uCloudlink Group Inc. Q1 FY2024 Earnings Call

Good day, and welcome to the uCloudlink First Quarter 2024 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Liam Xie. Please go ahead.

Hello, everyone, and thank you for joining us on uCloudlink's first-quarter 2024 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, Co-Founder and Chairman of the Board of Directors; Mr. Chaohui Chen, Co-Founder, Director and Chief Executive Officer; and Mr. Yimeng Shi, 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 quarter. They will all be able to take your questions in the Q&A section 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 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 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, 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 and unaudited non-GAAP financial measures. uCloudlink's press release contains a reconciliation of the unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures. I will now turn the call over to Mr. Chen. Please go ahead.

Thank you, Liam, and good morning or good evening, everyone. We had a promising start to the year with total revenues of USD 18.1 million, in line with guidance. With our business now healthy and back on a growth trajectory, we maintained the profitability we regained last year, achieving a net income of USD 0.4 million and generating a net operating cash inflow of USD 1.9 million in the fourth quarter of year 2024. Revenue growth was primarily driven by the continuous recovery of our 1.0 international data connectivity services business, particularly our Roamingman brand services, which continue to rebound strongly. With coverage expanding from 55 to 60 countries and regions, our full-speed 5G roaming network solution further solidified our leading position in this sector and helped expand our market share. According to the Mobile Economy 2024 report from the Global System for Mobile Communications Association, the global number of 5G connections is expected to rise to 5.5 billion by 2027 from 1.6 billion at the end of the year 2023. We also made significant progress in rolling out and expanding a comprehensive array of data connectivity solutions during the quarter to explore opportunities beyond portable Wi-Fi terminals. Let me start with the progress we have made in our GlocalMe mobile and fixed broadband business lines. At the Mobile World Congress earlier this year in Barcelona, we showcased the GuardFlex Pro, our highly reliable dual broadband consumer premises equipment solution, which we believe will redefine industry benchmarks for high-level connectivity and innovation. Unlike other CPE solutions on the market, the GuardFlex Pro supports multiple mobile networks from all available major operators in addition to 10 local fixed networks. This means it is able to intelligently select and automatically switch networks to maintain connectivity even when the fiber optic lines fail or are disrupted. Fueled by the surge in remote work, online learning, and streaming platforms in recent years, the demand for reliable wireless connectivity is poised for substantial growth. Our GlocalMe Life business made significant progress during the quarter with the initial rollout of new products that bring seamless connectivity into various high-frequency daily life application scenarios. We soft-launched our first daily life product, a smart tracker, powered by our innovative solutions, which offers more accurate and reliable checking than similar tracker products currently on the market. In addition, the smart tracker provides free local Internet access to users for security reasons, unlike competing products that only support a single network or technology such as Bluetooth for item checking. Our product can intelligently select and switch between multiple networks and six different location technologies. Furthermore, we have an exciting slate of Easy Life X series products under development, designed to enhance the daily life of smart device users, simplifying their everyday tasks. We will unveil three GlocalMe Life products and the upgraded GlocalMe App on May 23rd at the Viva Technology event in Paris. Meaningful revenue generation from the smart tracker and Easy Life X series products is anticipated to begin in the third quarter, with ongoing recurring revenues from subscription and services projected going forward. By offering more intelligent and convenient products that satisfy a wide range of user needs, we are expanding our market share and establishing a broader market presence to diversify our revenue streams and generate long-term sustainable growth. By expanding our business beyond the travel sector into various aspects of daily life and commercial life, customers will enjoy a more intelligent and convenient life through our high-quality data connections for a range of everyday scenarios. Our newly launched GlocalMe SIM made solid progress during the quarter, ranking highly on several e-commerce platforms for travelers heading to destinations such as Japan and Hong Kong. Our GlocalMe SIM solutions, including our over-the-air SIM and eSIM solutions, will continue to evolve into our innovative All SIM solution, allowing us to engage with a broader end-user base beyond those in the portable Wi-Fi terminals market. This pioneering All SIM solution is uniquely positioned to navigate carrier restrictions and empower various smartphones. According to the Mobile Economy Year 2024 report from the GSMA, SIM connections, excluding licensed cellular IoT are expected to increase from 8.6 billion in 2023 to 9.8 billion by the end of 2030. Lastly, within our IoT business line, we completed testing of our soft cloud SIM technology for consumer IoT devices, which we expect to commercialize soon. This unique technology is compatible with a broader array of mainstream chipset platforms found in many IoT devices and eliminates the need for hardware redesign, allowing global IoT manufacturers to seamlessly deploy it through software installation. This turnkey solution is expected to create significant opportunities for us in the consumer IoT market by deploying our technology in products such as walkie-talkies, security cameras, and two-wheeled electric scooters that have a substantial user base and can significantly contribute to data connectivity services revenue. According to the Mobile Economy Year 2024 report from the GSMA, licensed cellular IoT connections are expected to grow from 3.5 billion in 2023 to 5.8 billion by 2030. We believe that better connections empower lives. We recognized ourselves into four distinct business lines starting from the year 2024 to leverage our existing R&D resources and cutting-edge technologies to explore business opportunities beyond portable Wi-Fi terminals and to build and expand a comprehensive array of data connectivity solutions to meet a wide range of user needs. By extending our business beyond the travel sector into various commercial aspects of daily life, these solutions will allow us to engage with a broader user base by leveraging our cloud SIM and hyper-connectivity technologies, ultimately building out our broader GlocalMe ecosystem and global leading mobile data traffic sharing marketplace. Finally, I would like to review our guidance for the second quarter of year 2024. We are optimistic about our future growth prospects. For the second quarter of year 2024, we expect total revenues to be between USD 22 million and USD 24 million, representing an increase of 0.1% to 9.2% compared to the same period of year 2023. We maintain our outlook for the year, with total revenues expected to be between USD 95 million and USD 112 million, reflecting an increase of 11% to 30.8% for year 2023.

