Earnings Call Transcript - UCL Q3 2021

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to the uCloudlink Group Incorporated Third Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question-and-answer session. Today's conference call is being recorded. I would now like to turn the conference over to your host today, Mr. Bob Shen, Deputy Investor Relations Director of the company. Please go ahead.

Bob Shen, Deputy Investor Relations Director

Thanks everyone for joining us on our third quarter twenty twenty one earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as via newswire services. I will give a brief introduction to our uCloudlink's NASDAQ UCL team. Zhiping Peng is our Co-Founder and Chairman of the Board of Directors; Chaohui Chen is our Co-Founder, Director, and Chief Executive Officer; Yimeng Shi is our Chief Financial Officer; Zhu Tan is our Vice President of Marketing and Sales. Our CEO will begin with an overview of our company and business highlights, which will cover Section 1 of the earnings presentation posted on our IR website. Our CFO, Yimeng Shi, will then discuss our operational highlights and the financial results as presented in Section 2 and Section 3. 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 nineteen ninety-five. 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 the details of the company's filing 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, as well as 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 our Co-Founder and CEO, Mr. Chaohui Chen. Please go ahead.

Chaohui Chen, CEO

Great. Yes, there is content similar to the earnings presentation from the second quarter of 2021, and during this call, we will outline the major recent developments and highlights. uCloudlink 1.0 focuses on international data connectivity services and has a strong history of high gross margins and profitability with ongoing growth potential. As international travel restrictions ease over time, the gradual recovery of international travel is favorable for our business. Despite the new challenges posed by the COVID-19 pandemic, we remain optimistic about the positive trend in international travel, driven by the increasing use of vaccination digital passports and COVID-19 test reports. With the gradual recovery of international tourism, we reported an increase in revenue from our 1.0 business in the third quarter of 2021, both year-over-year and quarter-over-quarter, due to sustained user demand across various markets. For instance, during the third quarter of 2021, our US market experienced a year-on-year increase in order demand for the 1.0 business. We anticipate that our 1.0 business will not only recover but also experience growth through new developments and innovative technology and products. We have seen encouraging progress in our 1.0 business as the number of daily active terminals has increased due to a rise in international travel users in various markets. We have intelligently repackaged our data offerings to reduce data traffic unit costs. The costs of data packages can vary significantly between different mobile network operators and mobile virtual operators, and we have transitioned from wholesale to retail to optimize this. We possess the largest SIM card pool and source data packages at wholesale local prices from operators for our partners. Additionally, we provide high-quality data connection services, enhancing the user experience for both users and business partners through multi-network reselection and combination, highlighting our competitive advantages. The monetization model for our uCloudlink 1.0 business includes retailing to consumers, rentals or sales to end users, wholesale offerings to businesses and our PaaS and SaaS services, which encompass CRM, billing management, device sales, and rental management. For our wholesale business, we can act as resellers or provide commission services to our partners. We enable our partners to share data traffic pools through our PaaS and SaaS platform and charge commission fees. We acknowledge that the COVID-19 pandemic has posed challenges to our 1.0 business, but it has also created growth opportunities, driven by rising demand for mobile data related to travel, tracking, vaccination digital passports, and COVID-19 test reports. Moreover, we have noted a reduction in market competitors following the pandemic. Moving on to uCloudlink 2.0, which focuses on local data connectivity services, this segment has become a new growth driver in 2020. Our new Hyperconn technology has further fostered the growth and development of our uCloudlink 2.0 business, broadening the scope of our local data connectivity services. This technology has gained acceptance among mobile network operators and business partners across various industries, showing growth potential with local partners in China, the US, and Japan. Our 2.0 business has shown greater resilience with a proven demand and growth potential during the pandemic and has faced less overall negative impact. The monetization model for our 2.0 business is akin to that of our 1.0 business and has a substantial local user base. We collaborate with mobile network operators to offer soft data connections through our SaaS platform by partnering with more mobile network operators and mobile handset manufacturers, enabling broader usage of our GlocalMe Inside (GMI) technology in devices such as 5G smartphones. We aim to expedite the arrival of the 5G cloud era and related applications like AR, VR, cloud computing, and Autopilot. The high standard of 5G application data connectivity will also elevate user expectations regarding data quality. Additionally, we are advancing through hyper connectivity solutions that encompass both mobile and fixed broadband services under various application scenarios such as home broadband. Our successful collaboration with a major mobile network operator in China has yielded results and expanded into more provinces. The increase in total revenues suggests that uCloudlink is poised for growth in the short term due to our ongoing efforts to expand our platform service business, and in the long term, we believe international travel restrictions will eventually be lifted. We saw an increase in revenue from our 1.0 and 2.0 businesses in the third quarter of 2021 compared to the previous quarter, and we have experienced accelerated business development through both online and offline channels in the US market. We introduced our new branded technology, Hyperconn, which enables us to target IoT opportunities by leveraging 5G mobility for enhanced network connectivity. Our strategy is to utilize this technology to bring innovative products and services to market, further promoting the development of our 2.0 business. Our new tablets featuring Hyperconn and cloud SIM technology have been marketed across new sectors such as education. Our focus on expanding our network and strengthening partnerships with local entities allows our new 5G Hyperconn products to penetrate industries requiring dependable, high-quality data connections, including education, emergency services, live broadcasting, e-commerce, Walkie Talkies, and other IoT applications. Our Hyperconn-related offerings have been distributed via our offline retail channels and e-commerce platforms, receiving positive sentiment and growing recognition from users and business partners in diverse industries. Building on our cloud SIM and Hyperconn technology, we continue to innovate and expand our product and service range, including our SaaS-developed terminals and third-party devices. Following the announcement of our Hyperconn technology in June 2021, we successfully introduced our Hyperconn technology solutions and products to the market in Q3 2021, such as Numen, the world's first HyperConn 5G mobile Wi-Fi device, and Genie, a tablet device. We have received constructive feedback on both Numen and Genie and are progressing toward partnerships with more businesses. Our IPC is currently undergoing pre-testing and is expected to launch commercially soon. Looking ahead, we plan to continue launching more innovative products and services incorporating our HyperConn and GlocalMe Inside (GMI) technology. We aim to broaden our PaaS and SaaS ecosystem with users and partners globally. Our Hyperconn solutions are adaptable to various application scenarios and smart hardware, including 5G mobile phones, tablets, and CPE. These solutions also support our entry into new sectors that demand high-quality, reliable data connections such as online education, emergency response, and the electric power sector. We believe our PaaS and SaaS ecosystem will keep expanding as we persist in investing in R&D and introducing innovative products and services to the market, improving data connectivity services for the Internet of Everything. I will now turn the call over to our CFO, Yimeng Shi, who will review the business and financial highlights.

