a net loss of US$1.1 million in the same period of 2022. Adjusted EBITDA was US$1.5 million in the fourth quarter of 2023, compared to US$1.6 million for the same period of 2022. Moving to the 2023 full-year financial results, total revenues for 2023 rose to US$85.6 million from US$71.4 million in 2022, driven primarily by an increase in revenues from data connectivity services. Revenues from data connectivity services were US$46.7 million, an increase of 31.7% from US$35.5 million in 2022. Within data connectivity services, revenues from international data connectivity services rose to US$37.9 million from US$28.1 million in 2022, as the recovery in international travel accelerated. Overall gross margin improved to 49% in 2023 from 45.5% in 2022, and our gross margin on services increased to 58.5% from 56%. The increase in gross margin on services in 2023 was primarily attributable to a more favorable business mix with a larger proportion of revenues coming from international data connectivity services, which tend to have higher margins. For the full year 2023, excluding share-based compensation, total operating expenses increased to US$34.6 million, or 40% of total revenues in 2023, compared to US$34.4 million, or 48% of total revenues in 2022. We achieved a net income of US$2.8 million in 2023, improving from a net loss of US$19.9 million in 2022. Adjusted EBITDA was US$9.8 million in 2023, compared to a loss of US$2.3 million in 2022. Our capital expenditures were US$2.1 million, compared to US$0.4 million in 2022. For the full year 2023, we achieved positive operating cash flow of US$6.5 million, up from US$4.4 million in 2022. Moving on to balance sheet items, our cash and cash equivalents increased to US$23.4 million as of December 31, 2023, compared to US$20.3 million as of September 30, 2023. We are pleased to have strengthened the Company’s financial position over the course of the year and are well positioned to continue growing our business.

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

Thank you very much. I have two questions this morning. My first question is about revenues from data connectivity services of US$11.8 million in the quarter. That is down from US$13.8 million in the third quarter. I was wondering if you could give us some insight into that, and if it was driven by any particular geographic region that was down sequentially more so than others.

Hi, Theo. Thanks for your question regarding the change in data connectivity service revenues for that quarter. Yes, you mentioned that two quarters back, the third quarter compared with the fourth quarter. As you know from our disclosures, the international roaming service is a main factor for our growth in service. The seasonal reasons during the third quarter is peak time; it's summer vacation. Therefore, that's peak time for the roaming service. In the fourth quarter, there’s a slight decline for this roaming service. That's part of a pattern of the seasonal change.

Is it across all geographies, or is it any particular geography?

No, that's an overall seasonal change. The fourth quarter of the year is only a short period, like the Christmas holidays. But in the third quarter, it's a long summer vacation. So that's the overall seasonal change, not particularly related to any specific regions.

Okay, understood. Thank you very much. My other question is about G&A expenses of US$6 million in the quarter. I noticed also last year G&A expenses rose sequentially from third quarter to the fourth quarter, and this year, the same thing occurred. It went from US$3.8 million in the third quarter to US$6 million in the fourth quarter. I was wondering what drives that change sequentially from Q3 to Q4 in G&A?

Yes, from our understanding, that's a good incentive plan for our employees. We disclosed that we have performance turnaround positions in terms of revenues growth and also a net income trend that tends to be positive compared with the significant loss in 2022. Management decided to pay a significant increase for annual bonuses for all employees. So that's specifically driven by an increase in annual bonuses. I think that's a very good motivation for our employees. We have tight control on headcount numbers during the course of the year. Overall, the company’s employees have been well motivated to support our growth this year.

Thank you very much. That explains it to me. Thank you.

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

Hello. This is Vivian Zang with Diamond Equity. My first question would also be about the fourth quarter revenue, which didn't meet your guidance of US$22 million to US$26 million. So we'd like to know the reason for not meeting these expectations for the first quarter.

Hi, this is Yimeng. I will answer the questions first, and then Mr. Chen will add some context on this fourth quarter's revenue. The actual revenue was slightly lower than our guidance of US$22 million at the bottom; we achieved US$21.7 million in the fourth quarter of 2023. It was still within our business patterns. We deferred some hardware orders to later periods because we had certain commercial terms agreed upon with customers before we delivered the hardware to them. So technically, this was a change in the final week of December.

Yes. Additionally, we have another reason why we performed lower than our expectations, which is because some of our new products were delayed for R&D reasons. So that's another factor that contributed to being less than our expectations.

Okay. I understand. Can you share more information about your newly announced GlocalMe Life solutions business? Because Yimeng, as you mentioned, are there products or services expected to boost the revenue this year in 2024?

Yes. Before 2023, we primarily relied on our portable Wi-Fi to create major revenue. Since last year’s third quarter, we started to launch our new products such as the OTA SIM card and our GlocalMe Life product. For the smaller business, we have early business trials. This year, we will officially launch our GlocalMe Life product. This means we create solutions for people who need better connection. Better connection can create revenue from the data, and we aim to improve people’s lives. For example, if we get the best network, if older adults fall down, their SOS message can be sent to a rescue center. Typically, these individuals experience poor signal strength in areas such as bathrooms and kitchens. Our product can provide both local Wi-Fi and cross-carrier connectivity, which can assist in sending out critical SOS messages enabling these individuals to receive help in a timely manner. Another feature is our tracker, which can find items that normal trackers and LTE gadgets cannot detect. With GPS scenarios, our tracker can send GPS location data via various network carriers. In rural and low-coverage areas, our marketing network can ensure messages are sent out rather than being limited to a single carrier network. Additionally, our product includes a radar technology function that assists in locating items within the last 100 meters. It is often very difficult to find items in those last crucial meters. However, with our technology, we can rely on active radar to find devices more easily. This is why we refer to our new product as a super tracker, which can find out things that traditional trackers and LTE devices cannot. We also plan to enhance communications across health sectors as previously mentioned. We plan to launch these products systematically starting in the second quarter and aim for a broader rollout later in the year. We believe this new product will generate more revenue for us. Overall, these solutions, including OTA SIM and E-SIM, will provide more sales opportunities than our traditional portable Wi-Fi, facilitating access for more customers travelling worldwide. We are optimistic that all these new products will create an expanded customer base and revenue stream for our business in the coming quarters.

Okay, I got it. Thank you so much. 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 speak to our investor relations firm, Christensen Advisory. We look forward to speaking with you all again on our next quarterly call. Thank you. Goodbye.

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