uCloudlink Group Inc. (NASDAQ:UCL) Q1 2023 Earnings Call Transcript May 18, 2023

uCloudlink Group Inc. misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.04.

Operator: Good morning, and welcome to the uCloudlink First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jillian Zeng, Investor Relations for uCloudlink. Please go ahead.

Jillian Zeng: Thanks, everyone for joining us on our first quarter 2023 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com as well as our newswire surveys. I will give a brief introduction to our uCloudlink management team. Mr. Zhiping Peng is our Co-Founder and Chairman of 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 company’s operation highlights and 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 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 entity by the company’s statement with effective and the 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, change in market conditions or otherwise, except as required by law. Please also note that uCloudlink’s earnings press release and this conference call includes discussions of an unaudited GAAP financial information as well as an unaudited non-GAAP measures. UCloudlink’s press release contains a reconciliation of unaudited non-GAAP measures to an unaudited most directly comparable GAAP measure. I will now turn the call over to our Co-Founder and CEO, Mr. Chaohui Chen. Please go ahead.

Chaohui Chen: Thank you, Julian, and good morning, everyone. Thank you for joining us on our first quarter of year 2023 earning call. Today we appreciate everyone’s time. We are pleased to start off 2023 with strong first quarter results, which is the first time that we achieved both positive net income and positive cash flow generated from operations with growth in revenue since the outbreak of the COVID-⁠19 pandemic. The average daily active terminals continue to be in an upward trend and reached a historic height of over 300,000 in this quarter as we continue to expand our global PaaS and SaaS ecosystem, reflecting the accelerated market demand for uCloudlink services across the global market. uCloudlink 1.0 is our international data connectivity services business, which tends to be a higher margin line of business and has historically been one of our key growth drivers.

During the first quarter of year 2023, uCloudlink 1.0 business revenues increased 38.5% year-over-year to US$7.8 million. We are delight that our uCloudlink 1.0 business demonstrates significant growth as a result of accelerated international travel recovery across our major markets particularly in Japan. We also have observed increased demand from our 1.0 Roamingman business in mainland China and Southeast Asia which are historically strong markets with wide coverage Roamingman brand Average daily active terminals for uCloudlink 1.0 business increased by 55.3% compared with same period of year 2022 which indicates the significant growth of our business. We remain optimistic in our ability to further grow our uCloudlink 1.0 business thereby solidifying our leading global position in the International Roamingman Solutions market and we look forward to serving our users globally as the market continues to pick up.

uCloudlink 2.0 is our local data connectivity services business, which focuses on local residents and solve challenges among the carrier. This business took off during the pandemic as we seize the opportunities in the local markets by offering reliable local data connection services. Over the past two years, we continue to strengthen our presence in local markets, including Japan and North America, where we help operator and business partner improve their data connectivity services and resolve data connection problems through our Past and SaaS platform based on our patent technologies including cloud SIM and HyperConn technology solutions. Our new uCloudlink 2.0 business reported US$2.2 million in revenues, up by 37% in the first quarter of year 2023 as compared to US$1.6 million in the same period of year 2022.

We receive recognition from business partners in established markets like Japan and North America and continue our efforts in expanding our PaaS and SaaS Platform ecosystem. We expect our high quality, reliable data connectivity services based on our innovative HyperConn technology will receive more industry recognitions and applications, especially in the mobile and fixed broadband industry. We expect to launch more innovative HyperConn products catering to the needs of a diverse set of mobile virtual operators, business partners and individual customers in the near future. On the Internet of Things, IoT side of our business, we have shared updates on multi-application scenario support by our IoT Mobile module including WiFi router, IP cameras, et cetera, which have been welcomed by our customers in various markets for their competitive advantages.

In Japan, we are actively working with our business partners to explore and expand application scenarios for the IoT business to further improve the data connectivity experience for their customers. At the same time, our team continues to leverage existing resources in the research and development to develop uCloudlink 3.0 business. The one-stop mobile data traffic sharing marketplace application is planned to launch the fourth version in the near future which leverages our efforts in building scalable users based through our uCloudlink 1.0 and uCloudlink 2.0 models. This marketplace enables end users devices to connect to available network anytime, anywhere, utilized in the GlocalMe app new version. We remain confident in the market conditions ahead for the demand of year 2023 and we’re prepared to take advantage of the peak season of international travel during the summer.

We believe our track record of delivering reliable and high quality data connectivity experience and our historic of introducing innovative products and solutions enable us to maintain a leading position in the international data connectivity services industry. We are always committed to continuous development of innovative solutions and plan to expand our uCloudlink and HyperConn technology solutions to more application scenario. Our business aims to deliver value add services to our customers by continuously improving their mobile data connectivity experience. And we’ll continue to execute our growth strategies with our expanding portfolio of offerings. I will now turn the call over to our CFO, Mr. Yimeng Shi.