Yimeng Shi, CFO

Thank you, Mr. Chen. Hello, everyone. Let's turn to page seventeen, data for the third quarter of twenty twenty one shows that the impacts from COVID-19 are becoming stable. The left-hand side of the slide shows Daily Active Terminals (DATs) as of September thirty, twenty twenty one. Average daily active terminals in the third quarter were two hundred and fifty six thousand and one hundred and twenty-four, representing an increase of one point five percent from two hundred and fifty-two thousand and two hundred and sixty-five in the third quarter of twenty twenty. Our uCloudlink 2.0 service accounted for around sixty-seven percent of total DAT during the third quarter of twenty twenty one. The average daily data usage per terminal was one point eight gigabytes in September twenty twenty one. Please turn to page eighteen, which shows the global diversification of our business. We had ninety-six percent of the total revenue from outside Mainland China. During the third quarter of twenty twenty one, Japan contributed to forty-seven percent of the total revenue and it continues to be the single largest market for our business. For other countries' revenue, the US market had the largest contribution to our business. Given the further development of our US business, we will continue to expand into other markets, such as Japan, China, Europe, and Southeast Asia. During the third quarter of twenty twenty, we had five percent of revenue coming from Mainland China, seventy-six percent of total revenue came from Japan, and thirty-nine percent of total revenue came from other countries and regions. Let's turn to page twenty. I will go through our financial highlights of the third quarter of twenty twenty one. Service-related revenue as a percentage of total revenue was fifty-four point two percent during the third quarter of twenty twenty one, compared with forty-eight point five percent during the second quarter of twenty twenty one. Revenue from PaaS and SaaS services increased eighty-one point six percent from one point five million dollars in the third quarter of twenty twenty to two point seven million dollars in the third quarter of twenty twenty one. This increase was primarily due to the expansion in the number of our business partners who use our PaaS and SaaS services to provide local data connectivity services. Revenue from PaaS and SaaS as a percentage of total revenue also increased to thirteen point eight percent during the third quarter of twenty twenty-one compared with eight point one percent during the third quarter of twenty twenty. Let's move to page twenty-one, which shows the revenue breakdown of our two business segments, namely revenue from services and sales of products. Our total revenue increased by seven point four percent from eighteen million dollars in the third quarter of twenty twenty to nineteen point three million dollars in the third quarter of twenty twenty one. Revenue from services was ten point five million, representing an increase of six point four percent from nine point eight million dollars for the same period in twenty twenty. This increase was primarily due to higher revenue from PaaS and SaaS services, partially offset by a decrease in revenue from data connectivity services. Let’s turn to page twenty-two for gross margins of our business. Our service gross margin increased to forty-three point five percent while our overall gross margin decreased to twenty-eight point three percent in the third quarter of twenty twenty-one compared to thirty-six point six percent and thirty-one point three percent during the third quarter of twenty twenty, respectively. The decrease in overall gross margin is mainly due to product mix and the rising material costs due to global supply chain concerns during this third quarter of twenty twenty-one. The increase in service gross margin during the third quarter of twenty twenty-one is primarily due to the increase of our PaaS and SaaS revenue which has the highest gross margin over other revenue. Let's move to page twenty-three, which shows the breakdown of our operating expenses, excluding share-based compensation and others. Excluding share-based compensation, operating expenses as a percentage of total revenue was maintained at sixty-one percent in the third quarter of twenty twenty-one compared with sixty-five percent during the third quarter of twenty twenty, and we will continue to improve our operational efficiency in the future. Let’s turn to page twenty-four. Our CapEx was zero point three million dollars during the third quarter of twenty twenty-one compared to zero point one four million dollars during the third quarter of twenty twenty. CapEx as a percentage of total revenue increased from zero point eight percent during the third quarter of twenty twenty to one point four percent during the third quarter of twenty twenty-one. Let’s move to page twenty-five. The net loss during the third quarter of twenty twenty-one was seven million dollars compared to nine point seven million dollars during the third quarter of twenty twenty. Adjusted EBITDA was negative five point four million dollars during the third quarter of twenty-one compared to negative five million dollars during the third quarter of twenty twenty. With that, let me conclude today's presentations. Thank you. And we will start our Q&A session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question will come from Vivian Zhang with Diamond Equity. Please go ahead.

