uCloudlink Group Inc. (NASDAQ:UCL) Q2 2023 Earnings Call Transcript

uCloudlink Group Inc. (NASDAQ:UCL) Q2 2023 Earnings Call Transcript August 16, 2023

Operator: Good day, and welcome to the uCloudlink Group, Inc. Second Quarter 2023 Earnings Conference Call. All participants’ will be in listen-only mode. [Operator Instructions] 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, Investor Relations. Please go ahead.

Jillian Zeng: Thanks, everyone, for joining us on our second quarter 2023 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as our newswire services. I will give a brief introduction to our uCloudlink management team Mr. Zhiping Peng is our Cofounder and Chairman of Board of Directors. Mr. Chaohui Chen is our Cofounder, 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 operational highlights and the financial results.

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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 are based on management’s current expectations and automations 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 statements, risk factors and details of the company’s filings with the SEC.

The company does not assume any obligation or revise or update any forward-looking statements as a result of new information, due to event trends in market conditions or otherwise, except as required by law. Please also note that uCloudlink Earnings Press Release and this conference call include discussions of the unaudited GAAP financial information and an unaudited non-GAAP financial measures, uCloudlink 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: Thank you, Julian and good morning, everyone. Thank you for joining us on our second quarter year 2023 earnings call today. We appreciate everyone’s time. We were pleased to have achieved positive cash flow from operations for a fifth consecutive quarter. During the quarter, we reported strong top line growth with total revenues of $22 million at 21.9% increase from the prior year period and the average daily active terminals continues to increase and once again reached a record highs over 310,000. During the second quarter of year 2023, revenues from uCloudlink 1.0 International Data Connectivity Services business, we call uCloudlink 1.0 business increased by 32.5% year-over-year to $9 million and average daily active terminals from uCloudlink 1.0 business increased by 57.7% year-over-year, primarily as a result of the recovery in international travel.

While our bank travel from China remained somewhat limited in the first-half of the year 2023. Chinese tourists, utilizing Roamingman brand services here have contributed an increasingly configurable amount to our international data connectivity services. Our unique 5G portable Wi-Fi terminals and the various data traffic packages from 4G to 5G are widely recognized by the market for the ability to elevate the users’ experience across a broader audience, which will enable us to maintain our leading positions in the global roaming market. I’m pleased to share a few developments in our 1.0 business. In July year 2023, we launched the GlocalMe sim card. This sim card is backed by our patent cloud SIM technology, which allows our customers to clearly achieve and use multiple global data plans as need.

As of launch, this GlocalMe sim cover 10 major destination countries, including Japan, the United States, Australia, and we expect to gradually expand its availability to additional countries and regions. In addition, we are launching a pilot sales of GPS tracking enabled roaming portable Wi-Fi terminals that we believe we will be the smallest one in the world. The innovative product range cover portable Wi-Fi, GPS tracking enable roaming terminals and the GlocalMe SIM card as our ever expanding uCloudlink 1.0 business portfolio of offerings, so which we have global users has achieved a leading zero roaming experience in various application scenarios to certify their cross-border data demands, driving comprehensive — competitive advantage that enhance our business performance.

We remain optimistic about the prospect of uCloudlink 1.0 business and believe that this higher margin business will continue to assess as a key growth driving to the future. uCloudlink 2.0 local connectivity services business, we call uCloudlink 2.0 business maintained continuous development, which report $2.2 million in revenue, up by 23.1% from $1.8 million in the second quarter of the year [2002] (ph). During this quarter, our upgraded customer premise equipment, CPE was hefty commercially. This product enables a SIM based transition between fixed and mobile network, serving as a substitute for traditional fixed line broadband sub-suitable for home and office Internet connection use. We are confident that the upgraded CPE will allow us to further gain market share in the fixed broadband, we call FBB market.

What I discussed just now outlines our data connectivity services business. I would like to highlight uCloudlink PaaS/SaaS solutions, which is a line of business where we see great attention. On the IoT side, uCloudlink IoT module will began to be commercially embedded into the devices of a major mobile network operators in Japan within years 2023, making a significant expansion into IoT application scenarios. Adding to the embed IoT module, the GPS tracking enabled roaming portable Wi-Fi terminals and upgraded CPE. This offering will generate recurring PaaS/SaaS services revenues apart from data connectivity services revenue and sales of products. We look forward to applying our PaaS/SaaS solution to provide additional services, including customer management services, emergency and security communication services and the GPS tracking services, among the others, expanding our user base and application scenario and contributing to the growth of our revenue.