Yimeng Shi: Thank you, Mr. Chen. And hello, everyone, I will go over our operational and financial highlights for the first quarter of 2023, average daily active terminal, DAT is an important operating metrics for uCloudlink as it measures the trend of customer usage over the period reflecting our ongoing business performance. In the first quarter of 2023, Average Daily Active Terminal were 304,121 a month, of which 3,483 owned by the company and 300,638 owned by our business partner, up by 11% from 273,870 in the first quarter of 2022. The average DAT for our uCloudlink 1.0 and uCloudlink 2.0 business accounted for around 42.7% and 57.3% of the total DAT respectively during the first quarter of 2023. Average daily data usage per terminal was 1.62 GB in March 2023.

Total revenue for the first quarter of 2023 were US$18 million, representing an increase of 15.3% from US$15.6 million in the same period for 2022. Revenue from service in the first quarter of ‘23 was US$12.9 million, an increase of 31.4% from US$9.8 million in the same period of 2022. Revenue from service as percentage of total revenue was 71.7% during the first quarter of 2023, up from 62.9% during the same period of 2022. During the first quarter of 2023, Japan contributed 43.1%, North America contributed 33.6%, mainland China contributed 5.1% and other countries and regions contributed the remaining 18.2% of the total revenue, compared to 40.2%, 37.9%, 1.9% and 18% respectively in the first quarter of 2022. Overall gross margins improved to 47.8% in the first quarter of 2023 as compared to 37.4% in the same period of 2022, and our gross margins on service increased to 60.5% in the first quarter of 2023 from 49% in the same period of 2022.

Excluding the share-based compensation, our total operating expenses decreased to US$6.9 million or 38% of total revenues in the first quarter of 2023 as compared to US$9.3 million or 60% of total revenue in the same period of 2022. We realized net income of US$2.1 million in the first quarter of 2023, which represents a significant improvement on our bottom line results as compared to net loss of US$7.9 million in the same period 2022. Similarly, adjusted EBITDA improved to US$2.1 million during the first quarter of 2023 as compared to negative US$3.9 million in the same period 2022. We are pleased as this is the first-time, we achieved positive net income since the outbreak of COVID-⁠19 pandemic and adjusted EBITDA has remained positive for three consecutive quarters.

We have achieved positive operating cash flow US$1.6 million during the first quarter of 2023, which compared to negative US$4.4 million during the same period of 2022. We have significantly improved our bottom line in the first quarter of 2023 and have generated positive cash flow from operation for four consecutive quarters. Our strengths in financial position enable us to execute our growth strategies. With that operator, let’s open it for Q&A.

Q&A Session

Operator: The first question today comes from Theodore O’Neill with Litchfield Hills Research.

Theodore O’Neill: Thank you very much. Can you hear me, okay? Yes, good. Congratulations on the good quarter. I have three questions for you. The first on gross profit, I can see that the overall margin was better in the quarter because you had a greater mix of services. But I wanted to understand the margins got better on both products and services. Is that due to pricing or was there some efficiencies in the products?

Yimeng Shi : So we answer your questions one by one. So you just raised the first question right. Yes, regarding the gross profit, you will see we improve gross profit, gross margins in the past couples of quarters. So that’s massive improvements on quarter-to-quarter basis. For the service gross margin is improving depending on a mix of the service categories. So that’s a mixture of the three categories of main service revenues. One is the international roaming connectivity service; one is a local connectivity service and the PaaS and SaaS service. So the improving gross margins will reflect the proportions of the revenue generating from international roaming service and from PaaS, SaaS is growing faster than the local connecting service.

So that’s where we get the improving result of the gross margins improving over the past couple of quarters. So we look forward in the near future this year because the border has been open up for most countries so the people can move in cross border more freely than before. We expect there’s more revenue will generate from the international roaming connected service. So if you zooming the proportions of international roaming service will be improving in the future. So we expect the overall service cost margin will be improving a bit at least keep stables in following quarters for this year. That’s my opinion.

Theodore O’Neill: Thank you. My next question is about the research and development expense. It says in the prepared remarks that you had a decrease of $0.2 million in testing and certification expenses. Can you give me some insight into how that number for testing and certification? I would have thought it would sort of go up and down with new products, but can you give us a little more sense of how that goes up or down, quarter-to-quarter?