Vivian Zhang, Analyst

Hello. Good evening. This is Vivian from Diamond Equity Research. First, congratulations on the results. I have two questions. So first is, we know your new technology Hyperconn and its related products, including the tablets, were launched several months ago. So my question is, how does that impact the revenue? Can you provide any data related to the sales of this part? My second question is regarding the PaaS and SaaS services. We see the revenue increased a lot this quarter. So can you provide color on how you develop new business partners and keep expanding in this area? Thanks.

Chaohui Chen, CEO

Let me answer the first question regarding the tablets. We launched the tablets in the third quarter. We have launched the product in September. So actually, I think the delivery along was total in the third quarter. Since September, we delivered eighteen thousand devices for tablets. So we continue to have more orders in the first quarter for tablets, mainly used in Japan and the United States. So for the second question, can you answer for the PaaS and SaaS revenue.

Yimeng Shi, CFO

Yes. Regarding the PaaS and SaaS revenues, the weight of the SaaS revenue has been improving compared with last year. This relates to our platform-centric strategy in uCloudlink’s local connectivity as a service. So as we deliver more and more terminals or devices to our business partners worldwide that procure data packages from local carriers, they still need to rely on our platform system, PaaS, SaaS platform to provide Hyperconn and cloud SIM solutions and services to the users. This PaaS, SaaS service is our core strategy for our business in the past year and also in the future as well. We expect the weight of PaaS, SaaS service will be increasing in line with delivered more terminals to our business partners and more daily active terminals used by our users. This is very important for our business as this SaaS service has higher gross margins. Furthermore, most SaaS revenue contributes significantly to improving our overall profitability and cash flow.

Bob Shen, Deputy Investor Relations Director

Hi, Vivian. This is Bob Shen. I want to add some points regarding our new tablet. Yes, our new tablets come equipped with our innovative technology, enabling them to seamlessly connect to available networks, like mobile broadband and fixed broadband networks at all times. For example, in the Japanese market, our new tablet facilitates cooperation with our business partners in the education industry, such as online education. This is just one example of our recent developments with our Hyperconn technology solutions and new products. As we always mentioned, our new technology, such as Hyperconn technology solutions, paves the way for further development of our 1.0 and 2.0 businesses.

Vivian Zhang, Analyst

That makes sense. Thank you, Bob. Thank you, Chen and Shi.

Operator, Operator

Our next question will come from Lisa Thompson with Zacks Investment Research. Please go ahead.

Lisa Thompson, Analyst

Hello, and congratulations on returning to revenue growth. It's great to see. My first question goes to the last sentence of the press release, only because we had this conversation, and you said there's no way you would settle with SIMO. So now that you settled with SIMO, how much money do you think that will save you next year in terms of expenses from not having any more litigation?