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the first quarter of 2024. Average daily active terminals is an important operating metric for us as it measures customer usage trends over the period and is reflective of our business performance. In the first quarter of 2024, average terminals were 309,906, of which 13,622 were owned by the company and 296,284 were owned by our business partners, representing an increase of 1.9% from 304,121 in the first quarter of 2023. During the first quarter of 2024, 57.9% of daily active terminals were from uCloudlink 1.0 international data connectivity service and 42.1% were attributed to uCloudlink 2.0 local data connectivity service. In March 2023, the average daily data usage per terminal was 1.56 gigabytes. As of March 31, 2024, the company had 178 patents with 141 approved and 37 pending approval, while the pool of SIMs has grown from 382 MNOS globally, as of March 31, 2024. Total revenue for the first quarter of 2024 was USD 18.1 million, representing an increase of 0.7% from USD 18 million in the same period of 2023. Revenue from services in the first quarter was USD 13.5 million, an increase of 4.8% from USD 12.9 million in the same period of 2023. Revenue from services, as a percentage of total revenue, was 74.7% during the first quarter of 2024, up from 71.7% during the same quarter last year. Geographically speaking, during the first quarter of 2024, Japan contributed 40.9% of our total revenue; North America contributed 16.8%; Mainland China contributed 25.3%; and other regions contributed the remaining 17%, compared to 43.1%; 33.6%; 5.1%; and 18.2%, respectively, in the first quarter of 2023. Our gross profit rose to USD 10 million in the first quarter of 2024, representing an increase of 60.3% from $8.6 million in the first quarter of 2023. Overall gross margin in the first quarter of 2024 further rose to 55.2% from 47.8% in the same period of 2023. The gross margin on services increased to 65% in the first quarter from 60.5% in the same period of 2023. Excluding share-based compensation, total operating expenses were USD 8.5 million or 47% of total revenue in the first quarter of 2024, compared to $6.9 million or 38% of total revenue in the same period in 2023. Net income was USD 0.4 million in the first quarter of 2024 compared to USD 2.1 million in the same period of 2023. Adjusted EBITDA was USD 1.7 million in the first quarter of 2024 compared to USD 2.1 million for the same period of 2023. For the first quarter of 2024, we achieved an operating cash inflow of USD 1.9 million, up from USD 1.6 million in the same period of 2023. Our capital expenditures were USD 0.6 million compared to USD 0.4 million in the same period in 2023. We maintained a solid balance sheet with cash and cash equivalents increasing to USD 24.7 million, as of March 31, 2024, up from USD 23.4 million, as of December 31, 2023. With that, operator, please open up for Q&A.

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

Congratulations on a good quarter. My first question is about the good profit margins in the quarter. And I was wondering if you could talk about why those numbers came in so well. Is it a pricing issue? Was it a mix? Give us some more detail on how you were successful in the gross profit margins in the quarter?