Yimeng Shi : Yes, I answer you the first half part regarding the decreasing and expenses. Our CEO may give some colors on the new product. Yes, we report the streamlines our operations since the year 2021 and that’s reflecting our overall head account is decreasing compared with the year 2022. So the number of headcounts has been cut off for some certain part for improving our operational efficiency and so that’s with reflecting on comparable basis. So our overall expenditures have been decreases on year-to- year basis and that’s similar story for this R&D functions. We invest a lot in the past couple of years, we invest huge investments on research and development functions so that support our every year we launch different, a different new , new features and upgrades platform as well but we will still invest, leverage on this R&D to support to develop a new product. So regarding the new products developments, our CEO will give some more color on that.

Chaohui Chen: Yes, I’m Chaohui Chen. I add some comment because two years ago we invest in R&D side, you can see our loss last two years ago the heavy loss that’s because we have invested in R&D side so 56 and HyperConn, we finish all the development then end of last year we start to control the cost and control the R&D investment. But this did not impact our new product launch in these years. So in my presentation, I already tell — the choose, we will launch in near future for our HyperConn product. This will meet for Mobile broadband and fixed broadband. This is a huge opportunity for the mobile broadband operator market. I think in the next quarter we are prepared to launch around this time, we will launch this new series of new products in the second quarter and also quarter.

So we continue this HyperConn product launch to enhance high quality, reliable quality because no matter fixed broadband or mobile broadband operator, their network will face the failure. Once the failure happened, we can help them to improve the experience. That’s a quite unique solution. We expand this HyperConn connection product to expand to the different scenario for carrier and for cable carrier, fixed broadband carrier and mobile broadband carrier. And also, we will launch some new products for 1.0 business to enhance, to meet a more convenient, more compact and more 5G product leading tradition and both these two directions and we will launch more new product to meet 1.0 fast growth market as well. And also for IoT, so we will launch an IoT product to improve the reliable, we apply the HyperConn this technology into the IoT product because we know the autopilot like Lobot like this IoT technology scenario also need a very high reliable connection.

So in this high reliable connection, we do a lot of breakthroughs, we hope in the coming quarter we can give this good news to everyone. So basically once our growth of recovery from the pandemic so I think our R&D will also keep very stable investment and also our new product new solution because of historic investment and after this year we will also strengthen our R&D investment I believe we will get more good result and bright future for our HyperConn and cloud SIM.

Theodore O’Neill: Okay, thank you. And my last question is about accounts receivable. You have done a remarkable job at keeping receivables low relative to revenue. Is that primarily because the services are prepaid?

Yimeng Shi : Yes, I think the improvements on the balance account receivable depends on the couples of factors. The first one is we pay more attention and effort on improving our business term, as you say, mentions prepared terms and the credit term, the short term credit term some, we have some more bigger orders from this good credit customer as well. So that’s the first, I think first contributors for the improving balance. And the second part I think we pay effort to collect the cash from some agents account receivables some customers suffered this pandemic one year ago, two years ago. So now they recover gradually in terms of making profit or something, generate more cash flow from then its activities. So our efforts on cash collections have achieved a positive result.

That helped reducing, improving the balance of the account receivables. And the third part depends we’re selling more to individual customers via ecommerce via some our website so this ecommerce generates just cash — prepay cash at all before they use our service. So this also varies contributors help our improving managements. So we will take this managements in the future. We’ll maintain well our cash positions. So I expect our operating cash flow will keep this positive trend in the following couples of this year. I believe we will achieve a better than last year that we expect, yes.

Chaohui Chen: By the way, because our customer situation and finance situation also are so much better compared to during the pandemic so they are willing to accept our more better payment condition.

Operator: The next question comes from Vivian Zang with Diamond Equity Research.

Vivian Zang: Hello, this is Vivian Zhang with Diamond Equity. Congrats on the great quarter, most of my questions have answered but I still have one left, which is regarding your new business, the mobile data traffic sharing marketplace application. Can you give us a specific update on this business and when do you expect it to be launched and generate meaningful revenue? Thank you.

Chaohui Chen: Okay, yes, so because currently we are I think only majorly we sell in both local and international data. And this data is high quality and reliable cross carrier network. So that’s currently our business majorly come from. But I know this industry, we have people they may be not willing to carry the extra MiFi. We have a GlocalMe Inside also like eSIM, softer SIM, there are many kinds of technology. Even their connection quality may not as good as our cloud SIM but they have some advantage as well. For example, more convenient, no need the eastward MiFi then we could now waiting for our cloud SIM and GlocalMe handset even these years, our GlocalMe Inside sphere on the progress but we already develop our share in marketplace this concept.