Yimeng Shi, CFO

Yes. This is Yimeng. I'll answer your question. We disclosed settlement agreements with SIMO. From this segment, we see reductions in litigation expenses in the third quarter of twenty twenty-one. We see that this savings on litigation expenses will be quite significant. You might know, in the past couple of years from twenty eighteen, we endured this long litigation process with SIMO. That incurred significant litigation expenses, more than seventeen million dollars in the past three years. We don't expect this kind of significant expenditure in litigation in the future. This will be a noticeable improvement in expenditure control in the future, as we see. This will be reflected in our performance in the following periods this year and next year.

Lisa Thompson, Analyst

So this is my question. How much less would you have to spend next year than you spent this year? Just so I can have it in my model somehow?

Yimeng Shi, CFO

For comparable basis, we can discuss the specifics as projections for this category of expenses after this call. Yes, we can have additional discussions regarding these figures.

Lisa Thompson, Analyst

But it is in the millions of dollars for this year?

Yimeng Shi, CFO

Yes, this year we spent millions on litigation expenses.

Lisa Thompson, Analyst

Okay. And then out of curiosity, did any money change hands in your settlement agreement?

Yimeng Shi, CFO

No. No cash changed hands in the settlement.

Lisa Thompson, Analyst

Alright, good. In your guidance that you gave, you're guiding to be sequentially down in revenues from this quarter to next quarter. Where is that coming from? What do you think will be less next quarter than this quarter?

Yimeng Shi, CFO

We discussed the guidance for the fourth quarter is between seventy point five million to eighty million dollars. This is due to supply chain constraints, which still carry on, and we need to prepare to deliver orders within these constraints. So we disclosed that guidance, and we will strive to achieve that. However, we believe the orders are still coming for the next year.

Lisa Thompson, Analyst

Products will go down and the rest of the business will still grow.

Yimeng Shi, CFO

That's the expectation. Yes.

Chaohui Chen, CEO

Yes, in terms of litigation. We believe it is not valuable for us to waste money in litigation. That’s a major consideration. Secondly, due to the constraints of the supply chain, we have more order volume than we can deliver. So that poses delivery challenges for us in the next quarter.

Lisa Thompson, Analyst

And is that for all the products or any particular ones?

Yimeng Shi, CFO

I think it applies to all products. As you can see, we are facing supply constraints for all products, including chipset related to our devices.

Lisa Thompson, Analyst

Okay. And so, are you now thinking in twenty twenty-two that your tablet delivery is going to be lower than you thought because of this?

Chaohui Chen, CEO

I don't think so because tablet demand is going up, depending on COVID-19 developments. If COVID-19 continues to be serious, we think the demand will increase. We have more product launches, and our headcount is increasing. We have more key products, and we will continue to bring forth new products next year.

Lisa Thompson, Analyst

And that reminds me of the other question. Could you talk a little bit about the IP camera? I don't think that's been mentioned. Are you going to be working with partners to sell that? Who are you selling it to? And what countries?

Chaohui Chen, CEO

Our Hyperconn technology is increasingly accepted by IP camera companies. We have a recent release announcing our collaboration with a major OEM IP camera company that has a significant market share in China and globally. They appreciate our solution because we embed our software into their outdoor cameras. These outdoor cameras do not require a SIM card. When the technology changes, the user does not need to change the SIM card, which is often challenging. We can optimize the data traffic, which is why we are forming more collaborations with IoT companies like those in the IP camera sector.

Lisa Thompson, Analyst

So you're just going to be selling them software, and they’ll put it in their cameras with their brand?

Chaohui Chen, CEO

Yes. They will service our solution under many brands. We will also introduce joint branding to sell IPC. That’s one of the choices. The joint branding will occur in our online and offline shops, and we will embed our software into their cameras to further enhance their value for their customers.

Lisa Thompson, Analyst

So, will revenues show up in product sales or in PaaS, SaaS, or in another category? How does that work?

Chaohui Chen, CEO

Both. If it's joint branding, we sell the camera, then we can gain hardware and data revenue. If it's purely a partner arrangement, where they just use our technology, we'll generate revenue for data through PaaS and SaaS.

Lisa Thompson, Analyst

Alright, great. That sounds good. Are you going to release a product anytime soon with a press release?

Chaohui Chen, CEO

Yes. We plan to launch a new product next quarter since we finished testing in the third quarter.

Lisa Thompson, Analyst

Okay, great. Look forward to seeing it. Thank you. That's all my questions.

Operator, Operator

As there are no further questions, I would like to turn the conference back over to the management team for any closing remarks. Please go ahead.

Bob Shen, Deputy Investor Relations Director

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.

Operator, Operator

The conference call has concluded. You may now disconnect your line. Thank you.