Yes. Thanks, Theo. Let me answer the first question. Yes, as we disclosed, service gross margins are improving significantly in the first quarter of 2024 from 64% to 65% on the service part. The main contributions for these improvements is the increased proportion of international roaming service, as the roaming service comprises more than 53% of our daily active terminals. So, that's the major contribution. Additionally, we disclosed that our SaaS revenue in the first quarter improved compared to last year as well. So these two sectors have higher gross margins, contributing to our significant improvements in service gross margins. Looking forward to this year, we expect the recoveries accelerate in international roaming travels to help maintain this higher service gross margin in the next couple of quarters. We expect more revenue will also come from the new product services related, like GlocalMe SIM sales, which is a revenue-generating service. Overall, we expect that the main driver for this performance is the international roaming service.

And my next question is about GlocalMe Life. I was wondering if there's a substantial CapEx or R&D expense that we should associate with this new product line? Or is this primarily unlocking features that were already existing in the systems that you're selling?

Yes. Let me answer. The investments on these new products are going live. Regarding the opportunities for this new business, I will pass this question to our CEO, Mr. Chen. As we mentioned, we are investing in this new product development. So, in the first quarter of 2024, the headcount related to R&D is 148, which is 10 more compared to the same period last year. However, most of this investment is for our sales and marketing departments. By the end of the first quarter of 2024, sales headcount reached 183, which is 50 more than the same period in 2023. We are investing substantially in sales and marketing to support our opportunities in both our traditional Wi-Fi business and our new businesses. We launched three new business lines this year on top of our Wi-Fi dongles. I will pass the question to Mr. Chen to provide more details on this opportunity for GlocalMe Life.

Yes. Regarding GlocalMe Life, we plan to launch our product next week. We have an event scheduled in Paris on May 23rd. While we have increased R&D headcount, the focus has been on efficiency rather than substantial increases. During COVID-19, we conducted R&D for these four product lines, and now it is time to introduce the new products. We will continue to invest in R&D, including AI in the future. Our R&D costs are expected to expand over the next two to three years.

The next question comes from the line of Vivian Zhang from Diamond Equity Research.

Hello. This is Vivian with Diamond Equity Research. Congratulations on the quarter. Most of my questions have been answered. I would like to know about the selling expenses. We see the company's sales and marketing expenses increased over 38% in the quarter, while product sales were down about 10%. How are you allocating resources to drive the product sales?

Okay. Let me further explain these expenditures related to sales. As I just mentioned, the sales expenses increased due to the hiring of 50 additional headcount compared to the same period last year. We also invested an additional USD 0.7 million on promotions and marketing, such as exhibitions, including events in Barcelona and CES in America, as well as various marketing events and promotions on e-commerce platforms. We believe these promotions are beneficial to increase awareness of our brand, GlocalMe, and also prepare for our new product launches. We have four business lines, three of which we will expand and commercialize in the near future. We are maintaining our revenue guidance for the year, as mentioned by our CEO, Mr. Chen. As revenues increase in the next couple of quarters, I believe the operating expenses margin will be lower and improving compared to the first quarter of this year. Thank you.

Let me add some context. Our spending on the marketing and sales side has increased primarily due to the recovery in global markets, which required our sales and marketing teams to ramp up their efforts across different countries after COVID-19. Additionally, we are preparing resources and campaigns for the upcoming summer season, as well as new product launches and marketing efforts related to our eSIM, SIM card, and GlocalMe Life products, which will cater to the consumer market. We need to prepare for these marketing campaigns effectively.

The next question is from Xuan Liu from China Great Wall Securities.

Yes. This is Xuan Liu from China Great Wall Securities. Many questions have also been answered before. I have a question and would like to get more details because we got USD 18 million in the first quarter, and we expect revenue between USD 22 million to USD 24 million. For the whole year, we also have very positive expectations. Do you have any foreseeable or stable sales orders for our new products?

Let me address the guidance range for the second quarter of USD 22 million to USD 24 million. Yes, this outlook will show modest growth compared to the same period last year, though not very significant. The peak selling time is the summer, which is the third quarter. We expect to see sales revenue from our new products' launches taking place in May. We anticipate that these new product sales will contribute to revenues in the third and fourth quarters as well, sustaining our overall yearly guidance of USD 95 million to USD 112 million.

To add some comments, our traditional portable Wi-Fi business is showing stable growth. We see Japan and China as our major markets. We believe global travel is on a slight recovery trajectory, continuing to grow, but at a slower rate than we had expected. The new product revenues will likely originate largely from the third and fourth quarters. This is because we have only just launched the new products, and their potential for sales is significant, but there remains some uncertainty. Therefore, we maintain our existing forecast.

Thank you. Ladies and gentlemen, there are no further questions at this time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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.

Thank you.