During the quarter, we continued to prepare for the full initiation of our in-stock comprehensive marketplace APP, a centralized platform application that allows users to assess our full portfolio of services. We believe that we are approaching the launch of one-step marketplace APP, which will enable us to attract more users and customers beyond their users a bit beyond users of portable Wi-Fi step-by-step. We remain confident in our teams capabilities to launch the APP in the near-term. In conclusion, we were pleased with the progress we have met in our growth initiatives, as well as the improved financial results we have achieved in the first-half of the year. We are pleased to be at the forefront of the innovation and expect to continue expanding our portfolio of offerings based on our innovative cloud SIM technology and the HyperConn solutions, which demonstrates our strong research and development capability, laying a solid foundation for future growth.

For the third quarter of year 2023, uCloudlink expects total revenues to be between $23.5 million to $24.5 million, representing an increase of 29.1% to 34.6%, compared to the same period of year 2022. We will continue trading a significant part in integrating high-quality data connectivity experience into various life scenarios and we believe that our solutions truly enable our customers and users to leave more convenient and intelligent life from connected to be better connection. I will now turn the call over to our CFO, Mr. Yimeng Shi.

Yimeng Shi: Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the second quarter of 2023. Average daily active terminal DAT measure the trend of customer usage over the period, reflecting our ongoing business performance. In the second quarter of 2023 average daily active terminal was 318,778 of which 7,386 owned by the company and 311,392 owned by our business partners, up by 9% from 2,432 in the second quarter of 2022. The average DAT for our uCloudlink 1.0 and uCloudlink 2.0 business accounts for around, 46.4% and 53.6% of total DAT, respectively, during the second quarter of 2023. Average daily data usage per terminal was 1.59 gigabytes in June 2023. Total revenue for the second quarter of 2023 were $22 million, representing an increase of 21.9% from $18 million in the same period of 2022.

Revenues from service were $14.1 million, an increase of 25.2% from $11.2 million in the same period of 2022. Revenue from service as a percentage of total revenue was 64.1%, up from 62.5% during the same period of 2022. During the second quarter of 2023, as a percentage of our total revenue, Japan contributed 43%, North America contributed 29.5%, Mainland China contributed 11.6%, and other countries and the region contributed the remaining 15.9% as compared to 38.1%, 39.2%, 1.4% and 21.3% in the same period of 2022, respectively. The revenue from Mainland China increased significantly, primarily due to the recovery of international travel from the Chinese tourist utilizing Roamingman brand service. Overall gross margin was 44.9% in the second quarter of 2023, as compared to 44.1% in the same period 2022.

Gross margins on service was 58% in the second quarter of ’23, as compared to 56.2% in the same period of 2022. Excluding share-based compensation, total operating expenses were $3.3 million or 33% of total revenue in the second quarter of 2023, as compared to [Technical Difficulty] million or 41% of total revenue in the same period of 2022. [Indiscernible] net loss significantly to $0.9 million in the second quarter of 2023, compared to a net loss of $6.3 million in the second quarter of 2022. Adjusted EBITDA non-GAAP improved to $2.1 million during the second quarter of 2023, as compared to active $1 million in the same period of 2022. We achieved positive operating flow, $3.4 million during the second quarter of 2023, as compared to $2.5 million during the same period of 2022.

We successfully achieved positive cash flow from operations for a three consecutive quarter, accumulating operating cash flow of $13.9 million through the five periods. In the second quarter of 2023, we continue to improve our financial performance, and we believe that we are well positioned to execute it from our growth initiative. With that, operator, please open up for Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-answer session. [Operator Instructions] Our first question comes from Theodore O’Neill from Litchfield Hills Research. Please go ahead.

Theodore O’Neill: Thank you very much. My first question is about product sales in the quarter. They were up sequentially from the First Quarter, quite a bit. Is there a particular reason for that strength in Q2 versus Q1?

Chaohui Chen: So your question regarding the second quarter revenues, compared with the first quarter of this 2023. That’s your…

Theodore O’Neill: Yes. But only for products, not services, just the product strength growth was strong in Q2 versus Q1. I was just wondering if there was something going on in Q2 for products that was different from Q1.