So we will launch marketplace. This marketplace contains several technologies inside not only including the physical SIM, cloud SIM, eSIM and also softer SIM as well. We can provide all kinds of data connectivity and different advantage and convenient and price and high quality, different competitive requirement, data connectivity, quality and convenient scenario product to meet the different users requirement. For example, if like iPhone now you can use our MiFi solution to provide a better connection for family use, multiple use and best quality network. But also you can embed our soft SIM or our eSIM solution. Then we can provide more users and we educate them. People understand that the customer understand all they are one stop can provide all kinds of technology.

And this all kind of technology at least one or two can meet your requirements. Then this marketplace can help us. First, we will show demonstrate in our brand under our brand. Then we will copy this technology and this brand, this scenario to all our business partner. Then this becomes a marketplace. And this will help us enlarge our user base. Because we are currently only 20% or 30% people know us. Another 70% or 80% haven’t used our technology. With new launch of this version of the marketplace, we will cover all the technology, all the requirement of the users. This helps us and help our partner to meet all the requirements of the user application. So help us acquire a huge base of the user base. That’s our first version of when we launch in near term for this marketplace app, GlocalMe app first.

And then we will copy this one to our partner. That’s our initial plan.

Operator: The next question comes from with China Great Wall Securities.

Unidentified Analyst: Hi. Yes. I’m from China Great Wall Securities. And can you hear me? Okay, I have a small question about SaaS and PaaS sector because like from the report of our first quarter the revenue of PaaS and SaaS did not like grow much from the year-on-year or quarter-to-quarter. So what’s the plan and also the outlook for the whole year on this sector because I feel this is also the main focus of our company. And I want to know about what’s our plan for the PaaS, the client expands or the technology development in this sector. Thank you.

Yimeng Shi : Okay, thank you. First, I answer these questions and then I’ll see our CEO, will give some more supplementary. For the first quarter, it seems the PaaS, SaaS revenue is still growing compared with last year small percentage growth by 3.7% growth compared with the same period last year. But underlying this figure our daily activities terminal has achieved historical higher over 300,000 and you will see our revenue, service revenue generated from 1.0 and 2.0 increase massively compared last year’s. For example the international roaming service grows over 38.5% over the last years and uCloudlink 2.0 grows 37% over the last years. So in our business models, PaaS, SaaS play a central platform to build up a global ecosystem to support our global business partner to provide a better high quality connectivity service either to roaming, international roaming or to a local restraint.

So this gives us more flexible business model with partners. So our partners have options either to pay a PaaS, SaaS service to us and they supply their data from their own resource or they can choose buy from a data package from uCloudlink. And then we provide the SaaS function to support, to provide service to the customers. So we will treat this overall service package in one pool to view our growth trend. So in the future, we give this option flexibility to our business partners. So for this in the future, we expect we disclose our guidance as well. So the guidance gives us a growth, it’s a trend around 20 something to the guidance $85 million to $100 million revenues. In this guidance, I think the overall growth will give us a message, PaaS, SaaS and 1.0, will be growing as well in this guidance.

Yimeng Shi : Yes, okay. So I add more comment because initially recovery from the international travel from COVID-⁠19 is step by step. So at this stage, our partner, they prefer to use our data then immediately increase their PaaS, SaaS capacity. So that’s the reason I answer why our data traffic increase a lot, but platform no increase such a significantly. That’s because of the reason I mentioned first. Personally, I believe once the second quarter or third quarter, the recovery from China, Japan, all these Southeast Asia countries for international roaming business becomes stable and recovery more apparently and more significantly. I think some part of our data will transfer to be PaaS, SaaS increase. So that’s the reason.

Personally, I believe for the PaaS, SaaS for 1.0 business, following the quarter will keep continue increase. That’s the first part. And second part I just mentioned because currently our new solution, we will launch this new solution for mobile broadband, fixed broadband, for HyperConn ⁠series new product in the second quarter and third quarter. This will bring a lot of PaaS, SaaS revenue for us as well in the following quarter. And also for IoT, I think IoT will have a lot of the big customer now on the way. So if this customer we acquire, I think the PaaS , SaaS will be increased as well. Finally, so I mentioned our marketplace, the first new version we have been launching . And also once we copy this new model to our partner, also we bring the PaaS, SaaS increase.

And I think especially for HyperConn for mobile broadband and fixed broadband carrier, this carrier major is operator. They are preferring our PaaS. SaaS solution, follow this solution for the HyperConn for fixed solution once achieved, adopt by more and more carrier, I believe the PaaS and SaaS revenue will increase a lot. That’s the general information.

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

Jillian Zeng : 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. Or contact our Investor Relations firm, The Equity Group. Look forward to speaking to you again on our next quarterly call. Thank you.

Yimeng Shi : Thank you.

Chaohui Chen: Thank you.

Operator: This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.