Chaohui Chen: Yes. So I think there are two reasons [Indiscernible] happen. One is because of COVID-19, it’s all over the world including in China, Japan, Southeast Asia. So the first quarter just for China, the first quarter just opening. So everything still is not a fast growth and that is why, that’s the first reason because COVID-19 is over. And the second is the worldwide of our customers prepare for summer season. So these two reasons the equipment grows.

Theodore O’Neill: Okay. My next question is about the GPS Tracker enabled portable terminal. Is that — having a GPS tracker inside the terminal, is that to prevent theft? Or does it — does the GPS info feed into the SIM card selection?

Chaohui Chen: Sorry, can you repeat your question?

Theodore O’Neill: Yes. The GPS tracker enabled portable terminals. Is a GPS tracker in there, is that to prevent the terminal from being stolen or does GPS — the information from the GPS feed into the SIM card selection?

Chaohui Chen: Yes. Let me answer. We have newly launched a new product in the second quarter. So I think it’s a smaller volume launch and you can — it’s very small, very tiny about 40-gram, the weight is down 40 gram smaller than business card, smaller than business card. So it’s convenient. It’s more portable Wi-Fi and the market function with the GPS tracking SoS function. Why we launched this kind of product, that’s because we try to let people understand not only for connection, because our market network uCloudlink in technology and HyperConn will enable people to get a best coverage. So these technology, not only we can apply into the connection for better connection, but also because of better connection, we can enable people to find lost goods much easier, because we get better coverage on the loss — on a GPS information is easily to be — via our 4G, send back to the server and the other people can find the lose material or the people who lost and easy to SoS for — get that set [Indiscernible].

So that’s the reason we are now expanding of our business from a connection to be that the people who need better coverage and need these tracking and health requirement.

Theodore O’Neill: Oh, thank you very much. That completes my questions. Thank you.

Operator: [Operator Instructions] Our next question comes from Vivian Zang with Diamond Equity Research. Please go ahead.

Vivian Zang: [Indiscernible] Vivian with Diamond Equity Research. Congratulations on the nice quarter. I have two questions for you. First one is about the operating expenses, because in the quarter, the research and development expenses decreased by over 36% while sales and marketing expenses increased over 40%. So can you explain why this happens? Does this mean that the company spending will be focused more on the marketing side?

Chaohui Chen: Yes. Yes, you have — the figures tells how we manage our head count relevant cost and also other business driven expenses as well. Yes, for INDs, we’re managing tightly on the increased head count. Even this year, we expect the business activities is increasing and the revenue will grow. We’re managing this program and the tight cost of control measures. So the R&D, head count is not increasing as revenue growth expectations, but on the other side, as you saw, our sales and market sector expenses, compared with the last year period increasing. This came from to [Indiscernible] one on the sales guide — the head count sales guide increases, compared to last year as we explained in the ER, Roamingman brand service contributes a lot of revenue for Chinese outbound tourists.

So our head count for the China maintenance business increase. But all this head count increase is in our budget. And so that’s reflecting our growth and we control our budget in line with growth activities.

Yimeng Shi: Yes. Let me add more two more comments. I think our Q2 major revenue still come from our traditional products, but especially for our 5G product, that’s quite popular, because we are the only one currently launch the 5G worldwide connection. This is quite popular and generate a good revenue. But more than the traditional product, in the second quarter, we launched three new products. That means our R&D capabilities is very strong. So we can — in one quarter, launch three new products and this new product just end of the second quarter. And I think in the next two quarters and the next year, we have us win more revenue and users. These three products, I think, you can see is about our GlocalMe SIM first and second is our high reliable CPE, upgraded CPE, and then can enable enterprise office and home to get a high-level network to secure their fixed network, no job.

So for disaster recovery. So the last one we just launched smallest card size, checking and the Wi-Fi product. And this product can go to the daily life of people. So all these three new products, I think demonstrate our R&D has a very strong capability even during the last painful years, we still can launch our new product in the second quarter. So I believe this new product I just mentioned in the following quarter and the next year, we are generating more revenue and users for us. Thank you.

Vivian Zang: Okay. Okay. I understand. So next question is that could you elaborate on like what drove the company’s revenue growth in China and your products and growth strategy there, because I see the proportion of our revenue from China increased a lot this quarter. Can we expect this growth momentum to continue? Thank you.

Chaohui Chen: Yes, we — as we disclosed the third quarter’s guidance, the growth rate is will be — go to 30% around, compared to the same period of 2022. We expect the — this is a peak season for some holiday and yes same for Chinese outbound tourists. So some of the — some product is peak time for years — for this year. So we expect the growth momentum came from international travel, this pickup time. So that’s the main still a driver for our gross revenue in the third quarter and also will contribute our improving our service gross margins and contribute to our strongest financial position in terms of operating cash flow, and this adjusted net income.

Yimeng Shi: Yes. So I still add more to comment. First, we can see the report from the government. The first-half year of China outbound tourists only recover 30%. So you can see it’s a smaller, compared year before COVID-19, only 30% recovery. So people — the government forecast during the next holiday, like National Day, we go to the 50% around this figure, almost another bigger groups. Another reason we understand, because of the visa issue and the possible issue during the COVID-19. So we haven’t seen a big increase from the Chinese people, even these smaller percentage already give us a good revenue. We believe once the visa problem and passport problem and opening of the [Indiscernible] boundary become more I think this barrier was overcome, I believe in the third quarter and fourth quarter we will get a much better revenue from the China market for Roamingman brand.

Vivian Zang: Okay, that’s help. Thank you. That’s all my questions.

Yimeng Shi: Thank you.

Operator: Our next question comes from Yanxin Li with Great Wall Securities. Please go ahead.

Yanxin Li: Hi, this is from Great Wall Securities. And I have a question about the PaaS/SaaS service, because we see the revenue of this part — like doesn’t have obviously increased, compared to the First Quarter. So I want to know the — maybe the process of the PaaS/SaaS service development at this time, yes.

Yimeng Shi: Yes, yes. So you see we in the second quarter, ’23, our service revenue segment increased significantly with a mix of three main types service revenues. International roaming connect service; a local connect service and PaaS/SaaS service. Among the three categories, roaming service is the increase, number one, in terms of growth rate. And PaaS/SaaS is third place in terms of growth rate, but it’s growth as we report our daily app terminal in the second quarter reached a historical record high more over 310,000. So that’s our foundation to reflect our growth foundation and activity is growing. Why is this PaaS/SaaS revenue growth rate is in the third place. It depends on our monetized business models. We have three main business models, once the B2C retail business model and the thickest B2B2C wholesale business model and third PaaS/SaaS platform.

So it depends if the business product choose, which business models is suitable for them. So people that choose B2B2C wholesale model in roaming sectors, so we will have a more roaming service generated from this commercial term. And we don’t — sometimes, we don’t double charge wholesale packets to the partner and PaaS/SaaS platform. So that’s — but overall, our activity is growing in line of the growth total. And as we disclosed as well, we launched three products in this quarter and GlocalMe SIM card and this smallest Wi-Fi — portable Wi-Fi with the GPC track function and IoT modules delivered to a main operator of the mobile network operate in Japan. So this IoT modules deliveries most will generate more PaaS/SaaS service in the future to our accounts.

And for this other functions like GPS tracker will also generate platform service PaaS/SaaS service to account as well in the future. So the momentum for PaaS/SaaS revenue growth is still strong. So — but we managing our performance in terms of overall of three main categories, of service sector.

Chaohui Chen: Yes. I think because we launched new products and new service, I think we are expecting our PaaS/SaaS revenue not on where traditional is come from the connection services and the data volume, but now we expansion to the new area, like I just mentioned a GPS checking, high resolution and high availability tracking. So that’s our unique services. Also in the future about SOS in the high percentage for emergency services. So all these type of — also like high reliable CPE, high-level CPE, high-reliable router, even the data usage is quite smaller, but people buy or buy for emergence. So far, I think, like as we buy insurance for the high-quality connection. And I think this kind of the services more be aware by the people, more easy understanding rather than the connections and this type of the services will generate more PaaS/SaaS services revenue in the future.

Yanxin Li: Yes. I got it. Okay, thank you very much.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jillian Zing for 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 IR relation firm, The Equity Group. We look forward to speaking to you again on our next quarter. Thank you.

Chaohui Chen: Thank you.

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